HUGOTON ROYALTY TRUST, S-1, 1998-12-04

HUGOTON ROYALTY TRUST
S-1, 1998-12-04
CRUDE PETROLEUM & NATURAL GAS

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 4, 1998.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

--------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ON
FORM S-1 FORM S-3
--------------
HUGOTON ROYALTY TRUST CROSS TIMBERS OIL COMPANY
(EXACT NAME OF CO-REGISTRANT AS
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
SPECIFIED IN ITS CHARTER)

DELAWARE
TEXAS (STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
(STATE OR OTHER JURISDICTION OF

INCORPORATION OR ORGANIZATION)
58-6379215 75-2347769
(I.R.S. EMPLOYER IDENTIFICATION NO.)
(I.R.S. EMPLOYER IDENTIFICATION NO.)

901 MAIN ST., 17TH FLOOR 810 HOUSTON STREET, SUITE 2000
DALLAS, TEXAS 75202 FORT WORTH, TEXAS 76102
(214) 508-2440 (817) 870-2800
(ADDRESS, INCLUDING ZIP CODE, AND (ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE TELEPHONE
NUMBER, INCLUDING AREA CODE, OF NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE REGISTRANT'S PRINCIPAL EXECUTIVE
OFFICES) OFFICES)
FRANK G. MCDONALD, ESQ. BOB R. SIMPSON
901 MAIN ST., 17TH FLOOR 810 HOUSTON STREET, SUITE 2000
DALLAS, TEXAS 75202 FORT WORTH, TEXAS 76102
(214) 508-2400 (817) 870-2800
(NAME, ADDRESS, INCLUDING ZIP CODE, (NAME, ADDRESS, INCLUDING ZIP CODE, AND
AND TELEPHONE NUMBER, INCLUDING AREA CODE,
TELEPHONE NUMBER, INCLUDING AREA CODE, OF
OF AGENT FOR SERVICE)
AGENT FOR SERVICE)
--------------
COPIES TO:

F. RICHARD BERNASEK, ESQ. JAMES M. PRINCE, ESQ.
KELLY, HART & HALLMAN, P.C. ANDREWS & KURTH L.L.P.
201 MAIN STREET, SUITE 2500 600 TRAVIS, SUITE 4200
FORT WORTH, TEXAS 76102 HOUSTON, TEXAS 77002
(817) 332-2500 (713) 220-4300
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]

If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

--------------
CALCULATION OF REGISTRATION FEE
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- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------
<S> <C> <C>
Units of Beneficial
Interest.............. $89,700,000 $24,936.60
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY +
+NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN +
+OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE +
+SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated December 4, 1998.

HUGOTON ROYALTY TRUST

6,000,000 Trust Units

-----------

This is an initial public offering of units of beneficial interest in the
Hugoton Royalty Trust. Cross Timbers Oil Company is offering all of the Trust
Units to be sold in this offering and the Company will receive all proceeds
from the offering. The Trust will not receive any proceeds from the offering.

There is currently no public market for the Trust Units. The Company expects
that the public offering price will be between $ and $ per Trust Unit.
The Company will apply to list the Trust Units on the New York Stock Exchange
under the symbol " ".

THE TRUST. The Company organized the Trust in December 1998 by conveying to
the Trust net profits interests in oil and natural gas producing properties
in exchange for all beneficial units of the Trust. The net profits interests
are carved from the Company's interests in long-lived, principally natural
gas, properties located in the Hugoton area of Kansas and Oklahoma, the
Anadarko Basin of Oklahoma and the Green River Basin of Wyoming.

THE TRUST UNITS. Trust Units are units of beneficial ownership of the Trust
and represent undivided interests in the Trust. They do not represent any
interest in the Company. The Company currently owns 100% of the Trust Units
and after the offering will own approximately 85% of the Trust Units.

THE TRUST UNITHOLDERS. Trust Unitholders will receive monthly distributions
of cash that the Trust receives for its net profits interests from the sale
of oil and natural gas produced from the underlying properties.

See "Risk Factors" beginning on page 10 to read about certain information you
should consider before purchasing Trust Units.

-----------

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

-----------

<TABLE>
<CAPTION>
Per
Trust
Unit Total
----- -----
<S> <C> <C>
Public offering price............................................... $ $
Underwriting discounts.............................................. $ $
Proceeds, before expenses, to Cross Timbers Oil Company............. $ $
</TABLE>

The underwriters may, under certain circumstances, purchase from the Company
up to an additional 900,000 Trust Units at the initial public offering price
less the underwriting discount.

-----------

The underwriters expect to deliver the Trust Units against payment in New
York on , 1999.

GOLDMAN, SACHS & CO.
LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
DONALDSON, LUFKIN & JENRETTE
A.G. EDWARDS & SONS, INC.

-----------

Prospectus dated , 1999.
<PAGE>

[GRAPHIC HERE]

Hugoton Royalty Trust
Map of Major Producing Areas

2
<PAGE>

PROSPECTUS SUMMARY

This summary highlights some information from this prospectus. It is not
complete and may not contain all of the information that is important to you.
To understand this offering fully, you should read the entire prospectus
carefully, including the risk factors and the financial statements and notes to
those statements. You will find definitions for terms relating to the oil and
gas business in "Glossary of Certain Oil and Gas Terms."
HUGOTON ROYALTY TRUST

Hugoton Royalty Trust (the "Trust") is a grantor trust formed in December
1998 by Cross Timbers Oil Company (the "Company"). The Trust provides tax-
advantaged cash distributions from net profits interests carved from
substantially all of the Company's existing interests in oil and natural gas
properties located in the Hugoton area of Kansas and Oklahoma, the Anadarko
Basin of Oklahoma and the Green River Basin of Wyoming. The Company's interests
in these properties are referred to as the "Underlying Properties." The
Underlying Properties are long-lived, principally natural gas, properties with
well-established production histories, substantially all of which are working
interests. More than 90% of the properties are operated by the Company, with
the balance operated by major oil companies or established independents.

The Trust is a passive entity, and NationsBank, N.A., as trustee (the
"Trustee"), only has powers to collect and distribute proceeds received by the
Trust and to pay Trust liabilities and expenses. The Trustee does not
participate in business decisions of the Company and did not participate in the
decision of the Company to sell any Trust Units.

Ownership of the Trust is divided into 40,000,000 units of beneficial
interest (the "Trust Units"). The Trust Units do not constitute an interest in
or security of the Company or the Trustee. See "The Trust."

The Trust's business address is 901 Main Street, 17th Floor, Dallas, Texas
75202.
THE TRUST ASSETS

The assets of the Trust consist of net profits interests (the "Net Profits
Interests") carved from the Underlying Properties. The Net Profits Interests
entitle the Trust to receive 80% of the Net Proceeds (as defined below) from
the sale of production from the Underlying Properties.

"Net Proceeds" are determined monthly on a state-by-state basis. They are
proceeds received by the Company as the owner of the Underlying Properties,
after deducting property and production taxes, overhead fees and development
and production costs. Because the Company deducts development and production
costs from sales proceeds, the Net Profits Interests payable to the Trust are
dependent upon both production quantities and sales prices of oil and natural
gas and the costs to develop and produce the oil and natural gas. If at any
time development and production costs should exceed gross proceeds, neither the
Trust nor the holders of beneficial interests in the Trust (the "Trust
Unitholders") would be liable for the excess costs. However, the Trust would
not receive any Net Proceeds until future Net Proceeds exceed the total of
those excess costs, plus interest at the prime rate. The Company does not
expect future production costs for the Underlying Properties to change
significantly relative to recent historical costs. Moreover, the Company
expects the level of development costs to decline significantly as compared to
recent historical amounts. See "Risk Factors--Development Costs" and
"Computation of Net Proceeds--Net Profits Interests."

3
<PAGE>

The Trust may sell the Net Profits Interests if the Trustee receives the
affirmative consent of the holders of 80% of the Trust Units. The Trust must
sell the Net Profits Interests if annual gross proceeds from the Underlying
Properties are less than $1 million for each of two consecutive years after
1999. The Trustee would then distribute the net proceeds of the sale to Trust
Unitholders.

THE UNDERLYING PROPERTIES

The Underlying Properties are located in three of the best known and most
prolific gas producing areas in the United States. As of November 30, 1998,
proved reserves of the Underlying Properties were estimated at 518 Bcfe, of
which approximately 60% were located in Oklahoma, 29% were located in Wyoming
and 11% were located in Kansas. These areas are characterized by low natural
decline rates, low production costs and extensive production histories, which
in some cases date back to the 1920s. Reserve estimates for properties with
long production histories are generally more reliable than estimates for
properties with recently established production.

The Company has a proven record of adding reserves at a low cost. The
Company has experienced upward revisions of estimates of proved reserves on
many of the Underlying Properties. These upward revisions resulted from better
than projected production performance and development results, reduced
production costs, increased oil and gas prices in some years, gathering system
improvements and improved technology. There is no assurance that the Underlying
Properties will experience upward revisions of proved reserves in the future.

The average reserve-to-production index of the Underlying Properties is
approximately 12 years. The reserve-to-production index is calculated by
dividing proved reserves by projected annual production. This is an indication
of reserve longevity, but not an adequate indication of remaining economic
productive life, which is expected to exceed 40 years for the Underlying
Properties.

Natural production decline rates for the Underlying Properties, assuming no
additional development expenditures, typically would range between 6% and 10%
annually. The Company, however, increased production from the Underlying
Properties by 12% during the past three years. Development costs during this
period averaged $29 million per year, or approximately 50% of average annual
cash flow generated from production. Going forward, the Company anticipates
development costs of $12 million per year. The Company believes that there are
significant additional low risk and relatively low cost development
opportunities available to partially offset the natural decline rate on the
Underlying Properties. See "Productive Areas and Additional Development
Potential."

The Company operates more than 90% of the wells on the Underlying
Properties. The wells that are not operated by the Company are generally
operated by established independents or major oil companies. Through
operations, the Company can control the timing and level of discretionary
expenditures for operational improvements, the development of existing proved
reserves and the finding and development of new reserves. The Company has a
proven record of successfully operating the Underlying Properties and other
similar properties. Its historical five-year average finding cost for its
development program is $0.48 per Mcfe, which is one of the lowest in the
industry.

The Company and its affiliates operate gas gathering systems for
approximately 70% of the production from the Underlying Properties. Controlling
the gas gathering systems allows the Company to assure that gathering
operations will be managed to maintain optimum gas production.

The Company may drill additional wells on the Underlying Properties, but no
additional properties will be contributed to the Trust.
4
<PAGE>

Estimated proved reserves of the Underlying Properties are approximately
95% natural gas and 5% oil, based on the discounted present value of estimated
future net revenues as of November 30, 1998. Proved developed reserves for the
Underlying Properties represent approximately 93% of the discounted present
value of estimated future net revenues. See "The Net Profits Interests and the
Underlying Properties--Producing Acreage and Well Counts."

The following table sets forth, as of November 30, 1998, estimated proved oil
and gas reserves, estimated future net revenues and discounted estimated future
net revenues for the Underlying Properties and the Net Profits Interests:
<TABLE>
<CAPTION>
PROVED RESERVES (a)
---------------------------
FUTURE
NET REVENUES FROM
GAS PROVED RESERVES (a)(b)
OIL GAS EQUIVALENTS ---------------------------
(MBBLS) (MMCF) (MMCFE) UNDISCOUNTED DISCOUNTED (c)
------- ------- ----------- ------------ --------------
(IN THOUSANDS, EXCEPT
PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C>
Underlying Properties
(100%):
Oklahoma.............. 4,054 286,680 311,004 $441,992 $231,427
Wyoming............... 217 149,250 150,552 130,416 68,286
Kansas................ 57 56,004 56,346 61,607 32,257
----- ------- ------- -------- --------
Total............... 4,328 491,934 517,902 $634,015 $331,970
===== ======= ======= ======== ========
Underlying Properties
(80%).................. 3,462 393,547 414,322 $507,212 $265,576
Net Profits Interests
(d).................... 2,398 272,492 286,880 $507,212 $265,576
Per Trust Unit.......... -- -- -- $ 12.68 $ 6.64
</TABLE>
- --------
(a) Based on realized oil and natural gas prices as of November 30, 1998, which
were $9.50 ($8.50 posted price) per Bbl of oil and $2.00 per Mcf of natural
gas. For further information regarding Trust proved reserves, see "The Net
Profits Interest and the Underlying Properties--Oil and Gas Reserves" and
"Hypothetical Annual Cash Distributions--Assumptions and Methodology--Oil
and Gas Prices."
(b) Before income taxes and the tax benefit of the estimated Section 29 tight
sands gas production income tax credit.
(c) Discounted at an annual rate of 10%.
(d) Proved reserves for the Net Profits Interests are calculated by subtracting
from 80% of proved reserves of the Underlying Properties, quantities of a
sufficient value to pay 80% of the future estimated costs deducted in
calculating Net Proceeds. Accordingly, proved reserves for the Net Profits
Interests reflect quantities that are free of future costs and expenses
based on price and cost assumptions used in the reserve estimates.

PRODUCTIVE AREAS AND ADDITIONAL DEVELOPMENT POTENTIAL

The Company believes that it will have substantial economic incentive to
further develop the Underlying Properties due to its large ownership interest
in Trust Units and its 20% retained interest in Net Proceeds. The Company
intends to develop the Underlying Properties as discussed below under most
reasonably anticipated market conditions, but the Company is not obligated to
the Trust to develop the Underlying Properties.

Hugoton Area

formation in the Hugoton area, ranging in depth from 2,700 to 2,900 feet. There
are more than 7,200 Chase wells currently producing. More than 64 trillion
cubic feet of natural gas has been produced in the Hugoton area.

The Company's current net production from the Underlying Properties in the
Hugoton area averages approximately 30,000 Mcf of gas per day and 260 Bbls of
oil per day.

In the Hugoton area, the Company's development plan includes additional
compression to lower line pressures, pumping unit installations, deeper
drilling of existing wells to capture additional pay zones, and development
drilling activity. The Company plans to develop the Chase formation primarily
through infill drilling of up to 40 wells in Kansas. If new legislation is
enacted in Oklahoma allowing for reduced spacing and the Company receives
regulatory approval, it will have approximately 200 potential infill well
locations in Oklahoma. The Company also plans to develop the other formations,
including the Council Grove, Chester, Morrow and St. Louis formations that
underlie the 79,500 net acres held by production by the Chase formation wells.
The Company has participated in 3-D seismic shoots covering 30,000 acres of the
Company's net acreage position beneath the Chase formation.

Anadarko Basin

The Company is one of the largest producers in the Ringwood, Northwest
Okeene and Cheyenne Valley fields in Major County, Oklahoma. Current net daily
production from the Underlying Properties exceeds 34,000 Mcf of gas and 1,100
Bbls of oil.

Oil and gas were first discovered in the Major County area in 1945. The
fields in the Major County area are located in the Anadarko Basin and are
characterized by oil and gas production from a variety of structural and
stratigraphic traps. Productive zones range from 6,500 to 9,400 feet and
include the Oswego, Red Fork, Chester, Manning, Mississippian, Hunton and
Arbuckle formations.

The Company plans to develop these properties through artificial lift
installations, recompletions to add additional pay zones, restimulations of
existing pay zones and infill and development drilling. Development will target
the Chester, Mississippian, Red Fork and Hunton formations.

Green River Basin

The Green River Basin is located in southwestern Wyoming. The Company's
current net daily production from the Underlying Properties in the Fontenelle
field is approximately 26,700 Mcf of gas and 70 Bbls of oil.

Gas was discovered in the Fontenelle area in the early 1970s. The producing
reservoirs are the Cretaceous-aged Frontier and Dakota sandstones at depths
ranging from 7,500 to 10,000 feet. Potential development activities for the
fields in this area include restimulations, recompletions and development
drilling of the Frontier Sands. Additionally, there is the potential to
recomplete wells to the Baxter Sands.

Development Costs

The Company acquired a significant portion of the Underlying Properties in
1995 and 1996. After these acquisitions, the Company began an aggressive
development program, spending $19.8 million in 1996, $38.9 million in 1997 and
$28.6 million in 1998 in order to increase production. The Company expects a
significant reduction in development costs to a level of approximately $12
million annually. While the Company does not expect this development program to
continue to increase production, it expects a significant mitigation of the
natural decline in production of the Underlying Properties.

Any increase or decrease in production and development costs will directly
affect the Net Proceeds payable to the Trust. See "Risk Factors--Development
Costs." For a summary

6
<PAGE>

of development and operating costs over the last three years, see "The Net
Profits Interests and the Underlying Properties--Pro Forma Distributable Income
and Oil and Gas Sales Volumes."

PRO FORMA TRUST DISTRIBUTIONS AND RELATED DATA

The following table sets forth oil and gas sales volumes and average sales
prices for the Underlying Properties and the calculation of distributable
income (1) for the years ended December 31, 1996, 1997 and 1998 based on
historical net proceeds from the Underlying Properties, (2) for the year ended
December 31, 1998 on an adjusted basis using development costs of $12 million,
as is budgeted for 1999, and (3) for the year ended December 31, 1999 on a
hypothetical basis using the assumptions and methodology described under
"Hypothetical Annual Cash Distributions" and using hypothetical prices of
$10.00 ($11.00 realized) for oil and $2.00 for gas.

The hypothetical amounts are not a projection or forecast of the actual or
estimated results from an investment in the Trust Units. They are intended only
to demonstrate the calculation of distributable income based on assumed prices
and costs. See "Hypothetical Annual Cash Distributions."

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------- ADJUSTED HYPOTHETICAL
1996(a) 1997(a) 1998(a) 1998 (b) 1999 (c)
------- ------- ------- -------- ------------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Underlying Properties
Sales Volumes:
Gas (Mcf)............ 36,143 37,172 38,535 38,535 40,347
Oil (Bbls)........... 455 471 479 479 483
Average Price:
Gas (per Mcf)........ $ 1.67 $ 2.21 $ 2.00 $ 2.00 $ 2.00
Oil (per Bbl)........ $ 19.95 $ 20.63 $ 14.78 $ 14.78 $ 11.00
Calculation of
Distributable Income
Revenues:
Gas sales............ $60,502 $82,192 $77,124 $77,124 $80,694
Oil sales............ 9,075 9,704 7,083 7,083 5,313
------- ------- ------- ------- -------
Total.............. 69,577 91,896 84,207 84,207 86,007
Costs:
Taxes on production
and property........ 5,919 9,173 9,170 9,170 7,677
Production expenses.. 11,359 12,837 13,031 13,031 10,264
Development costs.... 19,797 38,875 28,600 12,000 12,000
Overhead............. 4,557 5,354 6,198 6,198 6,200
------- ------- ------- ------- -------
Total............. 41,632 66,239 56,999 40,399 36,141
------- ------- ------- ------- -------
Net proceeds........... 27,945 25,657 27,208 43,808 49,866
Net profits
percentage............ 80% 80% 80% 80% 80%
------- ------- ------- ------- -------
Trust royalty income... 22,356 20,526 21,766 35,046 39,893
Trust administrative
expense............... 300 300 300 300 300
------- ------- ------- ------- -------
Trust distributable
income (d)............ $22,056 $20,226 $21,466 $34,746 $39,593
======= ======= ======= ======= =======
Trust distributable
income per Trust
Unit (d).............. $ 0.55 $ 0.51 $ 0.54 $ 0.87 $ 0.99
======= ======= ======= ======= =======
</TABLE>
- --------
(a) Based on the audited statements of revenues and direct operating expenses
for the Underlying Properties for the years ended November 30, 1996, 1997
and 1998 included in this prospectus. See Index to Financial Statements.
Net proceeds from the Underlying Properties for the year ended November 30
are received by the Trust in the year ended December 31.
(b) Based on the audited statement of revenues and direct operating expenses
for the Underlying Properties for the year ended November 30, 1998, as
described under (a), with the exception that development costs are assumed
to be $12 million, as is budgeted for 1999.
(c) Based on the assumptions and methodology described under "Hypothetical
Annual Cash Distributions" and using hypothetical prices of $10.00 for oil
($11.00 realized) and $2.00 for gas.
(d) On a pro forma basis, assuming the Net Profits Interests were conveyed to
the Trust prior to January 1, 1996 and that Trust administrative expense
was $300,000 annually.

7
<PAGE>

For additional financial information regarding the Underlying Properties
and the Trust, see the Financial Statements of the Underlying Properties and
the Trust included in this prospectus.

THE COMPANY

Cross Timbers Oil Company is a leading United States independent energy
company engaged in the acquisition, development and exploration of oil and
natural gas properties, and in the production, processing, marketing and
transportation of oil and natural gas. The Company organized the Trust in
December 1998 and conveyed to the Trust Net Profits Interests in the Underlying
Properties in exchange for all of the Trust Units. The Company continues to own
the Underlying Properties, which are burdened by the Net Profits Interests
conveyed to the Trust.

The Company has announced a strategy of forming up to three royalty trusts,
including the Trust, over the next several years. The Company will sell
approximately 15% of the Trust Units in this offering, and over time, intends
to distribute some of the remaining Trust Units, together with units of other
royalty trusts formed by the Company, to its stockholders. It also may exchange
the remaining Trust Units for oil and gas properties or use them for other
corporate purposes. The Company currently anticipates distributing Trust Units
to its stockholders beginning no earlier than the fourth quarter of 1999, and
potentially as frequently as each quarter. The Company expects to distribute
royalty trust units representing a then market value of approximately $2.00 per
year for each share of Company common stock. For example, a stockholder with
100 shares of Common Stock would potentially receive annual distributions of
royalty trust units with a value of $200.

As the owner of the Underlying Properties as well as a substantial number
of the Trust Units, the Company will have a strong incentive to continue to
operate the Underlying Properties in an efficient and cost effective manner.

The Company's 1998 Royalty Trust Option Plan provides for the issuance of
options to purchase from the Company up to $12 million of Trust Units. The
Company has granted options to its executive officers covering all $12 million
of Trust Units in the plan. The options will be exercisable for three years at
a price per Trust Unit equal to the public offering price in this offering. The
executive officers will not receive any Trust distributions on the option Trust
Units until their options are exercised.

The Company's principal executive offices are located at 810 Houston
Street, Suite 2000, Fort Worth, Texas 76102 and its telephone number is (817)
870-2800.

THE OFFERING

Trust Units offered....... 6,000,000 Trust Units are being offered by the
Company, excluding 900,000 Trust Units that the
Underwriters may purchase from the Company upon
exercise of their over-allotment option.

Trust Units outstanding... 40,000,000 Trust Units are outstanding. No
additional Trust Units can be issued.

Use of Proceeds........... The Trust will not receive any of the proceeds from
the sale of Trust Units. The Company will receive
all net proceeds,

8
<PAGE>

anticipated to be approximately $ ($ if the
underwriters fully exercise their over-allotment
option), and will use the proceeds to repay
indebtedness under its revolving credit facility.

NYSE Symbol...............

Cash distributions........ The first cash distribution on Trust Units will be
made in April 1999 to record holders as of March
31, 1999, and will include Net Proceeds received,
less Trustee's expenses, during the period December
1, 1998 through February 28, 1999. This initial
distribution will also be adjusted to exclude any
development charges on the Underlying Properties
incurred through December 31, 1998, which the
Company will bear. Thereafter, the Trustee will
distribute available cash on or before the tenth
business day of each month to holders of record of
Trust Units on the last business day of the prior
month. The Trust generally receives the Net
Proceeds from the Net Profits Interests two to
three months following the production of the
applicable oil and gas.

Federal income tax
consequences of
distributions.............
Trust Unitholders will be taxed directly on the
income from the Net Profits Interests. Trust
Unitholders may claim tax deductions for depletion
and Trust administrative expenses and may claim a
tax credit under Section 29 of the Internal Revenue
Code (the "Section 29 tax credit") for qualifying
tight sands gas production from the Underlying
Properties that relates to the Trust's Net Profits
Interest. The Company estimates the Section 29 tax
credit will be approximately $.02 per year per
Trust Unit. Trust Unitholders will also be allowed
a deduction for the greater of cost depletion or
percentage depletion. The Company believes that
cost depletion will be more advantageous than
percentage depletion for most Trust Unitholders.
The amount of cost depletion deduction available to
Trust Unitholders depends on the Trust Unitholder's
cost of Trust Units, purchase date and prior
allowable depletion. The Section 29 tax credit and
depletion deduction will shelter a portion of the
Trust distributions from federal income taxation.
Income distributed from the Trust to Trust
Unitholders that are tax-exempt organizations does
not constitute unrelated business taxable income
for those organizations, if Trust Units are not
debt-financed within the meaning of Section 514 of
the Internal Revenue Code. See "Federal Income Tax
Consequences."

9
<PAGE>

RISK FACTORS

EFFECT OF CHANGING OIL AND GAS PRICES

The Trust's distributions are affected by the prices realized from the sale
of oil and natural gas. Oil and gas prices fluctuate widely in response to
relatively minor changes in supply, market uncertainty and a variety of
additional factors that are beyond the control of the Trust and the Company.
These factors include, among others:

. political conditions in the Middle East;

. activities of OPEC;

. the foreign supply of oil and gas;

. the price of foreign imports;

. the level of consumer product demand;

. worldwide economic conditions;

. weather conditions;

. government regulations;

. the price and availability of alternative fuels;

. the proximity to, and capacity of, transportation facilities; and

. worldwide energy conservation measures.

Lower oil and gas prices may reduce the amount of oil and gas that is
economic to produce. The volatility of energy prices reduces the accuracy of
estimates of future cash distributions to Trust Unitholders and the value of
the Trust Units.

MARKET FOR NATURAL GAS

Approximately 95% of the estimated proved reserves of the Underlying
Properties at November 30, 1998 are composed of natural gas, based on the
discounted present value of estimated future net revenues of proved reserves.
The revenues of the Trust and the amount of cash distributions made by the
Trust will depend upon, among other things, the volume of natural gas produced
and the price at which it is sold.

Due to the seasonal nature of demand for natural gas and its effect on
sales prices and production volumes, the cash distributions by the Trust may
vary substantially throughout the year. Generally, gas production volumes and
prices tend to be higher during the first and fourth quarters of the calendar
year. Trust distributions generally are not made until three or four months
after the sale of production from the Underlying Properties. As a result,
increased distributions from higher gas prices are usually delayed for that
period of time. See "Computation of Net Proceeds."

UNCERTAINTY OF RESERVE ESTIMATES

The value of the Trust Units will depend upon, among other things, the
proved reserves attributable to the Net Profits Interests. Estimating reserves
is inherently uncertain. The oil and natural gas reserves data in this
prospectus represent estimates based on reports prepared by the Company's
internal petroleum engineers. Petroleum engineering is not an exact science,
however, and estimates of economically recoverable oil and natural gas reserves
and of future net cash flows depend on a number of variable factors and
assumptions, such as:

. historical production from the area compared with production rates from
other producing areas;

. the assumed effect of governmental regulation; and

. assumptions about future commodity prices, production costs, severance
and excise taxes, capital expenditures and workover and remedial costs.

Estimates of reserves and expected future cash flows prepared by different
engineers (or by the same engineers at different times) may differ
substantially because of changes in relevant factors or the use of different
assumptions. Ultimately, actual production, revenues and expenditures for the
Underlying Properties will vary from estimated reserves, and those variations
could be material.

The Trust's reserve quantities and revenues are based on estimates of
reserves
10
<PAGE>

and revenues for the Underlying Properties. Because the Trust holds Net Profits
Interests and does not own a specific ownership percentage of the oil and gas
reserves, the amount of reserves allocated to the Trust for its Net Profits
Interests has been reduced to take into account the estimated production and
development costs deducted in calculating Net Proceeds.

NO CONTROL OF OPERATIONS AND DEVELOPMENT

Neither the Trustee nor the Trust Unitholders are able to influence or
control the operation or future development of the Underlying Properties.
Additionally, the Company does not operate or control as much as 10% of the
Underlying Properties, and the Company is unable to significantly influence the
operations or future development of those properties.

The current operators of the Underlying Properties are under no obligation
to continue operating the properties. Neither the Trustee, Trust Unitholders
nor the Company has a right to replace an operator. See "The Net Profits
Interests and the Underlying Properties--Producing Acreage and Well Counts."

PRODUCTION COSTS

The owner of each working interest in a property that is included in the
Underlying Properties must pay its proportionate share of production expenses.
Accordingly, higher or lower production expenses on the Underlying Properties
will directly decrease or increase the amount received by the Trust for its Net
Profits Interests. For a summary of these expenses for the last three years,
see "The Net Profits Interests and the Underlying Properties--Pro Forma
Distributable Income and Oil and Gas Sales Prices."

DEVELOPMENT COSTS

Each Underlying Property may undergo development activities intended to
increase or maintain production levels. If the requisite percentage of working
interest holders approves a development project, all working interest holders
may be required to pay their proportionate share of development costs. The
Company's working interests generally are sufficiently large to allow it to
veto or control a development decision, but neither the Trust nor the Trust
Unitholders will have that power. The Trust will not be liable for any
development costs, but the amount of development costs reduces the Net Proceeds
payable to the Trust. Significant increases in development costs could
materially reduce distributions from the Trust. The Company expects $12 million
of development costs for the Underlying Properties per year.

If development and production costs for a particular state exceed the
proceeds of production, the Trust will not receive Net Proceeds for those
properties until future proceeds from production in that state exceed the total
of the excess costs and expenses plus accrued interest during the deficit
period.

Development activities, such as infill drilling, may not generate
sufficient additional revenue to repay the costs.

PRODUCTION RISKS

The occurrence of drilling, production or transportation accidents at any
of the Underlying Properties will reduce Trust distributions by the amount of
uninsured costs. These accidents may result in personal injuries, property
damage, damage to productive formations or equipment and environmental damages.

TRANSFER OF UNDERLYING PROPERTIES AND
NET PROFITS INTERESTS; ABANDONMENT

The Company owns the Underlying Properties that are subject to the Trust's
Net Profits Interests. The Company may at any time transfer all or part of the
Underlying Properties, although it currently has no intention to do so. You
will not be entitled to vote on any transfer, and the Trust will not receive
any proceeds of the transfer. Following any material transfer, the Underlying
Properties will continue to be burdened by the Net Profits Interests, and the

11
<PAGE>

Net Proceeds from the transferred property will be calculated separately and
paid by the transferee. The transferee will be responsible for all of the
Company's obligations relating to the Net Profits Interest burdening the
portion of the Underlying Properties transferred, and the Company would have no
continuing obligation to the Trust with respect to those properties. The Trust
Indenture does not provide you with any right to compel the Trustee to sue the
Company or a transferee for any failure to honor its obligations.

The Trustee may sell the Net Profits Interests if the holders of 80% or
more of the Trust Units approve the sale. It must sell the Net Profits
Interests if the annual gross proceeds from the Underlying Properties are less
than $1 million for each of two consecutive years after 1999. Sale of all the
Net Profits Interests will terminate the Trust. The net proceeds of any sale
will be distributed to the Trust Unitholders. See "Description of the Trust
Indenture--Duration of the Trust; Sale of Net Profits Interests."

The Company and any transferee may abandon any well or property if it
believes that the well or property can no longer produce in commercially paying
quantities. The portion of the Net Profits Interests relating to the abandoned
property would then be extinguished.

PAYMENTS TO THE COMPANY AND ITS AFFILIATES

The Company and some of its affiliates will receive payments for services
rendered to the Trust or as the operator of Underlying Properties. Those
payments will be deducted from Gross Proceeds in determining Net Proceeds
payable to the Trust. This will reduce the amounts available for distribution
to the Trust Unitholders. Payments to the Company and its affiliates will
include:

. payments to the Company for production and development costs to operate
wells;

. payments to Company affiliates for marketing, gathering, processing and
transportation services; and

. overhead fees to operate the Underlying Properties, which includes
accounting and other administrative functions.

Company affiliates also purchase approximately 64% of the production from the
Underlying Properties.

In some cases, the Company sets the amounts of these payments without any
negotiation or other involvement by independent third parties. The Company
believes, however, that the payments are reasonable for the services rendered.

POTENTIAL CONFLICTS OF INTEREST

Because the Company has interests in oil and gas properties not included in
the Trust, the interests of the Company and the Trust Unitholders may not
always be in common. For example, in setting budgets for development and
production expenditures for the Company properties, including the Underlying
Properties, the Company may make decisions that could adversely affect future
production from the Underlying Properties. In addition, the Company could
continue to operate a property included in the Underlying Properties and earn
an overhead fee even though abandonment of the property might be more
beneficial to Trust Unitholders. Moreover, the Company could decide to sell or
abandon some or all of the Underlying Properties, and that decision may not be
in the best interests of the Trust Unitholders. Except for specified matters
that require approval of the Trust Unitholders (as described in "Description of
the Trust Indenture") the documents governing the Trust do not provide a
mechanism for resolving these conflicting interests.

LIMITED VOTING RIGHTS OF TRUST UNITHOLDERS

Your voting rights as a Trust Unitholder are more limited than those of
stockholders of most public corporations. For example, there is no requirement
for annual meetings of Trust Unitholders or for an annual or other periodic re-
election of the Trustee.

12
<PAGE>

AMENDMENT OF THE TRUST INDENTURE

Trust Unitholders may amend the Trust Indenture by a vote of the holders of
80% or more of the outstanding Trust Units. Any amendment will be binding on
you, regardless of whether you voted for or against the amendment. Some
provisions of the Trust Indenture cannot be amended. See "Description of the
Trust Indenture--Creation and Organization of the Trust; Amendments."

LIABILITY OF TRUST UNITHOLDERS

The Trustee must ensure that all contractual liabilities of the Trust are
limited to the assets of the Trust, and the Trustee will be liable for its
failure to do so. If a contractual liability were not limited to the assets of
the Trust and the liability were larger than the net assets of the Trust and
the Trustee, Texas law is unclear whether a Trust Unitholder would be
responsible for that liability. The Company believes that it is unlikely that
you would have any liability from the Trust because of the value and passive
nature of the Trust assets and the restrictions in the Trust Indenture on the
power of the Trustee to incur liabilities.

OWNERSHIP AND DISPOSITION OF
REMAINING TRUST UNITS

The Company currently owns 100% of the Trust Units and will sell
approximately 15% of the Trust Units in this offering. The Company may use the
remaining 85% of the Trust Units for a number of corporate purposes, including:

. distributing them to its common stockholders as dividends;

. granting options to executive officers to purchase some of them; and

. exchanging them for interests in oil and gas properties or securities
of oil and gas companies.

The Company has previously announced that it plans to form up to three
royalty trusts and to distribute to its stockholders units of beneficial
interest (including the Trust Units) in those royalty trusts. The Company
expects to distribute, as frequently as quarterly, royalty trust units having a
market value of approximately $2.00 per year (based on value at the time of
declaration of the dividend) for each share of common stock. A stockholder with
100 shares, for example, would receive royalty trust units with a market value
of $200.00. The Company plans to start these dividends no sooner than the
fourth quarter of 1999.

If the Company distributes Trust Units to its stockholders as dividends or
to its executives upon exercise of options, or if it exchanges Trust Units in
connection with acquisitions, then additional Trust Units will be available for
sale in the market. The Company expects these additional Trust Units to
increase market liquidity, but the Company cannot presently determine whether
they will increase or decrease the market price for Trust Units. The release of
these additional Trust Units may cause the market price to decrease. See
"Selling Trust Unitholder."

OWNERSHIP OF DEPLETING ASSETS

The Net Proceeds payable to the Trust are derived from the sale of
depleting assets. Accordingly, the portion of the distributions to Trust
Unitholders attributable to depletion may be considered a return of capital.
The reduction in proved reserve quantities is a common measure of the
depletion. Future maintenance and development projects on the Underlying
Properties will affect the quantity of proved reserves. The timing and size of
these projects will depend on the market prices of oil and natural gas. If
operators of the properties do not implement additional maintenance and
development projects, the future decline rate of proved reserves may be higher
than the rate during the past three years. For federal income tax purposes,
depletion is reflected as a deduction, which is anticipated to be $0.90 per
Trust Unit in 1999 based on a Trust Unit price of $11.00. See "Federal Income
Tax Consequences--Royalty Income and Depletion."

13
<PAGE>

TAX CONSIDERATIONS

The Trust has received an opinion of tax counsel that:

. the Trust is a "grantor trust" for federal income tax purposes;

. you will be taxed directly on your pro rata share of the income of the
Trust;

. you will be allowed (1) depletion deductions equal to the greater of
percentage depletion or cost depletion (computed on the tax basis of
your Trust Units) and (2) your pro rata share of other deductions of
the Trust; and

. you will be allowed the tax credit for qualifying gas production from
tight sands provided under Section 29 of the Internal Revenue Code,
subject to limitations described in this prospectus.

See "Federal Income Tax Consequences." Tax counsel believes that its
opinion is in accordance with the present position of the Internal Revenue
Service (the "IRS") regarding grantor trusts. Neither the Company nor the
Trustee has requested a ruling from the IRS regarding these tax questions.
There can be no assurance that the Company or the Trust would be granted such
a ruling if requested or that the IRS will continue this position in the
future. Trust Unitholders should be aware of possible state tax implications
of owning Trust Units. See "State Tax Considerations."
FORWARD-LOOKING STATEMENTS
Some statements made by the Company and the Trust in this prospectus under
"Hypothetical Annual Cash Distributions," in addition to statements contained
elsewhere in this prospectus, are prospective and constitute forward-looking
statements. These forward-looking statements involve known and unknown risks,
uncertainties and other factors that could cause actual results to differ
materially from future results expressed or implied by the forward-looking
statements. The most significant risks, uncertainties and other factors are
discussed under "Risk Factors" above.
USE OF PROCEEDS
The Trust will not receive any proceeds from the sale of the Trust Units.
The Company will receive all proceeds (net of underwriting discounts and costs
of the offering paid by the Company) from the sale of its Trust Units of
approximately $ ($ if the Underwriters exercise their over-allotment in
full). The Company intends to apply the net proceeds from the offering to
repay outstanding indebtedness under the Company's bank revolving credit
facility, which bears interest at a floating rate based on LIBOR, currently
7%, and matures on June 30, 2003. Indebtedness under the revolving credit
agreement was incurred to finance recent acquisitions of oil and gas producing
properties.
THE TRUST

The Trust was formed in December 1998 by execution of the Trust Indenture
between NationsBank, N.A., as trustee, and the Company. In connection with the
formation of the Trust, the Company carved the Net Profits Interests from the
Underlying Properties and conveyed the Net Profits Interests to the Trust in
exchange for all 40,000,000 of the Trust Units.

The Company owns the Underlying Properties, subject to the Net Profits
Interests. As owner of the Underlying Properties, the Company receives
payments for the sale of the oil and gas production from purchasers or from
the other operators of the properties. On a state-by-state basis, the Company
combines these payments, deducts costs and expenses where applicable, and pays
to the Trust each month 80% of the Net Proceeds.

The Trustee can authorize the Trust to borrow money to pay expenses that
exceed cash held by the Trust. The Trustee may authorize the Trust to borrow
from the Trustee
14
<PAGE>

as a lender. Because the Trustee is a fiduciary, the terms of the loan must be
fair to the Trust Unitholders. The Trustee may also deposit funds awaiting
distribution in an account with itself, if the interest paid to the Trust at
least equals amounts paid by the Trustee on similar deposits.

The Trustee will be paid a fee of $35,000 per year. The Trustee will
receive a fee of $15,000 for services to terminate the Trust. The Trust will
also incur legal, accounting and engineering fees, printing costs and other
expenses that are deducted from the 80% of Net Proceeds received by the Trust
before distributions are made to Trust Unitholders.
HYPOTHETICAL ANNUAL CASH DISTRIBUTIONS

Estimated proved reserves of the Underlying Properties are composed of
approximately 95% natural gas and 5% oil, based on the discounted present
value of estimated future net revenues as of November 30, 1998. The amount of
Trust revenues and cash distributions to Trust Unitholders will depend on oil
and gas prices, the volume of oil and gas sold and production and development
costs. The Company prepared the following unaudited tables, which demonstrate
the hypothetical effect that changes in the prices for oil and gas could have
on Trust distributions. The tables below show:

. the hypothetical annual cash distributions per Trust Unit for calendar
year 1999 on the accrual or production basis;

. the resulting hypothetical annual cash distributions per Trust Unit as
a percentage of the purchase price of the Trust Unit ("Hypothetical
Pre-Tax Yield"); and

. the resulting hypothetical annual yield following payment of all
federal income tax at the highest individual tax rate of 39.6%
("Hypothetical After-Tax Yield").

The data in the tables are based on:

. an assumed purchase price of $11.00 per Trust Unit;

. various hypothetical oil and gas sales prices, which were chosen
solely for illustrative purposes. See "The Net Profits Interests and
the Underlying Properties--Pro Forma Distributable Income and Oil and
Gas Sales Prices" for historical weighted average oil and gas prices;
and

. the other assumptions described below under "--Assumptions and
Methodology."

THE TABLES ARE NOT A PROJECTION OR FORECAST OF THE ACTUAL OR ESTIMATED
RESULTS FROM AN INVESTMENT IN THE TRUST UNITS. THE PURPOSE OF THE TABLES IS TO
ILLUSTRATE THE SENSITIVITY OF CASH DISTRIBUTIONS AND HYPOTHETICAL PRE-TAX AND
HYPOTHETICAL AFTER-TAX YIELDS TO VARIATIONS IN THE PRICE OF OIL AND GAS. THERE
IS NO ASSURANCE THAT THE ASSUMPTIONS DESCRIBED BELOW WILL ACTUALLY OCCUR OR
THAT THE PRICE OF OIL OR GAS WILL NOT DECLINE OR INCREASE BY AMOUNTS DIFFERENT
FROM THOSE SHOWN IN THE TABLES.

Due to the varying demand for natural gas, the amount of monthly cash
distributions from the Trust may vary on a seasonal basis. Additionally,
month-to-month distributions will vary based on the timing of development
expenditures and the net revenues, if any, generated by development projects.

AS A RESULT OF NATURAL PRODUCTION DECLINES, PRODUCTION ESTIMATES GENERALLY
DECREASE FROM YEAR TO YEAR. ACCORDINGLY, THE HYPOTHETICAL CASH DISTRIBUTIONS
FOR 1999 PRODUCTION DO NOT NECESSARILY INDICATE THE AMOUNT OF DISTRIBUTIONS
FOR FUTURE YEARS.

15
<PAGE>

HYPOTHETICAL ANNUAL CASH DISTRIBUTIONS PER TRUST UNIT
ATTRIBUTABLE TO ESTIMATED 1999 PRODUCTION(a)

<TABLE>
<CAPTION>
HYPOTHETICAL WELLHEAD
HYPOTHETICAL POSTED GAS
OIL PRICE PER BBL(b) PRICE PER MCF(c)
-------------------- --------------------------
$1.50 $2.00 $2.50 $3.00
----- ----- ----- -----
<S> <C> <C> <C> <C>
$10.00........................................... $0.61 $0.99 $1.37 $1.74
15.00........................................... 0.66 1.04 1.41 1.79
20.00........................................... 0.70 1.08 1.46 1.83
25.00........................................... 0.75 1.13 1.50 1.88

HYPOTHETICAL PRE-TAX YIELD AT A TRUST UNIT PRICE OF $11.00
ATTRIBUTABLE TO ESTIMATED 1999 PRODUCTION(a)

HYPOTHETICAL AFTER-TAX YIELD AT A TRUST UNIT PRICE OF $11.00
ATTRIBUTABLE TO ESTIMATED 1999 PRODUCTION(a)(d)

<CAPTION>
HYPOTHETICAL WELLHEAD
HYPOTHETICAL POSTED GAS
OIL PRICE PER BBL(b) PRICE PER MCF(c)
-------------------- --------------------------
$1.50 $2.00 $2.50 $3.00
----- ----- ----- -----
<S> <C> <C> <C> <C>
$10.00........................................... 6.7% 8.8% 10.9% 13.0%
15.00........................................... 7.1 9.1 11.2 13.3
20.00........................................... 7.3 9.4 11.5 13.5
25.00........................................... 7.5 9.6 11.6 13.7
</TABLE>
- --------
(a) Because the Trust Assets are depleting assets, a portion of this
distribution/yield may be considered a return of your original investment
in a Trust Unit.
(b) Oil prices shown are hypothetical posted West Texas Intermediate crude
prices. Posted price is the price paid for oil at a specific point,
unadjusted for gravity and other factors. These prices differ from the
actual price received for production from the Underlying Properties, which
takes into account gravity, quality, transportation and marketing costs. In
the computation of hypothetical distributions, $1.00 per barrel was added
to the hypothetical posted oil price for the foregoing adjustments. See "--
Assumptions and Methodology--Oil and Gas Prices" below.
(c) Gas prices shown are hypothetical wellhead gas prices. Wellhead price is
the net price received for gas and natural gas liquids after all deductions
for transportation, marketing and gathering. The weighted average price
received from December 1997 through November 1998 for natural gas
production from the Underlying Properties was $2.00 per Mcf, which was
approximately $0.25 below the average of the monthly closing NYMEX natural
gas futures contract prices for the same period. However, if previously
occurring location, quality and other differentials continue in the future,
there may be more significant differences between the natural gas price
received and the NYMEX price. See "--Assumptions and Methodology--Oil and
Gas Prices," below.
(d) See "--Assumptions and Methodology--Oil and Gas Prices--Hypothetical After-
Tax Yield" for assumptions relating to federal income taxes.

16
<PAGE>

The following table shows the calculation of the hypothetical 1999 cash
distribution per Trust Unit, pre-tax and after-tax yields, based on the
assumptions described under "Assumptions and Methodology" below and assuming a
$10.00 posted West Texas Intermediate crude oil price ($11.00 realized), a
$2.00 wellhead gas price and a $11.00 Trust Unit price:
HYPOTHETICAL 1999 CASH DISTRIBUTIONS

<TABLE>
<CAPTION>
VOLUMES AMOUNT
------- -------
(IN THOUSANDS,
EXCEPT PER
TRUST UNIT DATA
AND
PERCENTAGES)
<S> <C> <C>
TRUST DISTRIBUTABLE INCOME:
Gas(a)...................................................... 40,347 $80,694
Oil(b)...................................................... 483 5,313
-------
Total revenues.............................................. 86,007
-------
Production and property taxes(c)............................ 7,677
Production expenses......................................... 10,264
Development costs........................................... 12,000
Overhead.................................................... 6,200
-------
Total expenses.............................................. 36,141
-------
Net Proceeds................................................ 49,866
Net profits percentage...................................... 80%
-------
Trust royalty income........................................ 39,893
Trust administrative expense................................ 300
-------
Trust distributable income.................................. $39,593
=======

<CAPTION>
ANNUAL
YIELD
AMOUNT (d)
------- -------
<S> <C> <C>
PER TRUST UNIT (40,000,000 TRUST UNITS):
Total distributions......................................... $ 0.99 9.0%
Cost depletion deduction(e)................................. (0.90)
------
Taxable income.............................................. 0.09
Income tax rate............................................. 39.6%
------
Income tax expense.......................................... 0.04
Section 29 tax credit(f).................................... (0.02)
------
Net tax..................................................... 0.02
------
Total distributions after tax............................... $ 0.97 8.8%
======
</TABLE>
- --------
(a) Volumes are in Mcf. Wellhead gas price is $2.00 per Mcf.
(b) Volumes are in Bbls. Oil price is $11.00 per Bbl ($10.00 West Texas
Intermediate posted crude price plus quality and location adjustment of
$1.00).
(c) Includes production taxes, calculated by multiplying oil and gas revenues
by estimated tax rates, and estimated property taxes.
(d) Because the Trust Units are a depleting asset, a portion of this yield may
be considered a return of capital.
(e) The cost depletion percentage is 8.2%. Cost depletion is recaptured upon
sale of the Trust Units, which results in the taxation of any gain on sale
as ordinary income (as opposed to capital gain) up to the amount of cost
depletion previously deducted.
(f) The tight sands gas tax credit will expire January 1, 2003. This credit
cannot reduce the Trust Unitholder's regular tax liability below his
tentative minimum tax, subject to certain carryover provisions. See
"Federal Income Tax Consequences--Section 29 Tight Sands Gas Tax Credit."

17
<PAGE>

ASSUMPTIONS AND METHODOLOGY

TIMING OF ACTUAL DISTRIBUTIONS

In preparing the tables above, the revenues and expenses of the Trust were
calculated based on the terms of the conveyances creating the Net Profits
Interests as described under "Computation of Net Proceeds," except that amounts
were calculated on an accrual or production basis rather than the cash basis
prescribed by the conveyances. As a result, the proceeds for production for the
final one or two months of 1999, and reflected in the tables above, will
actually enter into the calculation of Net Proceeds to be received by the Trust
in 2000. Similarly, Net Proceeds from production during December 1998 will in
fact be distributed from the Trust in 1999. Accordingly, the hypothetical cash
distributions attributable to 1999 production represent hypothetical cash
distributions from the Trust from February or March 1999 through January or
February 2000.

PRODUCTION ESTIMATES

Production estimates for 1999 were based on the reserve report for the
Underlying Properties prepared by the Company's internal engineers. The reserve
report assumed constant prices at November 30, 1998, based on a West Texas
Intermediate crude oil price of $8.50 ($9.50 realized) per Bbl and the weighted
average wellhead gas price at November 30, 1998 of $2.00 per Mcf. Production
from the Underlying Properties for 1999 is estimated to be 483,000 Bbls of oil
and 40,347,000 Mcf of gas, based on 1998 year-end reserve estimates by the
Company's internal engineers. See "Oil and Gas Prices" below for a description
of changes in production due to price variations. Sales for the 12 months ended
November 30, 1998 were 479,000 Bbls of oil and 38,535,000 Mcf of gas. For
purposes of computing the amount of Section 29 tax credit, tight sands gas
production from the Underlying Properties is estimated to be 2,752,000 Mcf
during 1999 (1,376,000 Mcf net to the Trust). Differing levels of production
will result in different levels of distributions and yields.

OIL AND GAS PRICES

Oil prices shown in the above tables are hypothetical posted oil prices.
Posted price is the price paid for oil at a specific point, unadjusted for
gravity and other factors. Published benchmark prices are typically based upon
West Texas Intermediate crude, a light, sweet oil of a particular gravity.
These prices differ from the average or actual price received by the Company,
which takes into account gravity, quality, transportation and marketing costs.
Differentials between posted oil prices and the prices actually received for
the oil production may vary significantly due to market conditions. In the
computation of hypothetical distributions in the above tables, $1.00 per barrel
is added to the hypothetical posted oil price to reflect these adjustments.
This addition is based on the average difference between the posted price of
West Texas Intermediate crude and the price received by the Company during
1998. Pro forma average oil prices appearing in this prospectus have been
adjusted for these differentials.

Gas prices shown in the above tables are hypothetical wellhead prices for
natural gas. Wellhead price is the net price received for natural gas and
natural gas liquids after all deductions for transportation, marketing and
gathering. The weighted average price of natural gas production from the
Underlying Properties from December 1997 through November 1998 was $2.00 per
Mcf, which was approximately $0.25 below the average of the monthly closing
NYMEX natural gas futures contract prices for the same period. However, if
previously occurring location, quality and other differentials continue in the
future, there may be more significant differences between the natural gas price
received and the NYMEX price.

The foregoing adjustments to posted oil prices and wellhead gas prices
applied in the hypothetical distribution and yield analyses are based upon an
analysis by the Company of the historic price differentials for production from
the Underlying Properties with consideration given to other factors that may
affect these differentials in 1999. There is no assurance that these assumed
differentials will be similar to the actual price differentials for 1999.

When oil and gas prices decline, the operators of the Underlying Properties
may

18
<PAGE>

elect to reduce or completely suspend production. No adjustments have been made
to estimated 1999 production to reflect potential reductions or suspensions of
production.

PRODUCTION EXPENSES, DEVELOPMENT COSTS AND OVERHEAD

For 1999, the Company estimates production expenses to be $10.3 million,
development costs to be $12 million and overhead to be $6.2 million. Overhead
is the estimated fee for all Company-operated properties that is deducted by
the Company in calculating Net Proceeds. For a description of production
expenses and development costs, see "Computation of Net Proceeds."

ADMINISTRATIVE EXPENSE

Trust administrative expense for 1999 is assumed to be $300,000 ($0.0075
per Trust Unit). See "The Trust."

HYPOTHETICAL AFTER-TAX YIELD

Because the Trust Units are a depleting asset, a portion of this yield may
be considered a return of capital.

The Hypothetical After-Tax Yield was computed by determining the amount of
federal income tax that would be paid on the hypothetical distributions at the
highest individual marginal tax rate for 1999 (39.6%) after taking into account
cost depletion deduction of $0.90 per Trust Unit and the Section 29 tax credit
of $0.02 per Trust Unit. (Cost depletion is calculated by multiplying the
assumed Trust Unit price of $11.00 by the cost depletion rate of 8.2%, which is
computed by dividing estimated 1999 production by November 30, 1998 proved
reserves. The Section 29 tax credit was based on estimated tight sands gas
production of 1,376,000 Mcf for the Net Profits Interests at $0.52 per MMBtu.)
This income tax amount was then subtracted from the hypothetical cash
distribution per Trust Unit, and the result divided by $11.00 per Trust Unit to
provide the Hypothetical After-Tax Yield. When the hypothetical distributions
are less than $0.94 per Trust Unit, the Hypothetical After-Tax Yield would be
the same or greater than the Hypothetical Pre-Tax Yield because of cost
depletion and the Section 29 tax credit. In all instances, each Trust
Unitholder is assumed to have a regular federal income tax liability sufficient
to utilize the Section 29 tax credit and the depletion deduction. Alternative
minimum tax implications have not been considered. The Section 29 tax credit
cannot be used to reduce a Trust Unitholder's regular tax below his tentative
minimum tax, calculated as provided in the alternative minimum tax computation
rules. See "Federal Income Tax Consequences--Section 29 Tight Sands Gas Tax
Credit." The effect of state income taxes has not been taken into account in
computing the Hypothetical After-Tax Yield. See "State Tax Considerations."
THE NET PROFITS INTERESTS AND THE UNDERLYING PROPERTIES

GENERAL

The Company created the Net Profits Interests through three conveyances to
the Trust of 80% net profits interests carved from the Company's interests in
properties in Kansas, Oklahoma and Wyoming. The Net Profits Interests entitle
the Trust to receive 80% of the Net Proceeds from the sale of oil and gas
attributable to the Underlying Properties. Net Proceeds equal the gross
proceeds received by the Company from the sale of production less property and
production
taxes, overhead fees and production and development costs. Underlying
Properties that are royalty and overriding royalty interests, are not burdened
by production and development costs or overhead fees. For a more detailed
description of Net Proceeds, see "Computation of Net Proceeds."

The Company owns the Underlying Properties, subject to the Net Profits
Interests conveyed to the Trust. The Company may, at any time, sell all or any
portion of the Underlying Properties, subject to and burdened by the Net
Profits Interests. It has no present intention to do so.

19
<PAGE>

PRO FORMA DISTRIBUTABLE INCOME AND OIL AND GAS SALES VOLUMES

The following table sets forth oil and gas sales volumes and average sales
prices for the Underlying Properties and the calculation of distributable
income (1) for the years ended December 31, 1996, 1997 and 1998 based on
historical net proceeds from the Underlying Properties, (2) for the year ended
December 31, 1998 on a hypothetical basis using development costs of $12
million, as is budgeted for 1999, and (3) for the year ended December 31, 1999
on a hypothetical basis using the assumptions and methodology described under
"Hypothetical Annual Cash Distributions" and using hypothetical prices of
$10.00 ($11.00 realized) for oil and $2.00 for gas. The hypothetical amounts
are not a projection or forecast of the actual or estimated results from an
investment in the Trust Units. They are intended only to demonstrate
distributable income based on assumed prices and costs.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------- ADJUSTED HYPOTHETICAL
1996(a) 1997(a) 1998(a) 1998 (b) 1999 (c)
------- ------- ------- -------- ------------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Underlying Properties
Sales Volumes:
Gas (Mcf)............ 36,143 37,172 38,535 38,535 40,347
Oil (Bbls)........... 455 471 479 479 483
Average Price:
Gas (per Mcf)........ $ 1.67 $ 2.21 $ 2.00 $ 2.00 $ 2.00
Oil (per Bbl)........ $ 19.95 $ 20.63 $ 14.78 $ 14.78 $ 11.00
Calculation of
Distributable Income
Revenues:
Gas sales............ $60,502 $82,192 $77,124 $77,124 $80,694
Oil sales............ 9,075 9,704 7,083 7,083 5,313
------- ------- ------- ------- -------
Total.............. 69,577 91,896 84,207 84,207 86,007
------- ------- ------- ------- -------
Costs:
Taxes on production
and property........ 5,919 9,173 9,170 9,170 7,677
Production expenses.. 11,359 12,837 13,031 13,031 10,264
Development costs.... 19,797 38,875 28,600 12,000 12,000
Overhead............. 4,557 5,354 6,198 6,198 6,200
------- ------- ------- ------- -------
Total.............. 41,632 66,239 56,999 40,399 36,141
------- ------- ------- ------- -------
Net proceeds........... 27,945 25,657 27,208 43,808 49,866
Net profits
percentage............ 80% 80% 80% 80% 80%
------- ------- ------- ------- -------
Trust royalty income... 22,356 20,526 21,766 35,046 39,893
Trust administrative
expense............... 300 300 300 300 300
------- ------- ------- ------- -------
Trust distributable
income (d)............ $22,056 $20,226 $21,466 $34,746 $39,593
======= ======= ======= ======= =======
Trust distributable
income per Trust
Unit (d).............. $ 0.55 $ 0.51 $ 0.54 $ 0.87 $ 0.99
======= ======= ======= ======= =======
</TABLE>
- --------
(a) Based on the audited statements of revenues and direct operating expenses
for the Underlying Properties for the years ended November 30, 1996, 1997
and 1998 included in this prospectus. See Index to Financial Statements.
Net proceeds from the Underlying Properties for the year ended November 30
are received by the Trust in the year ended December 31.
(b) Based on the audited statement of revenues and direct operating expenses
for the Underlying Properties for the year ended November 30, 1998, as
described under (a), with the exception that development costs are assumed
to be $12 million, as is budgeted for 1999.
(c) Based on the assumptions and methodology described under "Hypothetical
Annual Cash Distributions" and using hypothetical prices of $10.00 for oil
and $2.00 for gas.
(d) On a pro forma basis, assuming the Net Profits Interests were conveyed to
the trust prior to January 1, 1996 and that Trust administration expenses
were $300,000 annually.

20
<PAGE>

DISCUSSION AND ANALYSIS OF
PRO FORMA DISTRIBUTABLE INCOME

Trust royalty income from the Net Profits Interests was $22,356,000 for
1996, $20,526,000 for 1997 and $21,766,000 for 1998. The changes in royalty
income were primarily related to changes in volumes, prices and development
costs. Gas sales were 89% of total revenues for the three-year period ended
December 31, 1998. Trust royalty income is recorded when received by the Trust,
which is the month following receipt by the Company, and generally two months
after the related oil and gas production.

VOLUMES

Gas sales volumes from the Underlying Properties increased 3% from 1996 to
1997, and 4% from 1997 to 1998. Oil sales volumes from the Underlying
Properties increased 4% from 1996 to 1997, and 2% from 1997 to 1998. The
increases were primarily attributable to the timing of development projects.

PRICES

The average gas price increased 32% from $1.67 per Mcf in 1996 to $2.21 in
1997, and decreased 10% from 1997 to $2.00 in 1998. The 1996 prices were at the
beginning of an upturn in gas prices that lasted through the summer of 1998.
The average oil price increased 3% from $19.95 per Bbl in 1996 to $20.63 in
1997, and decreased 28% from 1997 to $14.78 in 1998. The lower 1998 oil prices
were caused by increased global production without a corresponding increase in
consumption. The weighted average price of oil for November 1998 (related to
Trust distributable income for January 1999) is estimated to be $11.34.

COSTS

Total costs deducted in the calculation of royalty income increased 59%
from $41,632,000 in 1996 to $66,239,000 in 1997, followed by a 14% decrease to
$56,999,000 in 1998. The primary reason for the fluctuation among the three
years was the timing of development projects. Many of the Underlying Properties
were purchased by the Company in 1995 and 1996, leading to large development
expenditures in 1997 and 1998. Development costs rose 96% from $19,797,000 in
1996 to $38,875,000 in 1997, and decreased 26% to $28,600,000 in 1998 as
development projects were completed. Going forward the Company expects
development costs of $12,000,000 per year.

Production expense rose 13% from $11,359,000 in 1996 to $12,837,000 in
1997, and increased 2% to $13,031,000 from 1997 to 1998. Most of the increase
is related to the timing of major remedial projects such as workovers and
subsurface maintenance and to increases in production volumes. On a per Mcfe
basis, production costs declined from $.32 in 1997 to $.31 in 1998. Taxes on
production and property have generally fluctuated in relation to revenue
levels.

Overhead expenses charged to the Underlying Properties by the Company were
$4,557,000 for 1996, $5,354,000 for 1997 and $6,198,000 for 1998. Fluctuations
resulted from changes in the number of active operated wells and the increase
in overhead rates per well.

PRODUCING ACREAGE AND WELL COUNTS

For the following data, "gross" refers to the total wells or acres in which
the Company owns a working interest and "net" refers to gross wells or acres
multiplied by the percentage working interest owned by the Company. Although
many of the Company's wells produce both oil and gas, a well is categorized as
an oil well or a gas well based upon the ratio of oil to gas production.

The Underlying Properties are interests in developed properties located
primarily in gas producing regions of Kansas, Oklahoma and Wyoming. The
following is a summary of approximate producing acreage of the Underlying
Properties at November 30, 1998. Undeveloped acreage is not significant.

<TABLE>
<CAPTION>
Gross Net
------- -------
<S> <C> <C>
Oklahoma........................................................ 341,987 274,001
Kansas.......................................................... 72,253 60,485
Wyoming......................................................... 40,141 28,258
------- -------
Total........................................................... 454,381 362,744
======= =======
</TABLE>

21
<PAGE>

The following is a summary of the producing wells on the Underlying
Properties as of November 30, 1998:

<TABLE>
<CAPTION>
OPERATED NON-OPERATED
WELLS WELLS TOTAL
------------- ------------- -------------
GROSS NET GROSS NET GROSS NET
----- ------- ------------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Gas................................... 1,007 915.6 254 59.9 1,261 975.5
Oil................................... 146 129.0 7 1.5 153 130.5
----- ------- ----- ------ ----- -------
Total................................. 1,153 1,044.6 261 61.4 1,414 1,106.0
===== ======= ===== ====== ===== =======
</TABLE>

The following is a summary of the number of development wells drilled by
the Company on the Underlying Properties during the years indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1996 1997 1998
---------- ---------- ----------
GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Completed as--
Gas wells (a).................................. 39 30.9 79 68.8 64 43.7
Oil wells...................................... 2 2.0 1 1.0 -- --
Non-productive................................. -- -- 2 1.5 1 1.0
--- ---- --- ---- --- ----
Total (b)...................................... 41 32.9 82 71.3 65 44.7
=== ==== === ==== === ====
</TABLE>
- --------
(a) One gross (0.5 net) gas well drilled in 1997 was an exploratory well.
(b) Included in totals are 9 gross (3.2 net) in 1996, 8 gross (1.5 net) in 1997
and 25 gross (8.8 net) in 1998 wells drilled on non-operated interests.

OIL AND GAS SALES PRICES AND PRODUCTION COSTS

The following table shows the average sales prices per Bbl of oil and Mcf of
gas produced and the production costs and production and property taxes per
Mcfe for the Underlying Properties:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Sales prices:
Gas (per Mcf)......................................... $ 1.67 $ 2.21 $ 2.00
Oil (per Bbl)......................................... 19.95 20.63 14.78
Production costs per Mcfe.............................. 0.29 0.32 0.31
Taxes on production and property per Mcfe.............. 0.15 0.23 0.22
</TABLE>

MAJOR PRODUCING AREAS

HUGOTON AREA

Natural gas was discovered in 1922 in the Hugoton area, the largest gas
producing area in North America, covering parts of Texas, Oklahoma and Kansas
with an estimated five million productive acres. The Permian-aged Chase
formation is the major productive formation in the Hugoton area, ranging in
depth from 2,700 to 2,900 feet. There are more than 7,200 Chase wells currently
producing. More than 64 trillion cubic feet of natural gas have been produced
from the Hugoton area.

Additional productive formations in the Hugoton area include the Council
Grove between 2,950 and 3,400 feet, the Chester between 6,350 and 6,700 feet
and the Morrow between 6,000 and 6,300 feet. The Company is actively exploring
and developing these additional formations on the properties included in the
Underlying Properties.

The Company's current net production from the Underlying Properties
averages approximately 30,000 Mcf of gas per day and 260 Bbls of oil per day.

The Company delivers approximately 70% of its Hugoton gas production to a
gathering and processing system operated by a subsidiary. This system collects
71% of its throughput from Underlying Properties, which, in recent months, has
been approximately 24,600 Mcf per day from 243 wells. The subsidiary purchases
the gas from the Company at the wellhead, gathers and transports the gas to its
plant, treats and processes the gas at the plant, and then transports the gas
to the marketing pipelines. The Company sells the gas to the subsidiary under
long-term contracts at a price equal to 80% to 85% of the price received by the
subsidiary for the gas, and the price is adjusted based upon the Btu content of
the gas. The subsidiary sells the gas to a marketing affiliate of the Company
based upon the average price of several published indices less any pipeline
access fees incurred by the marketing subsidiary. Pipeline access fees
currently are approximately $0.02 per Mcf.

Other Hugoton gas production is delivered under a third party contract.
Under the contract, the Company receives 74.5% of the net proceeds received
from the sale of the residue gas and liquids.

22
<PAGE>

While much of the Kansas portion of the Hugoton Field has been infill
drilled on 320-acre spacing, the Company believes there are up to 40 additional
potential infill drilling locations. The Oklahoma portion is drilled on 640-
acre spacing. If new legislation is enacted in Oklahoma, the Company believes
that with regulatory approval there are approximately 200 potential infill
drilling locations in that state.

The Company drilled 12 gross (10.9 net) wells in 1997, and 17 gross (10.5
net) wells in 1998, to the Chester, Council Grove and Chase formations, all of
which were successfully completed.

ANADARKO BASIN

Major County Area

The Company is one of the largest producers in the Ringwood, Northwest Okeene
and Cheyenne Valley fields in Major County, Oklahoma. Current net daily gas
production from the Underlying Properties is approximately 31,100 Mcf and oil
production is approximately 1,000 Bbls.

Oil and gas were first discovered in the Major County area in 1945. The
fields in the Major County area are characterized by oil and gas production
from a variety of structural and stratigraphic traps. Productive zones range
from 6,500 to 9,400 feet and include the Oswego, Red Fork, Chester, Manning,
Mississippian, Hunton and Arbuckle formations.

The Company develops the Major County area primarily through mechanical
improvements, restimulations, recompletions to shallower zones and development
drilling. The Company drilled 25 gross (20.3 net) wells in 1997, and 23 gross
(16.3 net) wells in 1998, in the western portion of Major County, targeted at
the Mississippian and Chester formations. All of these wells were successfully
completed.

A gathering subsidiary of the Company operates a 300-mile gathering system
and pipeline in the Major County area. The gathering subsidiary and a third
party processor purchase gas produced at the wellhead from the Company and
other producers in the area under life of production contracts. The gathering
subsidiary gathers and transports the gas to a third party processor, which
processes the gas and pays the Company and other producers for 50% to 70% of
the liquids processed. After the gas is processed, the gathering subsidiary
transports the gas via a 26-mile pipeline to a connection with other pipelines.
The gathering subsidiary sells the residue gas to the marketing subsidiary of
the Company based upon the average price of several published indices. The
gathering subsidiary pays this price to the Company less a gathering fee of
$.313 per Mcf of residue gas. This gathering fee was previously approved by the
Federal Energy Regulatory Commission when the gathering subsidiary was
regulated. In recent months, the gathering system has been collecting
approximately 25,500 Mcf per day from over 400 wells, 70% of which the Company
operates. Estimated capacity of the gathering system is 40,000 Mcf per day. The
gathering subsidiary also provides contract operating services to properties in
Woodward County, collecting approximately 80,000 Mcf per month from 25 wells,
for a historical average fee of approximately $.125 per Mcf.

The Company also markets gas to its marketing subsidiary, which sells the
gas to third parties. The price paid to the Company is based upon the average
price of several published indices, less any transportation fees charged by the
third party.

Elk City Field

The Elk City Field is located in Beckham and Washita Counties of Western
Oklahoma. Current net production of Underlying Properties in the Elk City Field
is approximately 130 Bbls of oil and 3,300 Mcf of gas per day.

The Elk City Field was discovered in 1947 and has been extensively
developed. Production is from the Hoxbar (9,500 feet), Atoka (13,100 feet) and
Morrow (15,500 feet) zones. The Company has enhanced production primarily by
adding mechanical efficiencies and recompleting additional productive
intervals. Opportunities remain for additional recompletions and zone
isolations in the field.

23
<PAGE>

The Company added significant additional reserves through recent recompletions
to the Atoka Formation.

Gas produced from the Elk City Field is processed by a third party which
pays the Company 80% of the proceeds received from the sale of the liquids. The
Company sells the residue gas to its marketing subsidiary, which pays the
Company the average price of several published indices.

GREEN RIVER BASIN

Gas was discovered in the Fontenelle area in the early 1970s. The producing
reservoirs are the Cretaceous-aged Frontier and Dakota sandstones at depths
ranging from 7,500 to 10,000 feet. Potential development activities for the
fields in this area include restimulations, recompletions and development
drilling in the Frontier Sandstone. Additionally, there is the potential to
recomplete wells to the Baxter Sand.

The Company markets the gas produced from the Fontenelle Unit and nearby
properties, under three different marketing arrangements. Under the agreement
covering 70% of the gas sold, the Company compresses the gas on the lease,
transports it off the lease and compresses the gas again prior to entry into
the marketing pipeline. The Company sells the gas to its marketing subsidiary.
The marketing subsidiary delivers the gas to the processor, which takes
delivery of the gas at the entry into the marketing pipeline, transports it 35
miles to its plant, processes the gas and redelivers it to the marketing
subsidiary and charges a fee of $.0792 per MMBtu for the transportation and
processing. The marketing subsidiary then sells the residue gas based upon a
spot sales price, and pays the Company the net proceeds that the marketing
subsidiary receives. Condensate is sold at the lease to an independent third
party at market rates. The gas not sold under the above arrangement is sold
either under a similar arrangement where the fee is $.145 per MMBtu, or under a
contract where the Company directly sells the gas to a third party on the lease
at an adjusted index price.

The Company drilled 35 gross (34 net) wells in 1997 and 16 gross (16 net)
wells in 1998 in the Fontenelle Unit, all of which were successfully completed.

During 1997, the Company installed additional field compression to lower
overall field operating pressures and improve overall field performance. The
Company also completed an interconnect to another pipeline in the southeastern
part of the Fontenelle field that added an additional market for gas.

OIL AND GAS RESERVES

GENERAL

The Company's internal engineers estimated oil and gas reserves
attributable to the Net Profits Interests as of November 30, 1998. Numerous
uncertainties are inherent in estimating reserve volumes and values, and the
estimates are subject to change as additional information becomes available.
The reserves actually recovered and the timing of production of the reserves
may vary significantly from the original estimates.

The Company's internal engineers calculated reserve quantities and revenues
for the Net Profits Interests from projections of reserves and revenues
attributable to the combined interests of the Trust and the Company in the
Underlying Properties. Because the Trust owns Net Profits Interests and not a
specific ownership percentage of the oil and gas reserve quantities, the amount
of reserves allocated to the Trust's Net Profits Interests have been reduced to
adjust for its allocated payment of 80% of applicable production and
development costs.

The standardized measure of discounted future net cash flows and changes in
discounted cash flows presented below were prepared using assumptions required
by the

24
<PAGE>

Financial Accounting Standards Board. These assumptions include the use of
year-end prices for oil and gas and year-end costs for estimated future
development and production expenditures to produce the proved reserves.

Because natural gas prices are influenced by seasonal demand, use of year-
end prices, as required by the Financial Accounting Standards Board, may not be
the most accurate basis for estimating future revenues or reserve data. Future
net cash flows are discounted at an annual rate of 10%. There is no provision
for federal income taxes because future net revenues are not subject to
taxation at the Trust level.

Oil prices used to determine the standardized measure at November 30, 1998
were based on West Texas Intermediate crude prices of $8.50 ($9.50 realized)
per Bbl. The weighted average November 30, 1998 wellhead gas price used to
determine the standardized measure was $2.00 per Mcf.

PROVED RESERVES

The following table shows proved reserves and proved developed reserves at
November 30, 1998 for the Underlying Properties and the Net Profits Interests
(in thousands). Proved reserves for the Net Profits Interests are calculated by
subtracting from 80% of proved reserves of the Underlying Properties,
quantities of a sufficient value to pay 80% of the future estimated costs
deducted in calculating Net Proceeds. Accordingly, proved reserves for the Net
Profits Interests reflect quantities that are free of future costs and expenses
based on the price and cost assumption used in the reserve estimates.

<TABLE>
<CAPTION>
80% OF
UNDERLYING PROPERTIES UNDERLYING PROPERTIES NET PROFITS INTERESTS
------------------------- ------------------------- -------------------------
GAS GAS GAS
OIL GAS EQUIVALENTS OIL GAS EQUIVALENTS OIL GAS EQUIVALENTS
MBBLS MMCF MMCFE MBBLS MMCF MMCFE MBBLS MMCF MMCFE
----- ------- ----------- ----- ------- ----------- ----- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proved reserves......... 4,328 491,934 517,902 3,462 393,547 414,322 2,398 272,492 286,880
Proved developed
reserves............... 3,610 416,932 438,592 2,888 333,546 350,874 2,091 241,480 254,026
</TABLE>

The Company expects to spend $12 million per year for development of the
Underlying Properties in the future and expects that development activities
will moderate the rate of decline of proved reserves.

25
<PAGE>

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED RESERVES

The following table provides the summary calculation of the standardized
measure of discounted future net cash flows of the Net Profits Interests as of
December 31, 1998:

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Future cash flows................................................ $567,762
Future production taxes.......................................... 60,550
--------
Future net cash flows............................................ 507,212
10% discount factor.............................................. 241,636
--------
Standardized measure............................................. $265,576
========
</TABLE>

REGULATION

NATURAL GAS REGULATION

The availability, terms and cost of transportation significantly affect
sales of natural gas. The interstate transportation and sale for resale of
natural gas is subject to federal regulation, including transportation rates,
storage tariffs and various other matters, primarily by the Federal Energy
Regulatory Commission ("FERC"). Federal and state regulations govern the price
and terms for access to natural gas pipeline transportation. The FERC's
regulations for interstate natural gas transmission in some circumstances may
also affect the intrastate transportation of natural gas.

While natural gas prices are currently unregulated, Congress historically
has been active in the area of natural gas regulation. The Company cannot
predict whether new legislation to regulate natural gas might be proposed, what
proposals, if any, might actually be enacted by Congress or the various state
legislatures, and what effect, if any, the proposals might have on the
operations of the Underlying Properties.

Sales of crude oil, condensate and natural gas liquids are not currently
regulated and are made at market prices. The FERC implemented regulations on
January 1, 1995, to establish an indexing system for transportation rates for
oil that could increase the cost of transporting oil to the purchaser. The
Company is not able to predict what effect, if any, these regulations might
have.

STATE REGULATION

The various states regulate the production and sale of oil and natural gas,
including imposing requirements for obtaining drilling permits, the method of
developing new fields, the spacing and operation of wells and the prevention of
waste of oil and gas resources. States may regulate rates of production and may
establish maximum daily production allowables from both oil and gas wells based
on market demand or conservation, or both.

OTHER REGULATION

The Mineral Management Service of the United States Department of Interior
is evaluating existing methods of settling royalties on federal and Native
American oil and gas leases. A portion of the Underlying Properties, primarily
those located in Wyoming, involve federal leases. Although the final rules
could cause an increase in the federal royalties to be paid on these properties
and, correspondingly, decrease the revenue to the Company and the Trust from
these properties, the Company does not believe that the proposed rule changes
will have a significant detrimental effect on the distributions from the Trust.

The petroleum industry is also subject to compliance with various other
federal, state and local regulations and laws, including those relating to
environmental protection, occupational safety, resource conservation and equal
employment opportunity. The Company does not believe that compliance with these
laws will have a material adverse effect upon the Trust Unitholders.

TITLE TO PROPERTIES

The Company believes that its title to the Underlying Properties is, and
the Trust's title to the Net Profits Interest will be, good and defensible in
accordance with standards generally accepted in the oil and gas industry.

26
<PAGE>

The Underlying Properties are typically subject, in one degree or another,
to one or more of the following:

. royalties, overriding royalties and other burdens, under oil and gas
leases;

. contractual obligations (including, in some cases, development obligations)
arising under operating agreements, farmout agreements, production sales
contracts and other agreements that may affect the properties or their
titles;

. liens that arise in the normal course of operations, such as those for
unpaid taxes, statutory liens securing unpaid suppliers and contractors and
contractual liens under operating agreements;

. pooling, unitization and commutation agreements, declarations and orders;
and

. easements, restrictions, rights-of-way and other matters that commonly
affect property.

To the extent that these burdens and obligations affect the Company's
rights to production and the value of production from the Underlying
Properties, they have been taken into account in calculating the Trust's
interests and in estimating the size and the value of the reserves attributable
to the Net Profits Interests. The Company believes that the burdens and
obligations affecting the Underlying Properties and the Net Profits Interests
are conventional in the industry for similar properties. The Company also
believes that the burdens and obligations do not in the aggregate materially
interfere with the use of the Underlying Properties and will not materially
adversely affect the value of the Net Profits Interests.

Although the matter is not entirely free from doubt, the Company believes
that the Net Profits Interests should constitute real property interests under
Oklahoma and Wyoming law, but not under Kansas law. The Company will record the
conveyances in the appropriate real property records of Kansas, Oklahoma and
Wyoming, the states in which the Underlying Properties are located. If during
the term of the Trust the Company should become a debtor in a bankruptcy
proceeding, it is not entirely clear that the Net Profits Interests would be
treated as real property interests under the laws of Oklahoma and Wyoming, and
they would not be so treated under Kansas law. If a determination were made in
a bankruptcy proceeding that a Net Profits Interest did not constitute a real
property interest under applicable state law, it could be designated an
executory contract. An executory contract is a term used, but not defined, in
the federal bankruptcy code to refer to a contract under which the obligations
of both the debtor and the other party are so unsatisfied that the failure of
either to complete performance would constitute a material breach excusing
performance by the other. If a Net Profits Interest were designated an
executory contract and rejected in the bankruptcy proceeding, the Company would
not be required to perform its obligations under the Net Profits Interest and
the Trust would seek damages as one of the Company's unsecured creditors.
Although no assurance can be given, the Company does not believe that the Net
Profits Interests should be subject to rejection in a bankruptcy proceeding as
executory contracts.

MARKETING

A subsidiary of the Company markets the Company's gas production and the
gas output of the gathering and processing systems operated by other Company
subsidiaries. The gas is sold on a monthly basis to third parties for the best
available price, although the Company occasionally enters into forward
contracts for future deliveries. Oil production is generally marketed at the
wellhead to third parties at the best available price. The marketing subsidiary
may arrange to accumulate oil from a number of different locations and
transport it to a central point where the greater volume will provide a higher
price, net of the transportation costs. The Company arranges for some of its
gas to be processed by unaffiliated third parties and markets the natural gas
liquids from that processing in a similar manner as it markets its oil. The gas
attributable to the Underlying Properties will be marketed under the existing
sales contracts. Contracts covering production from the Major County area are
for the life of the lease, and

27
<PAGE>

the contract for the majority of production from the Hugoton area expires in
2004. If new contracts are entered into with unaffiliated third parties, the
proceeds from sales under those new contracts will be included in Gross
Proceeds. If new contracts are entered into with the marketing subsidiary, it
may charge the Company a fee that may not exceed 2% of the sales price of the
oil and gas received from unaffiliated third parties. The sales price is net of
any deductions for transportation from the wellhead to the unaffiliated third
parties and any gravity or quality adjustments.

YEAR 2000

"Year 2000," or the ability of computer systems to process dates with years
beyond 1999, affects almost all companies and organizations. Computer systems
that are not Year 2000 compliant by January 1, 2000 may cause material adverse
effects to companies and organizations that rely upon those systems. The
Trust's timely receipt of royalty income and disbursement of distributable
income to Trust Unitholders will largely be dependent upon performance of
computer systems of the Company and other third parties. Because the Trust will
not use the Trustee's computer systems to any significant degree, the Trustee's
Year 2000 compliance should not significantly affect the Trust.

The Company is in the process of reviewing its computer systems and making
the necessary modifications for Year 2000 compliance. The Company has completed
most of the modifications of its primary accounting and land computer programs
and is currently testing these modifications. Remediation and testing of all
the Company's computer systems is expected to be completed by June 1999. Based
on its review, remediation efforts and the results of testing to date, the
Company does not believe that timely modification of its computer systems for
Year 2000 compliance represents a material risk to the Trust. The Company's
costs related to Year 2000 compliance efforts to date have not been material,
and it expects that future costs will not be material. The Trust will not incur
any of the Company's Year 2000 costs.

The Company has identified significant third parties whose Year 2000
compliance could affect the Company, and is in the process of formally
inquiring about their Year 2000 status. Despite its efforts to assure that such
third parties are Year 2000 compliant, the Company cannot provide assurance
that all significant third parties will achieve compliance in a timely manner.
Such failure to achieve Year 2000 compliance could have a material adverse
effect on the Company's operations and cash flow, and therefore have a material
adverse impact on timely Trust distributions to Trust Unitholders. The extent
of that effect is currently unknown.

The Company is developing contingency plans in the event of potential
problems resulting from failure of the Company's or significant third parties'
computer systems on January 1, 2000. The Company expects these contingency
plans to be completed by September 1999.

LITIGATION

The Company is a defendant in two lawsuits that could, if adversely
determined, decrease the Net Proceeds from certain of the Underlying
Properties.

A class action lawsuit, Booth, et al. v. Cross Timbers Oil Company, was
filed on April 3, 1998 in the District Court of Dewey County, Oklahoma by
royalty owners of natural gas wells in Oklahoma. The plaintiffs allege that
since 1991 the Company has underpaid royalty owners as a result of (1) reducing
royalties for improper charges for production, marketing, gathering, processing
and transportation costs and (2) selling gas through affiliated companies at
prices less favorable than those paid by third parties. The Company believes
that it has strong defenses to this lawsuit and intends to vigorously defend
its position. However, if a judgment or settlement increased the amount of
future royalty payments, the Trust would bear its proportionate share of the
increased royalties through reduced Net Proceeds. The amount of any reduction
in Net

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Proceeds is not presently determinable, but is not expected to be material.

A second lawsuit, United States of America ex rel. Grynberg v. Cross
Timbers Oil Company, et al., was filed in the United States District Court for
the Western District of Oklahoma. This action alleges that in computing
royalties payable for natural gas produced from federal leases and lands owned
by Native Americans, the Company has mismeasured the volume of gas and
wrongfully analyzed its heating content. The suit, which was brought under the
qui tam provisions of the U.S. False Claims Act, seeks treble damages for the
unpaid royalties (with interest), civil penalties and an order for the Company
to cease the allegedly improper measuring practices. This lawsuit is one of
more than 75 suits filed nationwide by the same plaintiff alleging similar
claims against over 300 producers and pipeline companies. Royalties paid by
the Company for production from Underlying Properties on federal and Native
American lands during the 12 months ended November 30, 1998, totalled $2.8
million. The Company believes that the allegations of this lawsuit are without
merit. However, an order to change measuring practices or a related settlement
could adversely affect the Trust by reducing Net Proceeds in the future by an
indeterminable amount.

Damages relating to production prior to the formation of the Trust will be
borne by the Company.
COMPUTATION OF NET PROCEEDS
The provisions governing the computation of the Net Proceeds are detailed
and extensive. The following description of the Net Profits Interests and the
computation of Net Proceeds is subject to and qualified by the more detailed
provisions of the conveyances of the Net Profits Interests that are filed as
exhibits to the registration statement. See "Available Information."

NET PROFITS INTERESTS

The Net Profits Interests are defined net profits interests carved from
the Underlying Properties. Each Net Profits Interest entitles the Trust to
receive 80% of the Net Proceeds from the sale of oil and natural gas produced
from the Underlying Properties.

The amounts paid to the Trust for the Net Profits Interests are based on
the definitions of "gross proceeds" and "net proceeds" set forth in the
conveyances and described below. Under the conveyances, Net Proceeds are
computed monthly (a "Computation Period"). The Company pays 80% of the
aggregate Net Proceeds attributable to a Computation Period to the Trust on or
before the last business day of the month following the Computation Period.
The Company will not pay to the Trust interest on the Net Proceeds held by the
Company prior to payment to the Trust. The Trustee makes distributions to
Trust Unitholders monthly. See "Description of the Trust Units--Distributions
and Income Computations."

Net Proceeds equal the excess of Gross Proceeds over Production Costs and
Excess Production Costs attributable to a Computation Period. For royalty and
overriding royalty interests, Production Costs are zero.

Gross Proceeds means the amounts received by the Company from sales of oil
and gas produced from the Underlying Properties, after deducting:

. all general property (ad valorem), production, severance, sales,
gathering, excise and other taxes and gathering costs if they are
deducted or excluded from the proceeds of sales;

. any amounts attributable to nonconsent-operations as to which the
Company is a nonconsenting party and that are dedicated to the
reimbursement of costs and expenses of the consenting party; and

. any payment made to the owner of the Underlying Properties for gas not
taken (but to the extent payments are allocated to gas taken in the
future, payments are included, without interest, in Gross Proceeds
when such gas is taken), damages (other than drainage or reservoir
injury), rental for reservoir use and payments made to the owner of
the Underlying Properties in connection with the drilling of any well.

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Gross Proceeds does not include (1) consideration for the transfer or sale
of the Underlying Properties or (2) any amount for oil and gas lost in
production or marketing or used by the owner of the Underlying Properties in
drilling, production and plant operations. Gross Proceeds includes payments for
future production if they are not subject to repayment in the event of
insufficient subsequent production.

Production Costs means, on a cash basis, generally the sum of:

. all royalties or other burdens against production,delay rentals, shut-
in gas payments, minimum royalty or other payments for drilling or
deferring drilling;

. any taxes paid by the owner of the Underlying Properties to the extent
not deducted in calculating Gross Proceeds, including estimated and
accrued ad valorem and other property taxes;

. costs paid by the owner of the Underlying Properties under any joint
operating agreement;

. all other costs, expenses and liabilities of exploring for, drilling,
operating and producing oil and gas, including allocated expenses
(such as labor, vehicle and travel costs and materials);

. costs or charges associated with gathering, treating and processing
gas;

. certain interest costs;

. any overhead charge;

. amounts previously included in gross proceeds but subsequently paid as
a refund, interest or penalty;

. costs and expenses for renewals or extensions of leases; and

. at the option of the owner of the Underlying Properties, accruals for
costs approved under authorizations for expenditure.

As is customary in the oil and gas industry, the Company charges an
overhead fee to operate the Underlying Properties. The operating activities
include various engineering, accounting and administrative functions. The fee
is based on a monthly charge per active operated well, and it totalled $6.2
million in 1998 for all properties operated by the Company. The fee is adjusted
annually and will increase or decrease each year based on changes in the year-
end index of average weekly earnings of crude petroleum and gas workers.

Excess Production Costs are the excess of Production Costs over Gross
Proceeds, plus interest accrued at the prime rate. Therefore, if Production
Costs exceed Gross Proceeds for a Computation Period, the Trust will receive no
payment for that period, and Excess Production Costs will be carried over to
the following month as a Production Cost in determining the excess of Gross
Proceeds over Production Costs for that following month.

Gross Proceeds and costs are calculated on a cash basis, except that
certain costs, primarily ad valorem taxes and expenditures of a material
amount, may be determined on an accrual basis. For convenience in complying
with state tax laws, the Net Profits Interests were created by three separate
conveyances, one for each of Kansas, Oklahoma and Wyoming, the three states in
which the Underlying Properties are located. Net Proceeds are calculated
separately for the Underlying Properties covered by each conveyance, so Excess
Production Costs in one state do not reduce Net Proceeds from the others.

Cash distributions generally will include one month's Net Proceeds less
related Trustee expenses and administrative charges. However, the first
distribution, which will be made in April 1999 to record holders as of March
31, 1999, will include Net Proceeds received, less Trustee's expenses, during
the period December 1, 1998 through February 28, 1999. This initial
distribution will also be adjusted to exclude any development charges on the
Underlying Properties incurred through December 31, 1998, which the Company
will bear.

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ADDITIONAL PROVISIONS

If a controversy arises as to the sales price of any oil or gas, then for
purposes of determining Gross Proceeds:

. amounts withheld or placed in escrow by a purchaser are not considered
to be received by the owner of the Underlying Property until actually
collected;

. amounts received by the owner of the Underlying Property and promptly
deposited with a nonaffiliated escrow agent will not be considered to
have been received until disbursed to it by the escrow agent; and

. amounts received by the owner of the Underlying Property and not
deposited with an escrow agent will be considered to have been
received.

The Trust is not liable to the owner of the Underlying Properties or the
operators for any operating, capital or other costs or liabilities attributable
to the Underlying Properties. The Trustee is not obligated to return any income
received from the Net Profits Interests, but overpayments made to the Trust
will reduce future amounts payable to the Trust until the Company recovers the
overpayments plus interest at the prime rate.

The conveyances permit the Company to assign without the consent or
approval of the Trust Unitholders all or any part of the Underlying Properties,
subject to the Net Profits Interests. The Trust Unitholders are not entitled to
any proceeds of a transfer. Following a transfer, the Underlying Properties
will continue to be burdened by the Net Profits Interests, and the Net Proceeds
attributable to the transferred property will be calculated separately and paid
by the transferee. The conveyances have been recorded in the appropriate real
property records to give notice of the Net Profits Interests to the Company's
creditors and transferees.

Upon notice from the Company, the Trust is required to sell for cash Net
Profits Interests that relate to Underlying Properties which the Company is
selling to an unaffiliated party. These types of sales may not exceed in any
calendar year 1% of the discounted present value of estimated future net
revenues for the proved reserves of the Underlying Properties allocated to the
Trust's Net Profits Interests, as set forth in the most recent reserve report.
The Trust will receive 80% of the net proceeds from a sale.

The Company, acting in good faith and as a reasonably prudent operator, may
enter into farmout, operating, participation, joint venture and other similar
agreements covering the Underlying Properties. The Company may enter into any
of these agreements without the consent or approval of the Trustee or any Trust
Unitholder. The Net Profits Interests held by the Trust would then be
calculated on the interest retained by the Company under the agreement and not
on the Company's original interest before any modification resulting from the
agreement.

The Company and any transferee will have the right to abandon any well or
property if it believes the well or property ceases to produce or is not
capable of producing in commercially paying quantities. Upon termination of the
lease, that portion of the Net Profits Interests relating to the abandoned
property will be extinguished.

The Company must maintain books and records sufficient to determine the
amounts payable for the Net Profits Interests. Quarterly and annually, the
Company must deliver to the Trustee a statement of the computation of the Net
Proceeds for each Computation Period. The Company will cause the annual
computation of Net Proceeds to be audited. The audit cost will be borne by the
Trust.

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FEDERAL INCOME TAX CONSEQUENCES

This section summarizes the principal federal income tax consequences of
the ownership and sale of Trust Units. Many aspects of federal income taxation
that may be relevant to a particular taxpayer or to certain types of taxpayers
subject to specific tax treatment are not addressed. In addition, the tax laws
can and do change regularly and any future changes could have an adverse effect
on the ownership or sale of Trust Units. The Trust will not request advance
rulings from the IRS dealing with the tax consequences of ownership of Trust
Units but will rely on the opinion of Butler & Binion, L.L.P. ("Tax Counsel")
regarding the classification of the Trust and certain federal income tax
consequences described below, which will be confirmed at the time of the
closing. Tax Counsel believes that its opinion is in accordance with the
present position of the IRS regarding grantor trusts. The tax opinion is not
binding on the IRS or the courts, however, and no assurance can be given that
the IRS or the courts will agree with the opinion.

SUMMARY OF LEGAL OPINIONS

Tax Counsel is of the opinion that, for federal income tax purposes, (1)
the Trust will be treated as a grantor trust and not an association taxable as
a corporation, (2) the income from the Net Profits Interests will be royalty
income subject to an allowance for depletion, and (3) subject to the
limitations described below, a Trust Unitholder will be allowed a Section 29
tax credit with respect to his share of qualifying gas production from tight
sands attributable to the Net Profits Interests. Tax Counsel advises that,
unless noted otherwise, legal conclusions stated in this section constitute the
opinion of Tax Counsel. Tax Counsel's opinions are based on the Company's
representation that none of the Underlying Properties are or will be the
subject of any agreement that constitutes a partnership for federal income tax
purposes.

No ruling is being requested from the IRS with respect to the Trust or
Trust Unitholders. Therefore, the IRS could challenge the opinions and
statements set forth herein (which do not bind the IRS or the courts), and the
IRS could win in court if it did challenge these matters.

CLASSIFICATION AND TAXATION OF THE TRUST

In the opinion of Tax Counsel, under current law, the Trust will be taxable
as a grantor trust and not as a business entity. As a grantor trust, the Trust
will not be subject to tax at the trust level. For tax purposes, the grantors
(in this case, the Trust Unitholders) will be considered to own the Trust's
income and principal as though no trust were in existence. A grantor trust
simply files an information return, reporting all items of income, credit or
deductions which must be included in the tax returns of the grantors based on
their respective accounting methods and taxable years without regard to the
accounting method and tax year of the Trust. If, contrary to the opinion of Tax
Counsel, the Trust was determined to be an unincorporated business entity, it
would be taxable as a partnership unless it elected to be taxed as a
corporation. The principal tax consequence of the Trust's being treated as a
partnership for tax purposes would be that all Trust Unitholders would report
their share of income from the Trust on the accrual method of accounting
regardless of their own method of accounting.

DIRECT TAXATION OF TRUST UNITHOLDERS

Since the Trust will be treated as a grantor trust for federal income tax
purposes, each Trust Unitholder will be taxed directly on his share of Trust
income and will be entitled to claim his share of Trust deductions. Each Trust
Unitholder will recognize taxable income when the Trust receives or accrues it,
even if it is not distributed until later. Trust Unitholders will report their
Trust income and expenses consistent with their method of accounting and their
tax year.

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REPORTING OF TRUST INCOME AND EXPENSES

The Trustee intends to treat each royalty payment it receives as the
taxable income of the Trust Unitholders who own Trust Units on the day of
receipt (i.e., the last business day of each calendar month). Similarly, the
Trustee intends to pay expenses only on the day it receives a royalty payment
and to treat all expenses paid on a royalty receipt day as the expenses of the
Trust Unitholder to whom the royalty income received on that date is
distributed. In most cases, therefore, the income and expenses of the Trust for
a period will be reported as belonging to the Trust Unitholder to whom the
distribution for that period is made and the amount of the distribution for a
Trust Unit will generally equal the net income allocated to that Trust Unit,
determined without regard to depletion. Such correlation may not exist if, for
example, the Trustee establishes a cash reserve to pay estimated future
expenses or pays an expense with borrowed funds. Moreover, it is possible that
the IRS will attempt to impute income to persons who are Trust Unitholders when
a royalty payment on the Net Profits Interests accrues, to disallow the
deduction of administrative expenses to persons who are not Trust Unitholders
when the expenses are incurred, or both. If the IRS were successful, Trust
income might be taxed to Trust Unitholders other than those who received the
distribution relating to that income. Also, an accrual basis Trust Unitholder
might realize royalty income in a tax year earlier than that reported by the
Trustee.

ROYALTY INCOME AND DEPLETION

In the opinion of Tax Counsel, the income from the Net Profits Interests
will be royalty income qualifying for an allowance for depletion. The depletion
allowance must be computed separately by each Trust Unitholder for each oil or
gas property (within the meaning of Section 614 of the Internal Revenue Code of
1986, as amended (the "Code")). Tax Counsel understands that the IRS is
presently taking the position that a net profits interest carved from multiple
properties is a single property for depletion purposes. Accordingly, the Trust
intends to take the position that each Net Profits Interest transferred to the
Trust by a conveyance is a single property for depletion purposes. It would
change this position if a different method were established by the IRS or the
courts.

The deduction for depletion is determined annually and is the greater of
cost depletion or, if allowable, percentage depletion. Royalty income from
production attributable to Trust Units owned by "independent producers" will
qualify for percentage depletion. An individual or entity with production of
the equivalent of 1,000 barrels of oil per day or less is an "independent
producer." Percentage depletion is a statutory allowance equal to 15% of the
gross income from production from a property, subject to a net income
limitation of 100% of the taxable income from the property, computed without
regard to depletion deductions and certain loss carrybacks. The depletion
deduction attributable to percentage depletion for a taxable year is limited to
65% of the taxpayer's taxable income for the year before allowance of
"independent producers" percentage depletion. Unlike cost depletion, percentage
depletion is not limited to the adjusted tax basis of the property, although it
reduces such adjusted tax basis (but not below zero).

The Company believes that Trust Unitholders who purchase Trust Units in
this offering will derive a substantially greater benefit from cost depletion
than from percentage depletion.

In computing cost depletion for each property for any year, the adjusted
tax basis of the property at the beginning of the year is divided by the
estimated total units (e.g., Bbls of oil or Mcf of gas) recoverable from the
property to determine the per-unit allowance for the property. The per-unit
allowance is then multiplied by the number of units produced and sold from the
property during the year. Cost depletion for a property cannot exceed the
adjusted tax basis of the property. Since the Trust will be taxed as a grantor
trust, each Trust Unitholder will be deemed to own an

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undivided interest in the Net Profits Interests and other assets, if any, of
the Trust and will compute cost depletion using his basis in his Trust Units.
Information will be provided to each Trust Unitholder reflecting how his basis
should be allocated among each property represented by his Trust Units. To the
extent the depletion tax deduction exceeds cash distributions per Trust Unit,
such excess can be deducted from the taxpayer's other sources of taxable
income.

OTHER INCOME AND EXPENSES

It is anticipated that the only other income of the Trust will be interest
income earned on funds held as a reserve. Other expenses of the Trust will
include any state and local taxes imposed on the Trust and administrative
expenses of the Trustee. Although the issue has not been finally resolved, Tax
Counsel believes that all or substantially all of those expenses are deductible
in computing adjusted gross income and, therefore, are not the type of
miscellaneous itemized deductions that are allowable only to the extent that
they aggregate more than 2% of adjusted gross income.

ALTERNATIVE MINIMUM TAX

All taxpayers are subject to an alternative minimum tax. Alternative
minimum taxable income ("AMTI") is the taxpayer's taxable income recomputed
with various "adjustments" plus "items of tax preference." In the case of
persons other than "independent producers," tax preferences include the excess
of the aggregate percentage depletion deductions with respect to an oil or gas
property over the adjusted tax basis of the property. The alternative minimum
tax rate for noncorporate taxpayers (other than married persons filing
separately) is 26% up to $175,000 and 28% over $175,000 of AMTI in excess of an
exemption amount, which varies between $45,000 and zero. Alternative minimum
tax ("AMT") is the excess of a taxpayer's "tentative minimum tax" for a tax
year over his "regular" tax for that year. The tentative minimum tax is
determined by multiplying the excess of AMTI over the applicable exemption
amount by 26% up to $175,000 and 28% over $175,000 and subtracting the AMT
foreign tax credit. Reduced maximum AMT tax rates apply to net capital gains
and certain other gains.

Since the effect of the AMT varies depending upon each Trust Unitholder's
personal tax and financial position, each prospective investor is advised to
consult with his own tax advisor concerning the effect of the AMT on him.

SECTION 29 TIGHT SANDS GAS TAX CREDIT

Some of the gas production attributable to the Net Profits Interests is
produced from tight sands formations. Subject to certain statutory
requirements, taxpayers are entitled to the Section 29 tax credit for
production and sale of certain gas produced from tight formations ("tight
sands"). The Section 29 tax credit applies to tight sands gas produced and sold
to an unrelated party prior to January 1, 2003 from wells drilled prior to
January 1, 1993 and after November 5, 1990 or after December 31, 1979 if the
formation was dedicated to interstate commerce within the meaning of the NGPA
as of April 20, 1977. The Section 29 tax credit for qualifying tight sands gas
is equal to $3.00 per barrel of oil equivalent (i.e., 5.8 MMBtu), or
approximately $.52 per MMBtu. The credit is reduced by a formula computation as
the price of oil ("reference price") rises above an inflation adjusted amount.
Because the calendar year 1997 reference price did not exceed the inflation
adjusted amount, the credit was not reduced in 1997 and is not expected to be
reduced in 1998 or 1999. In the opinion of Tax Counsel, if the requisite
statutory requirements are met, the Trust Unitholders will be eligible to claim
the Section 29 tax credit for sales of qualified tight sands gas production
included in the calculation of the Net Profits Interests. The Company believes
that all of the statutory requirements have been or will be met on
substantially all of the tight sands wells.

The Section 29 tax credit allowable for any taxable year cannot exceed the
excess (if any) of the taxpayer's regular tax liability for that taxable year,
as reduced by the taxpayer's foreign tax credits and certain nonrefundable
credits, over the taxpayer's tentative minimum

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tax liability for that year. Any amount of Section 29 tax credit disallowed for
the tax year solely because of this limitation will increase the taxpayer's
credit for prior year minimum tax liability, which may be carried forward
indefinitely as a credit against the taxpayer's regular tax liability, subject,
however, to the limitation described in the preceding sentence. There is no
provision for the carryback or carryforward of the Section 29 tax credit in any
other circumstances. Hence, a Trust Unitholder may not receive the full benefit
of the tax credit depending on his particular circumstances.

NON-PASSIVE ACTIVITY INCOME AND LOSS

The income and expenses of the Trust and the Section 29 tax credit will not
be taken into account in computing the passive activity losses and income under
Code Section 469 for a Trust Unitholder who acquires and holds Trust Units as
an investment. Section 29 tax credits generated by an investment in the Trust
Units, therefore, can be utilized to offset regular tax liability on income
from any source, subject to the limitations discussed in "Section 29 Tight
Sands Gas Tax Credit" above.

UNRELATED BUSINESS TAXABLE INCOME

Certain organizations that are generally exempt from tax under Code Section
501 are subject to tax on certain types of business income defined in Code
Section 512 as unrelated business income. In the opinion of Tax Counsel, the
income of the Trust will not be unrelated business taxable income so long as
the Trust Units are not "debt-financed property" within the meaning of Code
Section 514(b). In general, a Trust Unit would be debt-financed if the Trust
Unitholder incurs debt to acquire a Trust Unit or otherwise incurs or maintains
a debt that would not have been incurred or maintained if the Trust Unit had
not been acquired.

SALE OF TRUST UNITS; DEPLETABLE BASIS

Generally, a Trust Unitholder will realize gain or loss on the sale or
exchange of his Trust Units measured by the difference between the amount
realized on the sale or exchange and his adjusted basis for such Trust Units.
Gain or loss on the sale of Trust Units by a Trust Unitholder who is not a
dealer of the Trust Units will be a long-term capital gain (taxable at a
maximum rate of 20%) if the Trust Units have been held for more than 12 months.
A portion of the long-term gain will be treated as ordinary income to the
extent of the depletion recapture amount explained below. A Trust Unitholder's
basis in his Trust Units will be equal to the amount he paid for the Trust
Units, reduced by deductions for depletion claimed by the Trust Unitholder (but
not below zero). Upon the sale of the Trust Units, a Trust Unitholder must
treat as ordinary income his depletion recapture amount, which is an amount
equal to the lesser of (1) the gain on such sale or (2) the sum of the prior
depletion deductions taken on the Trust Units (but not in excess of the initial
basis of the Trust Units). It is possible that the IRS would take the position
that a portion of the sales proceeds is ordinary income to the extent of any
accrued income at the time of sale allocable to the Trust Units sold, but which
has not been distributed to the selling Trust Unitholder.

TAXATION OF FOREIGN HOLDERS

Unless the election described below is made, a nonresident alien
individual, foreign corporation, or foreign estate or trust (a "Foreign
holder") will be subject to federal income withholding tax on his share of
gross royalty income from the Net Profits Interests at a 30% rate (or lower
treaty rate, if applicable), without any deductions. Gain realized on a sale of
a Trust Unit by a Foreign holder will be subject to federal income tax only if:
(1) the gain is otherwise effectively connected with business conducted by the
Foreign holder in the United States; (2) the Trust Unitholder is an individual
who is present in the United States for at least 183 days in the year of the
sale; (3) the Trust Unitholder owns more than a 5% interest in the Trust; or
(4) the Trust Units cease to be regularly traded on an established securities
exchange. Gain realized by a Foreign holder upon the sale by the Trust of all
or any

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<PAGE>

part of the Net Profits Interests would be subject to federal income tax.

The Trust Unitholders who are Foreign holders may elect under Code Section
871 or Section 882 or similar provisions of applicable treaties to treat income
attributable to the Net Profits Interests as effectively connected with the
conduct of a trade or business in the United States. The Foreign holder will
then be taxed at regular federal income tax rates on the net income
attributable to the Net Profits Interests (including gain recognized on the
disposition of Trust Units). Absent a treaty exception, the net income of a
corporate Foreign holder which has made such an election will also be subject
to the "branch profits tax" imposed under Code Section 884. To claim the
deductions allowable in computing net income, including cost depletion, an
electing Foreign holder will have to file a United States income tax return.
The election, once made, is irrevocable (unless an applicable treaty allows the
election to be made annually) and is applicable to all income and gain realized
by the Foreign holder on any real property interests located in the United
States (including those interests held through partnerships, fixed investment
trusts, and other pass-through entities).

BACKUP WITHHOLDING

In general, distributions of Trust income will not be subject to "backup
withholding" unless: (1) the Trust Unitholder is an individual or other
noncorporate taxpayer and (2) such Trust Unitholder fails to comply with
certain reporting procedures.

TAX SHELTER REGISTRATION

The Company does not believe that the Trust will meet the requirements to
register as a "tax shelter" under Code Section 6111. However, it is possible
that those requirements may be met with respect to any Unitholders whose
investment base is reduced by borrowing. To avoid any potential difficulty, the
Trust will be registered as a tax shelter with the IRS. The Trustee will
furnish the tax shelter registration number to each transferee of Trust Units
and to each Trust Unitholder. Each Trust Unitholder must disclose this number
by attaching Form 8271 to his tax return.

ISSUANCE OF A TAX SHELTER REGISTRATION NUMBER DOES NOT INDICATE THIS
INVESTMENT OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED
BY THE IRS.

REPORTS

The Trustee will furnish to Trust Unitholders of record quarterly and
annual reports in order to permit computation of their tax liability. See
"Description of the Trust Units--Periodic Reports."
STATE TAX CONSIDERATIONS
The following is a brief summary of information regarding state income
taxes and other state tax matters affecting the Trust and the Trust
Unitholders. Trust Unitholders are urged to consult their own legal and tax
advisors on these matters.

INCOME TAX CONSIDERATIONS

Wyoming presently does not have a state income tax on resident or
nonresident individuals. Kansas and Oklahoma impose income taxes on residents
and, for certain types of income, nonresidents. Trust Unitholders may also be
subject to taxation by their state of residence on income derived from the
Trust.

Kansas tax counsel, Morris, Laing, Evans, Brock & Kennedy, Chartered, is of
the opinion that, although there is no determinative precedent and Kansas
taxing authorities may adopt a contrary view:

. the activities of the Trust and the Trustee, as permitted under the
Indenture and the conveyance, will not subject either the Trust or the
Trustee to income taxation by the State of Kansas; and
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. a Trust Unitholder who is not a Kansas resident will not be subject to
Kansas income tax and will not be required to file a Kansas income tax
return, if

-- the Trust Unit and the Trust Unitholder's indirect interest in the
Net Profits Interest (through ownership of the Trust Unit) are not
employed by the Trust Unitholder in a trade, business, profession
or occupation carried on in Kansas, and

-- the Trust Unitholder is not otherwise subject to Kansas income
tax.

In providing this opinion, Kansas tax counsel has assumed, among other things,
that the Trust:

. will not own any property in Kansas other than the Net Profits
Interests;

. will not conduct any activities in Kansas other than ownership of the
Net Profits Interests for the benefit of Trust Unitholders; and

. is a grantor trust for federal income tax purposes.

The income tax law of Oklahoma is based on federal income tax laws.
Assuming the Trust is taxed as a grantor trust for federal income tax purposes,
the Trust Unitholders will be subject to Oklahoma income tax on their share of
income from the Oklahoma Net Profits Interests. It is uncertain whether Trust
Unitholders who are nonresidents of Oklahoma will be taxed in that state on
gains from sales of Trust Units.

The Trustee will provide information concerning the Trust sufficient to
identify the income of the Trust allocable to each state. Trust Unitholders
should consult their own tax advisors to determine their income tax filing
requirements for their share of income of the Trust allocable to states
imposing an income tax on that income.

PROBATE AND PROPERTY
CONSIDERATIONS

Kansas tax counsel is also of the opinion, although there is no
determinative precedent, that for purposes of Kansas law the Trust Units will
be treated essentially the same as other securities--as interests in intangible
personal property rather than as interests in tangible property with a situs in
Kansas.

However, in the absence of controlling legal precedent, there is a
possibility that under certain circumstances a Trust Unitholder could be
treated as owning an interest in tangible property with a situs in Kansas. In
that event, the estate tax, probate, devolution of title and administration
laws of Kansas applicable to that property may apply to the Trust Units, even
if held by a person who is not a Kansas resident. Application of these laws
could make inheritance and related matters relating to the Trust Units more
onerous than had the Trust Units been treated as interests in intangible
personal property.

The Trust Units may constitute real property or an interest in real
property under the inheritance, estate and probate laws of Oklahoma and
Wyoming. If the Trust Units are held to be real property or an interest in real
property under the laws of those states, the Trust Units may be subject to
devolution, probate and administration and estate taxes under the laws of those
states.
ERISA CONSIDERATIONS

The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes requirements on pension, profit-sharing and other employee benefit
plans to which it applies, and contains standards for persons who are
fiduciaries of those plans. In addition, the Code provides similar requirements
and standards which are applicable to these types of plans and to individual
retirement accounts, whether or not subject to ERISA (collectively, "Qualified
Plans").

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<PAGE>

A fiduciary of a Qualified Plan should carefully consider fiduciary
standards under ERISA regarding the Qualified Plan's particular circumstances
before authorizing an investment in Trust Units. A fiduciary should consider
(1) whether the investment satisfies the prudence requirements of Section
404(a)(1)(B) of ERISA, (2) whether the investment satisfies the diversification
requirements of Section 404(a)(1)(C) of ERISA and (3) whether the investment is
in accordance with the documents and instruments governing the Qualified Plan
as required by Section 404(a)(1)(D) of ERISA.

A fiduciary should also consider whether the acquisition of Trust Units
and/or operation of the Trust might result in direct or indirect nonexempt
prohibited transactions under Section 406 of ERISA and Code Section 4975. In
deciding on the existence of a prohibited transaction, a fiduciary must
determine whether "plan assets" are involved in the transaction. On November
13, 1986, the Department of Labor published final regulations concerning
whether or not a Qualified Plan's assets (such as a Trust Unit) would be deemed
to include an interest in the underlying assets of an entity (such as the
Trust) for purposes of the reporting, disclosure and fiduciary responsibility
provisions of ERISA and analogous provisions of the Code. These regulations
provide that the underlying assets of an entity will not be considered "plan
assets" if the equity interests in the entity are a publicly offered security.
Trust Units are considered to be "publicly offered" for this purpose if they
are part of a class of securities that is (1) widely held (i.e., owned by more
than 100 investors independent of the issuer and each other), (2) freely
transferable and (3) registered under Section 12(b) or 12(g) of the Securities
Exchange Act of 1934. The Company expects that these requirements will be
satisfied at the time of the sale of the Trust Units in this offering.
Fiduciaries, however, will need to determine whether the acquisition of Trust
Units is a nonexempt prohibited transaction under the general requirements of
ERISA Section 406 and Code Section 4975.

Due to the complexity of the prohibited transaction rules and the penalties
imposed upon persons involved in prohibited transactions, potential Qualified
Plan investors should consult with their counsel regarding the consequences
under ERISA and the Code of their acquisition and ownership of Trust Units.
DESCRIPTION OF THE TRUST INDENTURE

The following information and the information set forth under "Description
of the Trust Units" summarize information contained in the Trust Indenture and
are subject to its detailed provisions. This summary is not meant to be a
detailed description of the Trust Indenture and may not contain all the
information that is important to you. For more detailed provisions concerning
the Trust, you should read the Trust Indenture, a copy of which was filed as an
exhibit to the Registration Statement. See "Available Information."

CREATION AND ORGANIZATION OF THE TRUST; AMENDMENTS

At the formation of the Trust, the Company carved the Net Profits Interests
from the Underlying Properties and conveyed the Net Profits Interests to the
Trust in exchange for 40,000,000 Trust Units.

The Company created the Trust under Texas law to acquire and hold the Net
Profits Interests for the benefit of the Trust Unitholders. The Net Profits
Interests are passive in nature, and the Trustee will have no control over and
no responsibility for costs relating to the operation of the Underlying
Properties. Neither the Company nor other operators of the properties included
in the Underlying Properties have any contractual commitments to the Trust to
conduct further drilling on the properties or to maintain their ownership
interest in any of these properties. For a description of the Underlying
Properties and other information relating to them, see "The Net Profits
Interests and the Underlying Properties."

The beneficial interest in the Trust is divided into 40,000,000 Trust
Units, each of which represents equal undivided portions of

38
<PAGE>

the Trust. You will find additional information concerning the Trust Units, in
"Description of the Trust Units."

Amendment of the Trust Indenture requires a vote of holders of 80% or more
of the outstanding Trust Units. However, no amendment may--

. increase the power of the Trustee to engage in business or investment
activities;

. alter the rights of the Trust Unitholders as among themselves; and

. permit the Trustee to distribute the Net Profits Interests in kind.

ASSETS OF THE TRUST

The assets of the Trust consist of Net Profits Interests and cash and
temporary investments being held for the payment of expenses and liabilities
and for distribution to the Trust Unitholders. You will find information
relating to the assets of the Trust in "The Net Profits Interests and the
Underlying Properties."

DUTIES AND LIMITED POWERS OF THE TRUSTEE

The duties of the Trustee are specified in the Trust Indenture and by the
laws of the State of Texas. The Trustee's principal duties consist of:

. collecting income attributable to the Net Profits Interests;

. paying expenses, charges and obligations of the Trust from the Trust's
income and assets;

. distributing distributable income to the Trust Unitholders; and

. taking any action it deems necessary and advisable to best achieve the
purposes of the Trust.

If a liability is contingent or uncertain in amount or not yet currently
due and payable, the Trustee may create a cash reserve to pay for the
liability. If the Trustee determines that the cash on hand and the cash to be
received is insufficient to cover the Trust's liability, the Trustee may borrow
funds required to pay the liabilities. The Trustee may borrow the funds from
any person, including itself. The Trustee may also encumber the assets of the
Trust to secure payment of the indebtedness. If the Trustee borrows funds, the
Trust Unitholders will not receive distributions until the borrowed funds are
repaid.

Each month, the Trustee will pay Trust obligations and expenses and
distribute to the Trust Unitholders the remaining proceeds received from the
Net Profits Interests. The cash held by the Trustee as a reserve against future
liabilities or for distribution at the next distribution date must be invested
in:

. interest bearing obligations of the United States government;

. repurchase agreements secured by interest-bearing obligations of the
United States government; or

. bank certificates of deposit.

The only asset the Trust may acquire is the Net Profits Interests and the
only investment activity the Trustee may engage in is the investment of cash on
hand.

At the request of the Company, the Trustee must sell Net Profits Interests
that burden Underlying Properties sold by the Company to an unaffiliated third
party. But without the consent of holders of 80% of the Trust Units, the
Trustee cannot sell in any calendar year Net Profits Interests relating to more
than 1% of the discounted present value of estimated future net revenues for
the proved reserves of the Underlying Properties allocated to the Trust's Net
Profits Interests, as set forth in the most recent reserve report.

The Trustee may sell the Net Profits Interests in any of the following
circumstances:

. the sale does not involve a material part of the Trust's assets and is
in the best interests of the Trust Unitholders. A majority of the
Trust Units represented at a meeting of the Trust Unitholders where a
quorum is present must approve the sale;

39
<PAGE>

. the sale is in the best interests of the Trust Unitholders,
constitutes a material part of the Trust's assets and holders
representing 80% of the outstanding Trust Units approve the sale; or

. Upon termination of the Trust. No Trust Unitholder approval is
required.

The Trustee will distribute the net proceeds from any sale of the Net
Profits Interests to the Trust Unitholders.

The Trustee has the right to require any Trust Unitholder to dispose of his
Trust Units if an administrative or judicial proceeding seeks to cancel or
forfeit any of the property in which the Trust holds an interest because of the
nationality or any other status of a Trust Unitholder. If a Trust Unitholder
fails to dispose of his Trust Units, the Trustee has the right to purchase them
and to borrow funds to make that purchase.

The Trustee is authorized to agree to modifications of the terms of the
Conveyances or to settle disputes involving the Conveyances. The Trustee may
not agree to modifications or settle disputes involving the royalty part of the
Conveyances if these actions would change the character of the Net Profits
Interests in such a way that (1) the Net Profits Interests become working
interests, or (2) the Trust becomes an operating business.

LIABILITIES OF THE TRUST

Because the Trust assets are passive in nature and the Trustee has little
power to incur obligations, the Company anticipates that the Trust will only
incur liabilities for routine administrative expenses, such as the Trustee's
fees and accounting, engineering, legal and other professional fees.

FIDUCIARY RESPONSIBILITY AND
LIABILITY OF THE TRUSTEE

The Trustee is a fiduciary for the Trust Unitholders and is required to act
in the best interests of the Trust Unitholders at all times. The Trustee must
exercise the same judgment and care in supervising and managing the Trust's
assets as persons of ordinary prudence, discretion and intelligence would
exercise. Under Texas law, the Trustee's duties to the Trust Unitholders are
similar to the duty of care owed by a corporate director to the corporation and
its shareholders. The primary difference between the Trustee's duties and a
corporate director's duties is the absence of the legal presumption protecting
the Trustee's decisions from challenge.

Due to the passive nature of the Trust, the Trustee generally will not make
business decisions affecting the assets of the Trust. Therefore, substantially
all of the Trustee's functions under the Trust Indenture are expected to be
ministerial in nature. See "--Duties and Limited Powers of the Trustee," above.
Under Texas law, the Trustee may not profit from any transaction with the
Trust. The Trust Indenture, however, provides that the Trustee may:

. charge for its services as Trustee;

. retain funds to pay for future expenses and deposit them in its own
account;

. lend funds at commercial rates to the Trust to pay the Trust's
expenses; and

. seek reimbursement from the Trust for its out-of-pocket expenses.

In discharging its fiduciary duty to Trust Unitholders, the Trustee may act
in its discretion and will be liable to the Trust Unitholders only for fraud,
gross negligence or acts or omissions constituting bad faith. The Trustee will
not be liable for any act or omission of its agents or employees unless the
Trustee acted in bad faith or with gross negligence in their selection and
retention. The Trustee will be indemnified for any liability or cost that it
incurs in the administration of the Trust, except in cases of fraud, gross
negligence or bad faith. The Trustee will have a lien on the assets of the
Trust as security for this indemnification and its compensation earned as
Trustee. The Trustee is entitled to indemnification from Trust assets or, to
the extent that Trust assets are

40
<PAGE>

insufficient, from the Company. Trust Unitholders will not be liable to the
Trustee for any indemnification. See "Description of the Trust Units--Liability
of Trust Unitholders." The Trustee must ensure that all contractual liabilities
of the Trust are limited to the assets of the Trust and will be liable for its
failure to do so.

Under Texas law, if the Trustee acts in bad faith, the Trustee will be
liable to the Trust Unitholders for damages. Texas law also permits the Trust
Unitholders to file actions seeking other remedies, including:

. removal of the Trustee;

. specific performance;

. appointment of a receiver;

. an accounting by the Trustee to Trust Unitholders; and

. punitive damages.

DURATION OF THE TRUST;
SALE OF NET PROFITS INTERESTS

The Trust will terminate if:

. the Trust sells all of the Net Profits Interests;

. annual gross proceeds attributable to the Underlying Properties are
less than $1 million for each of two consecutive years after 1999;

. the holders of 80% or more of the outstanding Trust Units vote in
favor of termination; or

. the Trust violates the "rule against perpetuities."

The Trustee would then sell all of the Trust's assets, either by private
sale or public auction, and then distribute the net proceeds of the sale to the
Trust Unitholders.

DISPUTE RESOLUTION

Any dispute, controversy or claim that may arise between the Company and
the Trustee relating to the Trust will be submitted to binding arbitration
before a tribunal of three arbitrators.

COMPENSATION OF THE TRUSTEE

The Trustee's compensation will be paid out of the Trust's assets. See "The
Trust."

MISCELLANEOUS

The Trustee may consult with counsel, accountants, geologists and engineers
(which also may be retained by the Company) and other parties the Trustee
believes to be qualified as experts on the matters for which advice is sought.
The Trustee will be protected for any action it takes in good faith reliance
upon the opinion of the expert.
DESCRIPTION OF THE TRUST UNITS
GENERAL

Each Trust Unit represents an undivided share of beneficial interest in the
Trust. Each holder of a Trust Unit has the same rights as the holder of any
other Trust Unit. The Trust has 40,000,000 Trust Units outstanding.

DISTRIBUTIONS AND INCOME COMPUTATIONS

Each month, the Trustee will determine the amount of funds available for
distribution to the Trust Unitholders. Available funds will equal the excess
cash received by the Trust from the Net Profits Interests and other sources
that month, over the Trust's liabilities for that month. Available funds will
be reduced by any cash the Trustee decides to hold as a reserve against future
liabilities. Trust Unitholders that own their Trust Units on the close of
business on the last business day of the month (the "Monthly Record Date") will
receive a pro-rata distribution no later than 10 business days after the
Monthly Record Date. The first distribution
41
<PAGE>

will be made approximately April 10, 1999 to Trust Unitholders owning Trust
Units on the last business day of March 1999.

Unless otherwise advised by counsel or the IRS, the Trustee will record the
income and expenses of the Trust for each monthly period as belonging to the
Trust Unitholders of record on the Monthly Record Date. Trust Unitholders will
recognize income and expenses for tax purposes in the month of receipt or
payment by the Trust, rather than in the month of distribution by the Trust.
Minor variances may occur. For example, a reserve could be established in one
monthly period that would not give rise to a tax deduction until a later
monthly period, or an expenditure paid in one monthly period would be amortized
for tax purposes over several monthly periods. See "Federal Income Tax
Consequences."

TRANSFER OF TRUST UNITS

Trust Unitholders may transfer their Trust Units by surrendering their
Trust Unit certificate in the form for transfer requested by the Trustee. No
service charge will be made to the transferor or transferee for any transfer of
a Trust Unit. The Trustee may require payment of any tax or other governmental
charge imposed for a transfer. The Trustee may treat the owner of any Trust
Unit as shown by its records as the owner of the Trust Unit. The Trustee will
not be considered to know about any claim or demand on a Trust Unit by any
party except the record owner. Any transfer of a Trust Unit will, as to the
Trustee, transfer to the transferee as of the close of business on the date of
transfer, all right, title and interest of the transferor in the Trust.
However, a transfer of a Trust Unit after any Monthly Record Date will not
transfer to the transferee the right to any distribution relating to the
Monthly Record Date. The laws of the State of Texas will govern all matters
affecting the title, ownership, warranty or transfer of Trust Units.

PERIODIC REPORTS

The Trustee will mail to each Trust Unitholder of record on a Monthly
Record Date during each quarter (except the fourth) a report showing the
assets, liabilities, receipts and disbursements of the Trust for the quarter.
No later than 120 days following the end of each year the Trustee will mail to
the Trust Unitholders of record, as of a date to be selected by the Trustee, an
annual report containing audited financial statements of the Trust.

The Trustee will file all required Trust federal and state income tax and
information returns. The Trustee will prepare and mail to Trust Unitholders
quarterly and annually reports that Trust Unitholders need to correctly report
their share of the income and deductions of the Trust.

Each Trust Unitholder and his representatives may examine, for any proper
purpose, during reasonable business hours the records of the Trust and the
Trustee.

LIABILITY OF TRUST UNITHOLDERS

The Trustee must ensure that all contractual liabilities of the Trust are
limited to the assets of the Trust, and the Trustee will be liable for its
failure to do so. Texas law is unclear whether a Trust Unitholder would be
responsible for a liability that exceeds the net assets of the Trust and the
Trustee. Because of the value and passive nature of the Trust assets and the
restrictions in the Indenture on the power of the Trustee to incur liabilities,
the Company believes it is unlikely that a Trust Unitholder would incur any
liability from the Trust.

VOTING RIGHTS OF TRUST UNITHOLDERS

Trust Unitholders have more limited voting rights than those of
stockholders of most public corporations. For example, there is no requirement
for annual meetings of Trust Unitholders or for annual or other periodic re-
election of the Trustee.

The Trustee or Trust Unitholders owning at least 15% of the outstanding
Trust Units may call meetings of Trust Unitholders. Meetings

42
<PAGE>

must be held in Fort Worth, Texas. Written notice setting forth the time and
place of the meeting and the matters proposed to be acted upon must be given to
all of the Trust Unitholders of record at least 20 days and not more than 60
days before the meeting. The presence in person or by proxy of Trust
Unitholders representing a majority of Trust Units outstanding constitutes a
quorum. Each Trust Unitholder is entitled to one vote for each Trust Unit
owned.

Unless otherwise required by the Trust Indenture, any matter may be
approved by holders of a majority of Trust Units constituting a quorum,
although less than a majority of the Trust Units then outstanding. The
affirmative vote of the holders of 80% of the outstanding Trust Units is
required to (1) terminate the Trust, (2) amend the Trust Indenture or (3)
approve the sale of all or any material part of the assets of the Trust. The
sale of all or any part of the assets of the Trust requires the prior consent
of the Trustee except in connection with the termination of the Trust or
limited sales directed by the Company in conjunction with its sale of
Underlying Properties. The Trustee may be removed, with or without cause, by a
vote of the holders of a majority of the outstanding Trust Units.
SELLING TRUST UNITHOLDER

The Company currently owns 100% of the 40,000,000 outstanding Trust Units
and is offering 6,000,000 (15% of the outstanding) Trust Units in this
offering, or 6,900,000 Trust Units if the underwriters exercise their over-
allotment option in full. The Company has reserved $12 million of Trust Units
for issuance in the Company's 1998 Royalty Trust Option Plan. The Company has
granted options covering all $12 million of Trust Units in the Plan to its
executive officers at an exercise price equal to the public offering price in
this offering. The options are exercisable for a period of three years,
beginning at the date of grant. Assuming the sale of all Trust Units offered in
this offering and the exercise in full of the underwriters' over-allotment
option, after taking into account the Trust Units reserved for the Company's
1998 Royalty Trust Option Plan, the Company will have Trust Units, or % of
the outstanding Trust Units. Trust Units available for future sale or
distribution.

The Company has announced that it intends to form up to three royalty
trusts and distribute units of beneficial interest in those royalty trusts
(including the Trust Units) as dividends to its stockholders. It also may
exchange the remaining Trust Units for oil and gas properties or use them for
other corporate purposes. The Company currently anticipates beginning
distributions of units of royalty trusts to its stockholders no earlier than
the fourth quarter of 1999. Those distributions could be made potentially as
frequently as each quarter. The Company intends to distribute royalty trust
units representing a then market value of approximately $2.00 per year for each
share of Company common stock.

Prior to this offering there has been no public market for the Trust Units.
The Company cannot predict the effect on future market prices, if any, of
market sales of Trust Units or the availability of Trust Units for sale after
the Company's distribution to its shareholders of its remaining Trust Units.
Nevertheless, sales of substantial amounts of Trust Units in the public market
could adversely affect prevailing market prices.
LEGAL MATTERS

Counsel for the Company, Kelly, Hart & Hallman, P.C., Fort Worth, Texas,
will give a legal opinion that the Trust Units are valid. Counsel for the
Underwriters, Andrews & Kurth L.L.P., Houston, Texas, will give a legal opinion
to the Underwriters regarding other matters related to this offering. Butler &
Binion, L.L.P., Houston, Texas, will give the tax opinion set forth in the
section of this prospectus captioned "Federal Income Tax Consequences." Morris,
Laing, Evans, Brock & Kennedy, Chartered, Wichita, Kansas, will give the Kansas
tax
43
<PAGE>

opinion set forth in the section of this prospectus captioned "State Tax
Considerations." Certain members of Kelly, Hart & Hallman, P.C. currently own
approximately 23,200 shares of the Company's common stock.
EXPERTS
The financial statements of the Company incorporated by reference in this
prospectus have been audited by Arthur Andersen, independent public
accountants, as indicated in their reports with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm
as experts in accounting and auditing.
AVAILABLE INFORMATION

The Company files annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy any of these
reports, statements or other information at the SEC's public reference room at
450 Fifth Street, N.W., Washington, D.C. 20549. You may request copies of
these documents, upon payment of a duplicating fee, by writing to the SEC at
the address in the previous sentence. To obtain information on the operation
of the public reference rooms you may call the SEC at (800) SEC-0330. The
Company's filings are also available to the public on the SEC Internet Web
site at http://www.sec.gov.

The SEC allows the Company to "incorporate by reference" information the
Company files with it, which means that the Company can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus.

The Company incorporates by reference in this prospectus the following
documents:

. the Company's Annual Report on Form 10-K for the year ended December
31, 1997;

. the Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1998, June 30, 1998, and September 30, 1998;

. the Company's Current Reports on Form 8-K dated February 12, 1998,
February 16, 1998 (Amendment No. 1 to Report dated December 1, 1997),
February 18, 1998, February 25, 1998, April 13, 1998, April 17, 1998,
April 21, 1998, April 24, 1998, May 19,1998, July 2, 1998 (Amendment
No. 1 to Report dated April 24, 1998), and August 26, 1998; and

. all other documents filed by the Company pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 after the date of this
prospectus and prior to termination of the offering of the Trust
Units.

Information that the Company files later with the SEC will automatically
update the information in this prospectus. In all cases, you should rely on
the later information over different information included or incorporated by
reference in this prospectus.

As a recipient of this prospectus, you may request a copy of any document
the Company incorporates by reference, except exhibits to the documents
(unless the exhibits are specifically incorporated by reference), at no cost
to you by writing or calling the Company at 810 Houston Street, Suite 2000,
Fort Worth, Texas 76102, Attention: Investor Relations, telephone (817) 870-
2800.

NationsBank, N.A. is Trustee of the Trust. The Trustee's address is 901
Main Street, 17th Floor, Dallas, Texas 75202, and its telephone number is
(214) 508-2400.
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<PAGE>

GLOSSARY OF CERTAIN OIL AND GAS TERMS

In this prospectus the following terms have the meanings specified below.

Bbl -- One stock tank barrel, or 42 US gallons liquid volume, of crude oil or
other liquid hydrocarbons.

Bcf -- One billion cubic feet of natural gas.

Bcfe -- One billion cubic feet of natural gas equivalent, computed on an
approximate energy equivalent basis that one Bbl equals six Mcf.

Btu -- A British Thermal Unit, a common unit of energy measurement.

Estimated Future Net Revenues -- Also referred to as "estimated future net cash
flows." The result of applying current prices of oil and gas (with
consideration of price changes only as provided by existing contractual
arrangements) to estimated future production from oil and gas reserves, reduced
by estimated future expenditures (based on current costs) to be incurred in
developing and producing the proved reserves. Estimated future net revenues do
not include the effects of the tight sands gas tax credit, since the Trust is
not a taxable entity and the credit inures directly to the benefit of the Trust
Unitholders.

Gas Revenue -- Includes revenue related to the sale of natural gas, natural gas
liquids and plant products.

MBbl -- One thousand Bbl.

Mcf -- One thousand cubic feet of natural gas.

Mcfe -- One thousand cubic feet of natural gas equivalent, computed on an
approximate energy equivalent basis that one Bbl equals six Mcf.

MMBtu--One million British Thermal Units (Btus).

MMcf--One million cubic feet of natural gas.

MMcfe--One million cubic feet of natural gas equivalent, computed on an
approximate energy equivalent basis that one Bbl equals six Mcf.

Net Oil and Gas Wells or Acres--Determined by multiplying "gross" oil and gas
wells or acres by the interest in such wells or acres represented by the
Underlying Properties.

Oil Revenue--Includes revenue related to the sale of oil and condensate
production.

Proved Developed Reserves--Proved reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.

Proved Reserves--The estimated quantities of crude oil, natural gas and natural
gas liquids which, upon analysis of geological and engineering data, appear
with reasonable certainty to be recoverable in the future from known oil and
gas reservoirs under existing economic and operating conditions.

Proved Undeveloped Reserves--Proved reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required.

Reserve-to-Production Index--An estimate, expressed in years, of the total
estimated proved reserves attributable to a producing property divided by the
forecasted rate of production for the 12 months following the date as of which
the proved reserves were estimated.

Royalty or Overriding Royalty Interest--A real property interest entitling the
owner to receive a specified portion of the gross proceeds of the sale of oil
and gas production or, if the conveyance creating the interest provides, a
specific portion of oil and gas produced, without any deduction for the costs
to explore for, develop or produce the oil and gas. A royalty or overriding
royalty interest owner has no right to consent to or approve the operation and
development of the property, while the owners of the working interest have the
exclusive right to exploit the mineral on the land.
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<PAGE>

Standardized Measure of Discounted Future Net Cash Flows--Also referred to
herein as "standardized measure." It is the present value of estimated future
net revenues computed by discounting estimated future net revenues at a rate of
10% annually.

Working Interest--A real property interest entitling the owner to receive a
specified percentage of the proceeds of the sale of oil and gas production or a
percentage of the production, but requiring the owner of the working interest
to bear the cost to explore for, develop and produce such oil and gas. A
working interest owner who owns a portion of the working interest may
participate either as operator or by voting his percentage interest to approve
or disapprove the appointment of an operator and certain activities in
connection with the development and operation of a property.
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<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
UNDERLYING PROPERTIES
Report of Independent Public Accountants................................ F-2
Statements of Revenues and Direct Operating Expenses for the Years Ended
November 30, 1996, 1997 and 1998....................................... F-3
Notes to Financial Statements........................................... F-4
HUGOTON ROYALTY TRUST
Report of Independent Public Accountants................................ F-8
Statement of Assets and Trust Corpus as of December 4, 1998............. F-9
Note to Statement of Assets and Trust Corpus............................ F-10
Pro Forma Statement of Assets and Trust Corpus as of December 31, 1998
(Unaudited)............................................................ F-11
Pro Forma Statement of Distributable Income for the Year Ended
December 31, 1998 (Unaudited).......................................... F-12
Notes to Pro Forma Statement of Distributable Income (Unaudited)........ F-13
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Cross Timbers Oil Company:

We have audited the accompanying statements of revenues and direct operating
expenses of the Underlying Properties of Cross Timbers Oil Company ("the
Company") for each of the three years in the period ended November 30, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

The accompanying statements of revenue and direct operating expenses have
been prepared on the cash basis of accounting, as described in Note 2, and are
not intended to be a presentation in conformity with generally accepted
accounting principles.

In our opinion, the statements referred to above present fairly, in all
material respects, the revenues and direct operating expenses of the
Underlying Properties for each of the three years in the period ended November
30, 1998, in conformity with the basis of accounting described above and in
Note 2.

ARTHUR ANDERSEN LLP

Fort Worth, Texas
December 3, 1998

F-2
<PAGE>

UNDERLYING PROPERTIES

STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES

FOR THE YEARS ENDED NOVEMBER 30, 1996, 1997 AND 1998

<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Gas sales............................................ $60,502 $82,192 $77,124
Oil sales............................................ 9,075 9,704 7,083
------- ------- -------
Total Revenues..................................... 69,577 91,896 84,207
------- ------- -------
Direct Operating Expenses
Taxes on production and property..................... 5,919 9,173 9,170
Production and other expenses........................ 11,359 12,837 13,031
------- ------- -------
Total.............................................. 17,278 22,010 22,201
------- ------- -------
Excess of Revenues over Direct Operating Expenses...... $52,299 $69,886 $62,006
======= ======= =======
</TABLE>

See Accompanying Notes to Financial Statements.

F-3
<PAGE>

UNDERLYING PROPERTIES

NOTES TO FINANCIAL STATEMENTS

1. UNDERLYING PROPERTIES

The Underlying Properties are predominantly working interests in producing
properties currently owned by Cross Timbers Oil Company ("Company") in Kansas,
Oklahoma and Wyoming. The Company will convey 80% defined net profits
interests ("Net Profits Interests") in the Underlying Properties to the
Hugoton Royalty Trust ("Trust") in December 1998. Estimated proved reserves
attributable to the Underlying Properties are approximately 5% oil and 95%
natural gas, based on discounted present value of estimated future net
revenues as of November 30, 1998. See Note 5.

All of the Underlying Properties were acquired by the Company from 1986
through 1998. Significant property acquisitions were made by the Company
during the three-year period presented in the accompanying financial
statements. The statements include the historical revenues and direct
operating expenses from these acquired properties for all years presented.

2. BASIS OF PRESENTATION

The statements of revenues and direct operating expenses of the Underlying
Properties were derived from the historical accounting records of the Company,
(and prior owners for acquisitions occurring during the three-year period
presented) and are presented on the cash basis of accounting before the
effects of conveyance of the Net Profits Interests. The statements do not
include depreciation, depletion, and amortization, general and administrative
or interest expenses.

Royalty income of the Trust is determined based on the defined 80% net
profits interest percentage of Net Proceeds of the Underlying Properties. The
computation also includes deductions for capital development expenditures on
the properties of $19,797,000 in 1996, $38,875,000 in 1997 and $28,600,000 in
1998, as well as an overhead charge totalling $4,557,000 in 1996, $5,354,000
in 1997, and $6,198,000 in 1998. Accordingly, royalty income of the Trust is
materially different from the excess of revenues over direct operating
expenses from the Underlying Properties.

3. RELATED PARTY TRANSACTIONS

The Company sells a significant portion of gas production from the
Underlying Properties to certain of the Company's wholly owned subsidiaries,
generally at amounts approximating monthly spot market prices. Most of the
production from the Hugoton area is sold under a contract to Timberland
Gathering & Processing Company, Inc. ("TGPC"). Much of the gas production in
Major County, Oklahoma is sold to Ringwood Gathering Company ("RGC") which
retains a $0.313 per Mcf gathering fee, which the Company believes to be a
competitive industry rate. TGPC and RGC sell gas to Cross Timbers Energy
Services, Inc. ("CTES") which markets gas to third parties. The Company sells
directly to CTES most gas production not sold directly to TGPC or RGC.

Sales from the Underlying Properties to the Company's wholly owned
subsidiaries are as follows (in thousands):

F-4
<PAGE>

UNDERLYING PROPERTIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

4. CONTINGENCIES

The Company is a defendant in two separate lawsuits that could, if adversely
determined, decrease future revenues from certain of the Underlying
Properties. Damages relating to production prior to the formation of the Trust
will be borne by the Company.

A class action lawsuit, Booth, et al. v. Cross Timbers Oil Company, was
filed on April 3, 1998 in the District Court of Dewey County, Oklahoma by
royalty owners of natural gas wells in Oklahoma. The plaintiffs allege that
since 1991 the Company has underpaid royalty owners as a result of (1)
reducing royalties for improper charges for production, marketing, gathering,
processing and transportation costs and (2) selling gas through affiliated
companies at prices less favorable from those paid by third parties. The
Company believes that it has strong defenses to this lawsuit and intends to
vigorously defend its position. However, if a judgment or settlement increased
the amount of future royalty payments, revenues from the Underlying Properties
will be reduced. The amount of any reduction in such revenues is not presently
determinable, but is not expected to be material.

A second lawsuit, United States of America ex rel. Grynberg v. Cross Timbers
Oil Company, et al., was filed in the United States District Court for the
Western District of Oklahoma. This action alleges that in computing royalties
payable for natural gas produced from federal leases and lands owned by Native
Americans, the Company has mismeasured the volume of gas and wrongfully
analyzed its heating content. The suit, which was brought under the qui tam
provisions of the U.S. False Claims Act, seeks treble damages for the unpaid
royalties (with interest), civil penalties and an order for the Company to
cease the allegedly improper measuring practices. This lawsuit is one of more
that 75 suits filed nationwide by the same plaintiff alleging similar claims
against over 300 producers and pipeline companies. Royalties paid by the
Company for production from Underlying Properties on federal and Native
American lands during the year ended November 30, 1998, totalled $2.8 million.
The Company believes that the allegations of this lawsuit are without merit.
However, an order to change measuring practices or a related settlement could
adversely affect future revenues from the Underlying Properties by an
indeterminable amount.

5. SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)

Proved oil and gas reserves of the Underlying Properties have been estimated
as of November 30, 1998 by the Company's internal petroleum engineers. The
reserve estimates provided for the Underlying Properties are before the
effects of conveying the defined net profits interests to the Trust. In
accordance with Statement of Financial Accounting Standards No. 69, estimates
of future net revenues from proved reserves have been prepared using year-end
oil and gas prices and current costs to produce and develop the proved
reserves. The standardized measure of future net cash flows from oil and gas
reserves is calculated based on discounting such future net cash flows at an
annual rate of 10%. Year-end posted West Texas Intermediate crude oil prices
were $18.00 per barrel for 1995, $24.25 per barrel for 1996, $15.50 per barrel
for 1997, and $8.50 per barrel for 1998. Year-end weighted average spot gas
prices were $1.53 per Mcf for 1995, $3.31 per Mcf for 1996, $2.07 per Mcf for
1997, and $2.00 per Mcf for 1998.

Year-end proved reserves prior to November 30, 1998 have been developed by
adding back actual production volumes to arrive at estimated proved reserves
at November 30, 1995, 1996 and 1997. As a result, changes in proved reserves
during each of the three years presented do not include revisions of estimates
or extensions and discoveries.

F-5
<PAGE>

UNDERLYING PROPERTIES

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Estimated future production and development costs prior to November 30, 1998
have been developed by adding back actual costs to arrive at estimated future
costs at November 30, 1995, 1996 and 1997. As a result, the changes in
standardized measure of discounted future net cash flows from proved reserves
for each of the three years presented do not reflect cost estimate revisions.

The standardized measure of future net cash flows is not intended to
represent the fair value of the Underlying Properties. Numerous uncertainties
are inherent in estimating volumes and values of proved reserves and in
projecting future production rates and timing of development expenditures.
Such reserve estimates are subject to change as additional information becomes
available. The reserves actually recovered and the timing of production may be
substantially different from the original estimates. Also, because natural gas
prices are influenced by seasonal demand, use of year-end prices, as required
by the Financial Accounting Standards Board, may not be representative in
estimating future revenues or reserve data.

<TABLE>
<CAPTION>
GAS (MCF) OIL (BBLS)
PROVED RESERVES --------- ----------
(IN THOUSANDS)
<S> <C> <C>
Balance, November 30, 1995.............................. 603,784 5,733
Production............................................ (36,143) (455)
------- -----
Balance, November 30, 1996.............................. 567,641 5,278
Production............................................ (37,172) (471)
------- -----
Balance, November 30, 1997.............................. 530,469 4,807
Production............................................ (38,535) (479)
------- -----
Balance, November 30, 1998.............................. 491,934 4,328
======= =====
</TABLE>

<TABLE>
<S> <C> <C>
PROVED DEVELOPED RESERVES
<CAPTION>
GAS (MCF) OIL (BBLS)
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
November 30, 1995....................................... 528,782 5,014
======= =====
November 30, 1996....................................... 492,639 4,559
======= =====
November 30, 1997....................................... 455,467 4,089
======= =====
November 30, 1998....................................... 416,932 3,610
======= =====
</TABLE>

<TABLE>
<S> <C> <C> <C>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS RELATING TO PROVED
RESERVES
<CAPTION>
NOVEMBER 30,
--------------------------------
1996 1997 1998
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows...................... $2,012,625 $1,177,862 $1,025,456
Future production and development costs.. 565,163 451,278 391,441
---------- ---------- ----------
Future net cash flows.................... 1,447,462 726,584 634,015
10% discount factor...................... 759,472 364,310 302,045
---------- ---------- ----------
Standardized measure of discounted future
net cash flows.......................... $ 687,990 $ 362,274 $ 331,970
========== ========== ==========
</TABLE>

F-6
<PAGE>

<TABLE>
<S> <C> <C> <C>
CHANGES IN STANDARDIZED MEASURE OF
DISCOUNTED FUTURE NET CASH FLOWS FROM
PROVED RESERVES
<CAPTION>
NOVEMBER 30,
-----------------------------
1996 1997 1998
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure, beginning of year.... $219,537 $ 687,990 $362,274
-------- --------- --------
Sales of production, net of costs.......... (52,299) (69,886) (62,006)
Changes in price........................... 480,207 (360,026) (31,501)
Development costs incurred................. 19,797 38,875 28,600
Accretion of discount...................... 20,748 65,321 34,603
-------- --------- --------
468,453 (325,716) (30,304)
-------- --------- --------
Standardized measure, end of year.......... $687,990 $ 362,274 $331,970
======== ========= ========
</TABLE>

F-7
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Hugoton Royalty Trust:

We have audited the accompanying statement of assets and trust corpus of
Hugoton Royalty Trust as of December 4, 1998. This financial statement is the
responsibility of the management of Cross Timbers Oil Company. Our
responsibility is to express an opinion on this financial statement based on
our audit.

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

In our opinion, the statement referred to above presents fairly, in all
material respects, the assets and trust corpus of Hugoton Royalty Trust as of
December 4, 1998, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Fort Worth, Texas
December 4, 1998

F-8
<PAGE>

HUGOTON ROYALTY TRUST

STATEMENT OF ASSETS AND TRUST CORPUS

DECEMBER 4, 1998

<TABLE>
<S> <C>
Cash.................................................................. $1,000
======
Trust Corpus.......................................................... $1,000
======
</TABLE>

See Note to Statement of Assets and Trust Corpus.

F-9
<PAGE>

HUGOTON ROYALTY TRUST

NOTE TO STATEMENT OF ASSETS AND TRUST CORPUS

1. TRUST ORGANIZATION

Hugoton Royalty Trust ("Trust") is a grantor trust that was created on
December 4, 1998 by Cross Timbers Oil Company ("Company"). The Statement of
Assets and Trust Corpus reflects the Company's initial cash contribution to
the Trust of $1,000.

The Trust was formed to hold net overriding royalty interests equivalent to
80% defined net profits interests in certain producing oil and gas properties
in Kansas, Oklahoma and Wyoming to be conveyed by the Company effective
December 1, 1998 in exchange for 40 million units of beneficial interest in
the Trust ("Units").

The Trust will terminate upon the first occurrence of: (a) disposition of
all Royalty Trust Interests pursuant to terms of the Trust Indenture, (b) when
gross proceeds attributable to the Underlying Properties are less than $1
million per year for each of two successive years after 1999, or (c) a vote of
at least 80% of the Trust Unitholders to terminate the Trust in accordance
with provisions of the Trust Indenture.

F-10
<PAGE>

HUGOTON ROYALTY TRUST

PRO FORMA STATEMENT OF ASSETS AND TRUST CORPUS (UNAUDITED)

DECEMBER 31, 1998

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Cash........................................................... $ 1
Net overriding royalty interests in oil and gas properties..... 237,052
--------
Total Assets................................................. $237,053
========
Trust Corpus (40,000,000 units of beneficial interest
authorized and outstanding)................................... $237,053
========
</TABLE>

See Accompanying Note to Statement of Assets and Trust Corpus.

F-11
<PAGE>

HUGOTON ROYALTY TRUST

PRO FORMA STATEMENT OF DISTRIBUTABLE INCOME (UNAUDITED)

FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT FOR PER UNIT AMOUNTS)

<TABLE>
<S> <C>
Gross Proceeds
Gas revenues....................................................... $77,124
Oil revenues....................................................... 7,083
-------
Total Revenues................................................... 84,207
Taxes on production and property................................... 9,170
-------
Total............................................................ 75,037
-------
Production and Development Costs
Production......................................................... 13,031
Development (Note 2)............................................... 28,600
-------
Total............................................................ 41,631
-------
Net proceeds before overhead......................................... 33,406
Overhead (Note 2).................................................... 6,198
-------
Net proceeds......................................................... 27,208
Net profits percentage............................................... 80%
-------
Trust royalty income................................................. 21,766
Administrative expense............................................... 300
-------
Distributable income................................................. $21,466
=======
Distributable income per Unit (40,000,000 Trust Units issued and
outstanding--Note 1)................................................ $ 0.54
=======
</TABLE>

See Accompanying Notes to Unaudited Pro Forma Statement of Distributable
Income.

F-12
<PAGE>

HUGOTON ROYALTY TRUST

NOTES TO PRO FORMA STATEMENT OF DISTRIBUTABLE INCOME (UNAUDITED)

1. BASIS OF PRESENTATION

The pro forma statement of assets and trust corpus has been prepared
assuming that on December 31, 1998 net profits interests ("Net Profits
Interests") were conveyed to the Trust from certain oil and gas properties
("Underlying Properties") owned by Cross Timbers Oil Company ("Company") in
exchange for 40 million units of beneficial interest ("Units"). The initial
pro forma carrying value of the net overriding royalty interests of
$237,052,000 is based on the Company's estimated historical net book value
(successful efforts method of accounting) on December 31, 1998.

The pro forma statement of distributable income of the Trust for the year
ended December 31, 1998 has been prepared on a cash basis of accounting from
the historical results (successful efforts method of accounting) of operations
of the properties out of which the Net Profits Interests were carved and the
following assumptions made:

a. The Trust was formed and the Net Profits Interests were conveyed to
the Trust effective December 1, 1997.

A significant property acquisition was made by the Company during the
year ended December 31, 1998. The pro forma statement of distributable
income include the historical revenues and expenses of this acquisition.

b. Net proceeds related to the Net Profits Interests are received and
recorded as royalty income by the Trust in the month following their
receipt by the Company from the Underlying Properties.

Generally the Trust will receive and record royalty income two months
after the month of production. This basis for recognizing royalty income
differs from generally accepted accounting principles which requires that
revenues be accrued in the month of production.

c. Royalty income is calculated based on 80% of the Net Proceeds from the
Underlying Properties. Net Proceeds is a defined term in the Net Profits
Interests conveyance to the Trust.

d. Administrative expense is estimated to be $300,000 annually. Such
expense generally would include Trustee fees and costs incurred by the
Trustee to administer the Trust and report Trust results to Unitholders,
including the expense of attorneys, independent auditors, reservoir
engineers, printing and mailing.

2. PRO FORMA ADJUSTMENTS

The following pro forma adjustments were made to the historical direct
operating expenses of the Underlying Properties to present pro forma
distributable income for the year ended December 31, 1998:

a. Historical development costs of $28,600,000 were deducted.

b. An overhead charge by the Company totalling $6,198,000 was deducted.
This charge, based on a monthly count of active wells operated by the
Company, is specified by the terms of the Net Profits Interest conveyance
to the Trust. Such charge is deducted in the computation of Net Proceeds
and represents reimbursement to the Company for costs associated with
monitoring the Underlying Properties.

3. FEDERAL INCOME TAXES

As a grantor trust, the Trust will not be required to pay federal income
taxes. Accordingly, the accompanying pro forma statement of distributable
income does not include a provision for federal income taxes.

F-13
<PAGE>

HUGOTON ROYALTY TRUST

NOTES TO PRO FORMA STATEMENT OF DISTRIBUTABLE INCOME (UNAUDITED)--(CONTINUED)

4. CONTINGENCIES

The Company is a defendant in two separate lawsuits that could, if
adversely determined, decrease future Trust distributable income. Damages
relating to production prior to the formation of the Trust will be borne by
the Company.

A class action lawsuit, Booth, et al. v. Cross Timbers Oil Company, was
filed on April 3, 1998 in the District Court of Dewey County, Oklahoma by
royalty owners of natural gas wells in Oklahoma. The plaintiffs allege that
since 1991 the Company has underpaid royalty owners as a result of (1)
reducing royalties for improper charges for production, marketing, gathering,
processing and transportation costs and (2) selling gas through affiliated
companies at prices less favorable from those paid by third parties. The
Company believes that it has strong defenses to this lawsuit and intends to
vigorously defend its position. However, if a judgment or settlement increased
the amount of future royalty payments, the Trust would bear its proportionate
share of the increased royalties through reduced Net Proceeds. The amount of
any reduction in Net Proceeds is not presently determinable, but is not
expected to be material.

5. PRO FORMA SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION

Proved oil and gas reserves of the Trust have been estimated as of December
31, 1998 by the Company's internal petroleum engineers. In accordance with
Statement of Financial Accounting Standards No. 69, estimates of future net
revenues from proved reserves have been prepared using year-end oil and gas
prices and current costs to produce and develop the proved reserves. The
standardized measure of future net cash flows from oil and gas reserves is
calculated based on discounting such future net cash flows at an annual rate
of 10%. Year-end posted West Texas Intermediate crude oil prices were $15.50
and $8.50 per barrel for 1997 and 1998, respectively. Year-end weighted
average spot gas prices were $2.07, and $2.00 per Mcf for 1997 and 1998,
respectively. As the Trust is not subject to taxation at the trust level, no
provision is included for federal income taxes.

Reserve quantities and revenues for the Net Profits Interests were estimated
from projections of reserves and revenues attributable to the Underlying
Properties. Since the Trust has a defined net profits interests, the Trust
does not own a specific ownership percentage of the oil and gas reserve or
production quantities. Accordingly, reserves and production allocated to the
Trust pertaining to its 80%

F-14
<PAGE>

HUGOTON ROYALTY TRUST

NOTES TO PRO FORMA STATEMENT OF DISTRIBUTABLE INCOME (UNAUDITED)--(CONTINUED)

net profits interest in the working interest properties have effectively been
reduced to reflect recovery of the Trust's 80% portion of applicable
production and development costs. Because Trust reserve quantities are
determined using an allocation formula, any fluctuations in actual or assumed
prices or costs will result in revisions to the estimated reserve quantities
allocated to the Net Profits Interests.

Proved reserves at January 1, 1998 have been developed by adding back 1998
production volumes to the proved reserve estimate at December 31, 1998. As a
result, changes in proved reserves for 1998 do not include revisions of
estimates or extensions and discoveries.

The standardized measure of future net cash flows is not intended to
represent the fair value of the Trust. Numerous uncertainties are inherent in
estimating volumes and values of proved reserves and in projecting future
production rates and timing of development expenditures. Such reserve
estimates are subject to change as additional information becomes available.
The reserves actually recovered and the timing of production may be
substantially different from the original estimates. Also, because natural gas
prices are influenced by seasonal demand, use of year-end prices, as required
by the Financial Accounting Standards Board, may not be representative in
estimating future revenues or reserve data.

F-15
<PAGE>

HUGOTON ROYALTY TRUST

NOTES TO PRO FORMA STATEMENT OF DISTRIBUTABLE INCOME (UNAUDITED)--(CONTINUED)

<TABLE>
<CAPTION>
GAS (MCF) OIL (BBLS)
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
PROVED RESERVES
Balance, January 1, 1998................................ 291,972 2,646
Revisions of prior estimates.......................... (5,755) (77)
Production............................................ (13,725) (171)
------- -----
Balance, December 31, 1998.............................. 272,492 2,398
======= =====
PROVED DEVELOPED RESERVES
January 1, 1998......................................... 259,050 2,325
======= =====
December 31, 1998....................................... 241,480 2,091
======= =====
</TABLE>

<TABLE>
<S> <C>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED RESERVES AT DECEMBER 31, 1998
<CAPTION>
(IN THOUSANDS)
<S> <C>
Future cash inflows........................................ $567,762
Future production taxes.................................... 60,550
--------
Future net cash flows...................................... 507,212
10% discount factor........................................ 241,636
--------
Standardized measure of discounted future net cash flows... $265,576
========
</TABLE>

<TABLE>
<S> <C>
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET
CASH FLOWS FROM PROVED RESERVES (IN THOUSANDS)
Standardized measure, January 1, 1998..................... $ 289,819
--------------
Trust royalty income ..................................... (21,766)
Changes in prices and other............................... (30,159)
Accretion of discount..................................... 27,682
--------------
(24,243)
--------------
Standardized measure, December 31, 1998................... $ 265,576
==============
</TABLE>

F-16
<PAGE>

UNDERWRITING
The Company and the underwriters named below (the "Underwriters") have
entered into an underwriting agreement with respect to the Trust Units being
offered. Subject to certain conditions, each Underwriter has severally agreed
to purchase the number of Trust Units indicated in the following table.
Goldman, Sachs & Co., Lehman Brothers Inc., Bear, Stearns & Co., Inc., Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, Donaldson, Lufkin &
Jenrette Securities Corporation and A. G. Edwards & Sons, Inc. are
representatives of the Underwriters.
<TABLE>
<CAPTION>
Number of
Underwriter Trust Units
----------- -----------
<S> <C>
Goldman, Sachs & Co.....
Lehman Brothers Inc.....
Bear, Stearns & Co.
Inc....................
Dain Rauscher Wessels a
division of Dain
Rauscher
Incorporated.....
Donaldson, Lufkin &
Jenrette Securities
Corporation............
A.G. Edwards & Sons,
Inc....................
---------
Total................. 6,000,000
=========
</TABLE>
----------------

If the Underwriters sell more Trust Units than the total number set forth
in the table above, the Underwriters have an option to buy up to an additional
900,000 Trust Units from the Company to cover such sales. They may exercise
that option for 30 days. If any Trust Units are purchased pursuant to this
option, the Underwriters will severally purchase Trust Units in approximately
the same proportion as set forth in the table above.

The following table shows the per Trust Unit and total underwriting
discounts and commissions to be paid to the Underwriters by the Company. Such
amounts are shown assuming both no exercise and full exercise of the
Underwriters' option to purchase 900,000 additional Trust Units.

<TABLE>
<CAPTION>
Paid by the Company
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Trust Unit....................................... $ $
Total................................................ $ $
</TABLE>

Trust Units sold by the Underwriters to the public will initially be
offered at the initial public offering price set forth on the cover of this
prospectus. Any Trust Units sold by the Underwriters to securities dealers may
be sold at a discount of up to $ per Trust Unit from the initial public
offering price. Any such securities dealers may resell any Trust Units
purchased from the Underwriters to certain other brokers or dealers at a
discount of up to $ per Trust Unit from the initial public offering price. If
all the Trust Units are not sold at the initial offering price, the
representatives may change the offering price and the other selling terms.

The Company and its executive officers have agreed with the Underwriters
not to dispose of or hedge any of their Trust Units or securities convertible
into or exchangeable for Trust Units during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of the representatives. This
agreement does not apply to any existing employee benefit plans.

Prior to the Offering, there has been no public market for the Trust Units.
The initial public offering price has been negotiated among the Company and the
representatives. Among the factors to be considered in determining the initial
public offering price of the Trust Units, in addition to prevailing market
conditions, will be estimates of distributions to Trust Unitholders and overall
quality of the Underlying Properties.

U-1
<PAGE>

The Company intends to list the Trust Units on the New York Stock Exchange
under the symbol " ." In order to meet one of the requirements for listing the
Trust Units on the New York Stock Exchange, the Underwriters have undertaken to
sell lots of 100 or more Trust Units to a minimum of 2,000 beneficial holders.

In connection with the Offering, the Underwriters may purchase and sell
Trust Units in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the Underwriters of a greater number of
Trust Units than they are required to purchase in the Offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the Trust Units while
the Offering is in progress.

The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount it received because the representatives repurchased Trust Units sold
by or for the account of such Underwriter in stabilizing or short covering
transactions.

These activities by the Underwriters may stabilize, maintain or otherwise
affect the marketprice of the Trust Units. As a result, the price of the Trust
Units may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
Underwriters at any time. These transactions may be effected on the New York
Stock Exchange, in the over-the-counter market or otherwise.

The Underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of Trust Units offered.

The Company estimates that total expenses of the Offering, other than
underwriting discounts and commissions, will be approximately $525,000.

The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.

U-2
<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information or
to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell the Trust Units offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors............................................................... 10
Forward Looking Statements................................................. 14
Use of Proceeds............................................................ 14
The Trust.................................................................. 14
Hypothetical Annual Cash Distributions..................................... 15
The Net Profits Interests and the Underlying Properties.................... 19
Computation of Net Proceeds................................................ 29
Federal Income Tax Consequences............................................ 32
State Tax Considerations................................................... 36
ERISA Considerations....................................................... 37
Description of the Trust Indenture......................................... 38
Description of the Trust Units............................................. 41
Selling Trust Unitholder................................................... 43
Legal Matters.............................................................. 43
Experts.................................................................... 44
Available Information...................................................... 44
Glossary of Certain Oil and Gas Terms...................................... 45
Index to Financial Statements.............................................. F-1
Underwriting............................................................... U-1
</TABLE>

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

Through and including , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when
acting as an underwriter and with respect to an unsold allotment or
subscription.

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

6,000,000 Trust Units

HUGOTON ROYALTY TRUST

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

PROSPECTUS

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

GOLDMAN, SACHS & CO.

LEHMAN BROTHERS

BEAR, STEARNS & CO. INC.

DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED

DONALDSON, LUFKIN & JENRETTE

A.G. EDWARDS & SONS, INC.

REPRESENTATIVES OF THE UNDERWRITERS

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

All capitalized terms used and not defined in Part II of this Registration
Statement shall have the meanings assigned to them in the Prospectus forming a
part of this Registration Statement.

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

Except for the Registration Fee and the NASD Filing Fee, the following
itemized table sets forth estimates of those expenses payable by the Company
in connection with the offer and sale of the securities offered hereby:

<TABLE>
<S> <C>
Registration Fee................................................... $ 24,937
NASD Filing Fee.................................................... 9,470
Printing and Engraving Expenses.................................... 100,000
Legal Fees and Expenses............................................ 150,000
Accountants' Fees and Expenses..................................... 40,000
Miscellaneous Fees and Expenses.................................... 200,593
--------
Total.............................................................. $525,000
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 6.02 of the Trust Indenture provides that the Trustee will be
indemnified by the Trust estate or, if Trust assets are insufficient, by the
Company, against any and all liability and expenses incurred by it
individually or as Trustee in the administration of the Trust and the Trust
estate, except for any liability or expense resulting from fraud or gross
negligence or acts or omissions in bad faith.

The Company is incorporated in Delaware. Under Section 145 of the Delaware
General Corporation Law (the "DGCL"), a Delaware corporation has the power,
under specified circumstances, to indemnify its directors, officers, employees
and agents in connection with actions, suits or proceedings brought against
them by a third party or in the right of the corporation, by reason that they
were or are such directors, officers, employees or agents, against expenses
and liabilities incurred in any such action, suit or proceeding so long as
they acted in good faith and in a manner that they reasonably believed to be
in, or not opposed to, the best interests of such corporation, and with
respect to any criminal action, that they had no reasonable cause to believe
their conduct was unlawful. With respect to suits by or in the right of such
corporation, however, indemnification is generally limited to attorneys' fees
and other expenses and is not available if such person is adjudged to be
liable to such corporation unless the court determines that indemnification is
appropriate. A Delaware corporation also has the power to purchase and
maintain insurance for such persons. Article Nine of the Certificate of
Incorporation of the Registrant permits indemnification of directors and
officers to the fullest extent permitted by Section 145 of the DGCL. Reference
is made to the Certificate of Incorporation of the Registrant.

Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, provided that such provisions may not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 (relating to liability for
unauthorized acquisitions or redemptions of, or dividends on, capital stock)
of the DGCL or (iv) for any transaction from which the director derived an
improper personal benefit. Article Ten of the Registrant's Certificate of
Incorporation contains such a provision.

II-1
<PAGE>

The above discussion of the Registrant's Certificate of Incorporation and of
Sections 102(b)(7) and 145 of the DGCL is not intended to be exhaustive and is
qualified in its entirety by such Certificate of Incorporation and statutes.

Additionally, the Company has acquired directors' and officers' insurance in
the amount of $10 million, which provides an exclusion from coverage for
liability under the federal securities laws.

ITEM 16. EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* --Form of Underwriting Agreement.
4.1 --Hugoton Royalty Trust Indenture.
5.1* --Opinion of Kelly, Hart & Hallman, P.C. as to legality of the
securities registered hereby.
8.1* --Opinion of Butler & Binion, L.L.P. regarding federal income tax
matters.
8.2* --Opinion of Morris, Laing, Evans, Brock & Kennedy, Chartered as to
Kansas State tax matters.
10.1* --Form of 80% Net Overriding Royalty Conveyance--Kansas.
10.2* --Form of 80% Net Overriding Royalty Conveyance--Oklahoma.
10.3* --Form of 80% Net Overriding Royalty Conveyance--Wyoming.
15.1 --Awareness letter of Arthur Andersen LLP.
23.1 --Consent of Arthur Andersen LLP.
--Consent of Kelly, Hart & Hallman, P.C. (set forth in their opinion
23.2* filed as Exhibit 5.1).
--Consent of Butler & Binion, L.L.P. (set forth in their opinion filed
23.3* as Exhibit 8.1).
--Consent of Morris, Laing, Evans, Brock & Kennedy, Chartered (set
23.4* forth in their opinion filed as Exhibit 8.2).
24.1 --Powers of attorney (set forth on the signature page hereof).
27.1 --Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment

ITEM 17. UNDERTAKINGS.

The Company hereby undertakes:

(a) that, for purposes of determining any liability under the Securities Act
of 1933, each filing of the Company's annual reports pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section 15(d)
of the Securities Exchange Act of 1934) that is incorporated by reference in
the Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.

(b) to provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.

(c) for purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed a part of this registration
statement as of the time it was declared effective.

(d) for the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-2
<PAGE>

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore unenforceable. In the event that claim for
indemnification against such liabilities (other than the payment by the Trust
or Company of expenses incurred or paid by a director, officer or controlling
person in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered the Trust or Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.

II-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fort Worth, State of Texas, on December 4, 1998.

CROSS TIMBERS OIL COMPANY,

By /s/ Bob R. Simpson
-----------------------------------
BOB R. SIMPSON
CHAIRMAN OF THE BOARD

HUGOTON ROYALTY TRUST

By CROSS TIMBERS OIL COMPANY, as
sponsor

By /s/ Bob R. Simpson
-------------------------------
BOB R. SIMPSON
CHAIRMAN OF THE BOARD

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears
below hereby authorizes and appoints J. Richard Seeds and Louis G. Baldwin,
and each of them, any one of whom may act without the joinder of the other, as
his attorney-in-fact to sign on his behalf individually and in the capacity
stated below all amendments and post-effective amendments to this Registration
Statement, and any related registration statement filed pursuant to Rule
462(b) under the Securities Act of 1933 and all amendments and post-effective
amendments thereto, as such attorney-in-fact may deem necessary or
appropriate.

<TABLE>
<S> <C> <C>
/s/ Bob R. Simpson Director, Chairman of the December 4, 1998
______________________________________ Board and Chief Executive
BOB R. SIMPSON Officer (Principal
Executive Officer

/s/ Steffen E. Palko Director, Vice Chairman of December 4, 1998
______________________________________ the Board and President
STEFFEN E. PALKO

/s/ J. Richard Seeds Director, Executive Vice December 4, 1998
______________________________________ President
J. RICHARD SEEDS

/s/ J. Luther King, Jr. Director December 4, 1998
______________________________________
J. LUTHER KING, JR.

/s/ Jack P. Randall Director December 4, 1998
______________________________________
JACK P. RANDALL

/s/ Scott G. Sherman Director December 4, 1998
______________________________________
SCOTT G. SHERMAN

</TABLE>

II-4
<PAGE>

<TABLE>
<S> <C> <C>
/s/ Louis G. Baldwin Senior Vice President and December 4, 1998
______________________________________ Chief Financial Officer
LOUIS G. BALDWIN (Principal Financial
Officer)

/s/ Bennie G. Kniffen Senior Vice President and December 4, 1998
______________________________________ Controller (Principal
BENNIE G. KNIFFEN Accounting Officer)

</TABLE>

II-5
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.1 --Hugoton Royalty Trust Indenture.
15.1 --Awareness letter of Arthur Andersen LLP.
23.1 --Consent of Arthur Andersen LLP.
24.1 --Powers of attorney (set forth on the signature page hereof).
27.1 --Financial Data Schedule.
</TABLE>

<PAGE>

================================================================================

HUGOTON ROYALTY TRUST

ROYALTY TRUST INDENTURE

December 1, 1998

===============================================================================
<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>

<S> <C>
ARTICLE I. DEFINITION............................................................ 1
Section 1.01. Defined Terms............................................. 1

ARTICLE II. NAME AND PURPOSE OF THE TRUST....................................... 4
Section 2.01. Name....................................................... 4
Section 2.02. Purposes................................................... 4
Section 2.03. Nature of the Trust........................................ 5
Section 2.04. Transfer of Trust Property to the Trust; Closing Matters... 5

ARTICLE III. ADMINISTRATION OF THE TRUST........................................ 6
Section 3.01. General.................................................... 6
Section 3.02. Limited Power to Dispose of Royalties...................... 6
Section 3.03. No Power to Engage in Business or Make Investments......... 7
Section 3.04. Interest on Cash on Hand................................... 7
Section 3.05. Power to Settle Claims..................................... 7
Section 3.06. Power to Contract for Services............................. 7
Section 3.07. Payment of Liabilities of Trust............................ 8
Section 3.08. Establishment of Reserves.................................. 8
Section 3.09. Limited Power to Borrow.................................... 8
Section 3.10. Income and Principal....................................... 8
Section 3.11. Term of Contracts.......................................... 8
Section 3.12. Transactions between Related Parties....................... 9
Section 3.13. No Bond Required........................................... 9
Section 3.14. Timing of Trust Income and Expenses........................ 9
Section 3.15. Divestiture of Units....................................... 9
Section 3.16. Filing of Registration Statements, Listing of Units....... 10
Section 3.17. Reserve Reports........................................... 12
Section 3.18. Miscellaneous............................................. 13

ARTICLE IV. BENEFICIAL SHARES AND CERTIFICATES................................... 13
Section 4.01. Creation and Distribution.................................. 13
Section 4.02. Beneficial Interest of Unitholders......................... 13
Section 4.03. Execution of Certificates.................................. 14
Section 4.04. Registration and Transfer of Unit.......................... 14
Section 4.05. Mutilated, Lost, Stolen and Destroyed Certificates......... 15
Section 4.06. Protection of Trustee...................................... 15
Section 4.07. Determination of Ownership of Certificates................. 15

ARTICLE V. ACCOUNTING AND DISTRIBUTION; REPORTS................................. 16
Section 5.01. Fiscal Year and Accounting Method.......................... 16
Section 5.02. Distributions.............................................. 16
Section 5.03. Income Tax Reporting....................................... 16
Section 5.04 Reports to Unitholders..................................... 16
Section 5.05. Filings.................................................... 17
Section 5.06. Information to be Supplied by Grantor and Trustee.......... 17
Section 5.07. Reliance on Information.................................... 17

</TABLE>
<PAGE>

<TABLE>
<CAPTION>
<S> <C>
ARTICLE VI. LIABILITY OF TRUSTEE,
INDEMNIFICATION AND METHOD OF SUCCESSION......................................... 18
Section 6.01. Liability of Trustee....................................... 18
Section 6.02. Indemnification of Trustee................................. 18
Section 6.03. Guaranty................................................... 19
Section 6.04. Contribution............................................... 19
Section 6.05. Indemnification Procedures................................. 19
Section 6.06. Resignation of Trustee..................................... 20
Section 6.07. Removal of Trustee......................................... 20
Section 6.08. Appointment of Successor Trustee........................... 20
Section 6.09. Laws of Other Jurisdictions................................ 21
Section 6.10. Force Majeure.............................................. 21

ARTICLE VII. COMPENSATION OF THE TRUSTEE........................................ 22
Section 7.01. Compensation of Trustee.................................... 22
Section 7.02. Expenses................................................... 22
Section 7.03. Other Services............................................. 22
Section 7.04. Source of Funds............................................ 22

ARTICLE VIII. MEETINGS OF UNITHOLDERS........................................... 22
Section 8.01. Purpose of Meetings........................................ 22
Section 8.02. Call and Notice of Meetings................................ 22
Section 8.03. Voting..................................................... 23
Section 8.04. Conduct of Meetings........................................ 23
Section 8.05. Unitholder Proposals....................................... 23

ARTICLE IX. DURATION, REVOCATION AND TERMINATION OF TRUST....................... 24
Section 9.01. Revocation................................................. 24
Section 9.02. Termination................................................ 24
Section 9.03. Disposition and Distribution of Properties................. 24

ARTICLE X. AMENDMENTS........................................................... 25
Section 10.01. Prohibited................................................ 25
Section 10.02. Permitted................................................. 25

ARTICLE XI. ARBITRATION......................................................... 25

XII. MISCELLANEOUS.............................................................. 28
Section 12.01. Inspection of Trustee's Books............................. 28
Section 12.02. Trustee's Employment of Experts........................... 28
Section 12.03. Merger or Consolidation of Trustee........................ 28
Section 12.04. Filing of this Indenture.................................. 29
Section 12.05. Severability.............................................. 29
Section 12.06. Notices................................................... 29
Section 12.07. Counterparts.............................................. 30
Section 12.08. Successors................................................ 30

</TABLE>
<PAGE>

HUGOTON ROYALTY TRUST INDENTURE

This Royalty Trust Indenture ("Indenture") of Hugoton Royalty Trust (the
"Trust") is entered into as of December 1, 1998, between Cross Timbers Oil
Company, a Delaware corporation ("Grantor"), as Grantor, and NationsBank, N.A.,
a banking association organized under the laws of the United States (the
"Bank"), as trustee.

WHEREAS, Grantor is engaged in the business of developing and producing oil
and gas and owns various mineral interests in properties that contain proved
reserves of oil and gas and are currently producing oil and gas; and

WHEREAS, Grantor has determined to convey to the Trust the Royalties
(hereinafter defined) pursuant to the Conveyances (hereinafter defined) in
consideration for the issuance by the Trust to Grantor of 40,000,000 Units
(hereinafter defined) representing the ownership of undivided Beneficial
Interest (hereinafter defined) in the assets of the Trust;

NOW, THEREFORE, in furtherance of forming the Trust, Grantor has delivered
to the Bank, on behalf of the Trust, One Thousand Dollars ($1,000.00) upon
execution of this Indenture, which Bank accepts and agrees to hold in trust,
together with the Royalties to be received hereunder, for the purposes, and in
accordance with the duties, terms and conditions hereof.

ARTICLE I. DEFINITIONS

Section 1.01. Defined Terms. As used herein, the following terms are used
with the meanings indicated:

"Affiliate" of a Person means another Person controlled by,
controlling or under common control with such Person. As used herein,
"control" (including the terms "controlling", "controlled by" and "under
common control with") means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.

"Beneficial Interest" means the aggregate equitable interest of the
Unitholders in the Trust Estate as expressly set out in this Trust
Indenture and all other rights of beneficiaries of express trusts created
under the Texas Trust Code, subject to the limitations set forth in this
Trust Indenture.

"Business Day" means any day that is not a Saturday, Sunday or other
day on which national banking institutions in the City of Fort Worth,
Texas, are closed as authorized or required by law or a holiday determined
by the New York Stock Exchange as "affecting 'ex' dates."
<PAGE>

"Certificate" means a certificate issued by the Trustee pursuant to
Article IV evidencing the ownership of one or more Units.

"Code" means the Internal Revenue Code of 1986, as amended.

"Closing" means the closing of the initial public offering of Units
contemplated by the Securities Act Registration Statement.

"Conveyances" means the Net Overriding Royalty Conveyances effective
as of December 1, 1998 between Grantor and the Trust pursuant to which the
Royalties are to be conveyed to the Trust.

"Distribution Date" means the date of a distribution, which shall be
on or before ten Business Days after the Monthly Record Date.

"Effective Time" means 12:01 A.M. on December 1, 1998.

"Environmental Laws" means all applicable federal, state and local
laws, regulations, ordinances, rules, orders, permits and governmental
restrictions relating to the environment, the effect of the environment on
human health or safety, pollutants, contaminants, hazardous substances, or
hazardous waste, in effect on the date of this Indenture, and all binding
judicial and administrative interpretations thereof.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Exchange Act Registration Statement" means the registration statement
by which the Units may be registered under Section 12 of the Exchange Act.

"Indenture" means this instrument, as originally executed, or, if
amended or supplemented, as so amended or supplemented.

"Monthly Distribution Amount" means for each Monthly Period an amount
determined by the Trustee (pursuant to Section 5.02 hereof) to be equal to
the excess, if any, of (a) the cash received by the Trustee during the
Monthly Period attributable to the Royalties, plus any cash available for
distribution as a result of the reduction or elimination during the Monthly
Period of any existing cash reserve created pursuant to Section 3.08 hereof
to provide for the payment of liabilities of the Trust, plus any other cash
receipts of the Trust during the Monthly Period including any cash received
from interest earned pursuant to Section 3.04, other than interest earned
on deposits of the Monthly Distribution Amount for any prior Monthly Period
pending distribution of such amount, over (b) the liabilities of the Trust
paid during the Monthly Period, plus the amount of any cash used pursuant
to Section 3.08 hereof in the Monthly Period to establish or increase a
cash reserve for the payment of any accrued, future or contingent
liabilities of the Trust. Without limiting the foregoing, the liabilities
of the Trust to be paid during the first Monthly Period shall include
liabilities incurred prior to the Effective Time that relate to the
formation of the Trust or for which the Trust or Trustee is otherwise
responsible for payment. If the Monthly

2
<PAGE>

Distribution Amount determined in accordance with the preceding sentence
shall for any Monthly Period be a negative amount, then the Monthly
Distribution Amount shall be zero, and such negative amount shall reduce
the next Monthly Distribution Amount. Notwithstanding the foregoing, the
Monthly Distribution Amount for any Monthly Period shall not include any
amount which would have been required to be reported to any securities
exchange or quotation system on which the Units are listed or admitted in
connection with the establishment of an 'ex' date in order to be
distributed to Unitholders who were such on the Monthly Record Date for
such Monthly Period but was not so reported unless the securities exchange
or quotation system agrees to such amount being a part of that Monthly
Period's Monthly Distribution Amount or the Trustee receives an opinion of
counsel, in a form reasonably satisfactory to the Trustee, stating that
none of the Trust, the Trustee or any owner of Units will be adversely
affected by such inclusion. An amount which pursuant to the preceding
sentence is not included in the Monthly Distribution Amount for that
Monthly Period shall be included in the Monthly Distribution Amount for the
next Monthly Period (unless it is reserved pursuant to Section 3.08
hereof).

"Monthly Period" means, for the initial period, the period which
commences on the Effective Time and continues through and includes the
Monthly Record Date occurring in March 1999, and for succeeding periods the
period which commences on the day following a Monthly Record Date and
continues through and includes the next succeeding Monthly Record Date.

"Monthly Record Date" for each month means the close of business on
the last Business Day of such month unless the Trustee determines that a
different date is required to comply with applicable law or the rules of
any exchange or quotation system on which the Units may be listed or
admitted for trading, in which event it means such different date.

"NASD" means the National Association of Securities Dealers, Inc.

"NASDAQ" means the National Association of Securities Dealers
Automated Quotation System.

"NYSE" means the New York Stock Exchange.

"Person" means an individual, a corporation, partnership, limited
liability company, trust, estate or other organization.

"Reserve Report" means a report of estimated proved reserves
attributable to the Royalties and the present value thereof prepared on the
basis required by the SEC for inclusion in financial statements filed with
the SEC.

"Royalties" means the net overriding royalty interests conveyed to the
Trustee pursuant to the Conveyances.

"SEC" means the Securities and Exchange Commission and any agency
which may succeed to its responsibilities and functions after the date
hereof.

3
<PAGE>

"Securities Act" means the Securities Act of 1933, as amended.

"Securities Act Registration Statement" means a registration statement
filed under and complying with the requirements of the Securities Act, and
the rules and regulations promulgated thereunder, in respect of the
offering and sale of all or a fraction of the Units to the public and the
transactions related thereto.

"Subject Interests" has the meaning set forth in the Conveyances.

"Transferee", as to any Unitholder or former Unitholder, means any
Person succeeding to the interest of such Unitholder or former Unitholder
in one or more Units of the Trust, whether as purchaser, donee, legatee or
otherwise.

"Trust" means the express trust created hereby which shall be held and
administered as provided herein and in accordance with the terms and
provisions (not inconsistent with any terms and provisions hereof) of the
Texas Trust Code.

"Trust Estate" means the assets held by the Trustee under this
Indenture, and shall include both income and principal if separate accounts
or records are kept therefor.

"Trustee" means the initial trustee under this instrument, or any
successor, during the period it is so serving in such capacity.

"Unit" means an undivided fractional interest in the Beneficial
Interest, determined as hereinafter provided.

"Unitholder" means the owner of one or more Units as reflected on the
books of the Trustee pursuant to Article IV.

ARTICLE II. NAME AND PURPOSE OF THE TRUST

Section 2.01. Name. The Trust shall be known as the Hugoton Royalty
Trust, and the Trustee may transact the affairs of the Trust in that name.

Section 2.02. Purposes. The purposes of the Trust are:

(a) to receive, hold, protect and conserve, for the benefit of the
Unitholders, the Trust Estate;

(b) to convert the Royalties to cash either (1) by retaining them and
collecting the proceeds from production payable with respect thereto until
production has ceased or the Royalties have otherwise terminated or (2) by
selling or otherwise disposing of all or a part of the Royalties in
accordance with and subject to the terms of this Indenture;

(c) to pay, or provide for the payment of, any costs and liabilities
incurred in carrying out the purposes of the Trust, and thereafter to
distribute the remaining amounts of

4
<PAGE>

cash received by the Trust to the Unitholders pro rata based on the number
of Units owned; and

(d) subject to Section 3.03 of this Indenture, to engage in such other
activities as are necessary or convenient for the attainment of any of the
foregoing or are incident thereto and which may be engaged in or carried
out by a trust under the Texas Trust Code.

Section 2.03. Nature of the Trust. It is the intention and agreement of
Grantor and the Trustee to create an express trust within the meaning of Section
111.004(4) of the Texas Trust Code, for the benefit of the owners of Units, and
a grantor trust for federal income tax purposes of which the owners of Units are
the grantors. As set forth above and amplified herein, the Trust is intended to
be limited to the receipt of revenues attributable to the Royalties and the
distribution of such revenues, after payment of or provision for Trust expenses
and liabilities, to the Unitholders. It is neither the purpose nor the intention
of the parties hereto to create, and nothing in this Trust Indenture shall be
construed as creating, a partnership, joint venture, joint stock company or
business association between or among Unitholders, present or future, or among
or between Unitholders, or any of them, and the Trustee or Grantor.

Section 2.04. Transfer of Trust Property to the Trust; Closing Matters.
Upon the execution of this Indenture, Grantor has paid to the Trustee, in trust,
and the Trustee has accepted, for the uses and purposes provided herein, the sum
of One Thousand Dollars ($1,000.00) in consideration for 40,000,000 Units to be
issued by the Trust to Grantor, which Units shall collectively represent the
entire Beneficial Interest in accordance with Section 4.01 of this Indenture.
At or before the Closing, Grantor shall grant, bargain, sell, convey and assign
the Royalties to the Trust for the uses and purposes provided herein and for the
benefit of the Unitholders, pursuant to the Conveyances. The Units to be issued
by the Trust to Grantor in accordance with the first sentence of this Section
2.04 shall be evidenced by one or more Certificates (which may be temporary
Certificates) issued in such denominations and otherwise in accordance with
written instructions furnished to the Trustee. Upon receipt of written transfer
instructions from Grantor, the Trustee shall prepare Certificates (which may be
temporary Certificates) in proper form duly executed and countersigned in
accordance with Section 4.03 of this Indenture in such names and in such
denominations as Grantor may request in writing not less than two full Business
Days before the Closing. For the purpose of expediting the checking and
packaging of the Certificates so prepared by the Trustee pursuant to the
preceding sentence, the Trustee shall make such Certificates available for
inspection by the representatives of the several underwriters named in the
Securities Act Registration Statement. The Trustee shall deliver such
Certificates to such location and at such time as is stated in the written
transfer instructions from Grantor and shall release such Certificates (a) upon
the receipt from Grantor of one or more Certificates, duly endorsed for
transfer, that evidence a number of Units equal to or not less than the number
of Units evidenced by the Certificates to be so released and (b) in accordance
with the instructions of Grantor. At the Closing, the Trustee shall receive the
following documents dated as of the date of the Closing: (i) local counsel
opinions and opinions of Kelly, Hart & Hallman, P.C. and Butler & Binion, L.L.P.
addressed to the Trustee substantially in the forms of the opinions to be
delivered by such counsel at the Closing pursuant to the underwriting agreement
referred to in the Securities Act Registration Statement (the "Underwriting
Agreement"), (ii) a certificate of Grantor signed by an executive officer
certifying that the representations and warranties of Grantor contained in the
Underwriting Agreement are true and correct as of the date of the Closing and
(iii) such other

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documents or certificates as the Trustee may reasonably request; provided, that
the certificate regarding Grantor's representations and warranties set forth in
said Underwriting Agreement may be to the best knowledge of the officer
certifying as to such representations and warranties, and shall exclude
information furnished to Grantor in writing by or on behalf of the Trustee.

ARTICLE III. ADMINISTRATION OF THE TRUST

Section 3.01. General. The Trustee accepts the Trust created by this
Indenture and agrees to perform its duties in accordance with the terms of this
Indenture. Subject to the limitations set forth in this Indenture, the Trustee
is authorized to take such action as in its judgment is necessary or advisable
best to achieve the purposes of the Trust, including the authority to enter into
the Conveyances, to agree to modifications or settlements of the terms of the
Conveyances or to settle disputes with respect thereto, so long as such
modifications or settlements do not alter the nature of the Royalties as rights
to receive a share of the proceeds of oil and gas produced from the properties
presently burdened by such Royalties which are free of any obligation for
operating expenses and as rights which do not possess any operating rights or
obligations. The Trustee may not dispose of all or any portion of the Royalties
except as provided in Sections 3.02, 3.05, 3.09 and 9.03 of this Indenture.

Section 3.02. Limited Power to Dispose of Royalties.

(a) In the event the Trustee determines it to be in the best interest
of the Unitholders the Trustee may sell, at any time and from time to time,
all or any part of any of the Royalties for cash in such a manner as it
deems in the best interest of the Unitholders if approved by the
Unitholders present or represented at a meeting held in accordance with the
requirements of Article VIII. This Section 3.02(a) shall not be construed
to require approval of the Unitholders for any sale or other disposition of
all or any part of the Royalties pursuant to Sections 3.02(b), 3.05, 3.09
or 9.03. The Trustee is authorized to retain any of the Royalties in the
form in which such property was transferred to the Trustee, without regard
to any requirement to diversify investments or other requirements.

(b) Grantor may at any time and from time to time notify the Trustee
that it desires to sell for cash any of the Subject Interests to any Person
not an Affiliate of Grantor free of and unburdened by the Royalties, and
upon receipt of such notice the Trustee shall be required to join in such
sale and execute and deliver a partial release, assignment or such other
instrument as Grantor may reasonably request to evidence that such Subject
Interest is being sold free and unburdened by the Royalties; provided,
however, that the Trustee shall not be required to join in such sale if the
value of the Royalties (determined as provided below) associated with the
Subject Interests to be so sold in any calendar year pursuant to this
Section 3.02(b) exceeds one percent (1%) of the value of all the Royalties
before such sale. The net proceeds from any sale pursuant to this Section
3.02(b) shall be allocated twenty percent (20%) to Grantor and eighty
percent (80%) to the Trust. For purposes of this Section 3.02(b), the
value of the Royalties associated with the Subject Interests to be sold and
of all the Royalties shall be the discounted present value of the future
net revenue attributable to the proved reserves attributable to such
Royalties, respectively, as determined by reference to the Reserve Report
as of December 31 of the year preceding the closing of the sale. The

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use of such values is solely for the purpose of determining compliance with
this Section 3.02(b) and it is recognized that the proceeds of sale may be
greater or lesser than the value so determined.

Section 3.03. No Power to Engage in Business or Make Investments. The
Trustee shall not, in its capacity as Trustee under the Trust, engage in any
business or commercial activity of any kind whatsoever and shall not, under any
circumstances, use any portion of the Trust Estate to acquire any oil and gas
lease, royalty or other mineral interest other than the Royalties, or, except as
permitted in Sections 3.04 and 3.15, acquire any other asset. The Trustee shall
have no right or duty to operate the Subject Interests burdened by the Royalties
or to market any production therefrom. The Trustee shall not accept
contributions to the Trust other than the Royalties and the initial cash
deposit.

Section 3.04. Interest on Cash on Hand. Cash being held by the Trustee as
a reserve for liabilities or for distribution at the next Distribution Date
shall be invested (in the Trustee's discretion) in: (a) obligations issued (or
unconditionally guaranteed) by the United States of America or any agency or
instrumentality thereof (provided such agency or instrumentality obligations are
secured by the full faith and credit of the United States of America), (b)
repurchase agreements secured by obligations qualifying under subparagraph (a)
above, or (c) certificates of deposit of any bank having capital, surplus and
undivided profits in excess of $100,000,000; provided such repurchase agreements
or certificates of deposit shall bear interest at a rate that is not less than
the greater of (i) the interest rate that the Bank or its successor pays in the
normal course of business on amounts placed with it, taking into account the
amounts involved, the period held and other relevant factors, or (ii) the rate
of interest paid on obligations qualifying under subparagraph (a) above. Any
such obligations, repurchase agreements or certificates representing funds to be
distributed at the next Distribution Date must mature on or before the next
succeeding Distribution Date and must be held to maturity. To the extent not
prohibited by Section 113.057 of the Texas Trust Code, any such cash may be
placed with the Bank or any successor bank serving as Trustee.

Section 3.05. Power to Settle Claims. Subject to the limitations
specified in Article XI, the Trustee is authorized to prosecute or defend, or to
settle by arbitration or otherwise, any claim of or against the Trustee, the
Trust or the Trust Estate, to waive or release rights of any kind and to pay or
satisfy any debt, tax or claim upon any evidence by it deemed sufficient,
without the joinder or consent of any Unitholder. Such authority shall include,
but not be limited to, the authority to dispose of or relinquish title to any of
the Royalties that are the subject of such a dispute upon receipt of such
evidence. The Trustee agrees to respond definitively to, and within a
commercially reasonable time period following its receipt of, any written
request by Grantor relating to any such claim and complying with the last
sentence of this Section 3.05, and the failure of the Trustee so to respond
definitively and timely shall conclusively estop the Trustee from thereafter
claiming a right that is inconsistent with the stated intent as set forth in the
notice and materially detrimental to Grantor or its Affiliates with respect to
such requested matter. Any request made by Grantor intended to be governed by
this Section 3.05 shall specifically reference this Section.

Section 3.06. Power to Contract for Services. In the administration of
the Trust, the Trustee is empowered to employ oil and gas consultants,
independent reservoir engineers, accountants (who may be the same accounting
firm who are engaged as outside auditors for Grantor), attorneys (who

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may be counsel to Grantor unless Grantor otherwise notifies the Trustee in
writing), transfer agents and other professional and expert persons and to
employ or contract for clerical and other administrative assistance (including
assistance from Grantor or its Affiliates) and to make payments of all fees for
services or expenses in any manner thus incurred out of the Trust Estate.

Section 3.07. Payment of Liabilities of Trust. The Trustee shall, to the
extent that funds of the Trust are available therefor (which shall not include
funds previously set aside for payment of a Monthly Distribution Amount), make
payment of all liabilities of the Trust, including, but without limiting the
generality of the foregoing, all expenses, taxes, liabilities of all kinds,
including compensation to it for its services hereunder, and compensation to
such parties as may be employed as provided for in Section 3.06 hereof.

Section 3.08. Establishment of Reserves. With respect to any liability
which is contingent or uncertain in amount or which otherwise is not currently
due and payable, the Trustee in its sole discretion may, but is not obligated
to, establish a cash reserve for the payment of such liability.

Section 3.09. Limited Power to Borrow. If at any time the cash on hand and
to be received by the Trust and available to pay liabilities is not, or will not
be, in the judgment of the Trustee, sufficient to pay liabilities of the Trust
as they become due or to purchase Units if required under Section 3.15(b), the
Trustee is authorized to borrow the funds required to pay such liabilities or
make such purchases. In such event, no further distributions will be made to
Unitholders (except in respect of previously determined Monthly Distribution
Amounts) until the indebtedness created by such borrowing has been paid in full.
Such funds may be borrowed from any Person, including, without limitation, the
Bank or any other fiduciary hereunder. To secure payment of such indebtedness,
the Trustee is authorized to mortgage, pledge, grant security interests in or
otherwise encumber (and to include as a part thereof any and all terms, powers.
remedies, covenants and provisions deemed necessary or advisable in the
Trustee's discretion, including, without limitation, the power of sale with or
without judicial proceedings) the Trust Estate, or any portion thereof,
including the Royalties, and to carve out and convey production payments.

Section 3.10. Income and Principal. The Trustee shall not be required to
keep separate accounts or records for income and principal or maintain any
reserves for depletion of the Royalties. However, if the Trustee does keep such
separate accounts or records, then the Trustee is authorized to treat all or any
part of the receipts from the Royalties as income or principal, and in general
to determine all questions as between income and principal and to credit or
charge to income or principal or to apportion between them any receipt or gain
and any charge, disbursement or loss as is deemed advisable under the
circumstances of each case. Regardless of any such characterization, however,
the Trustee shall not make any distribution, accumulate any funds, or maintain
any reserve except as expressly provided in this Indenture.

Section 3.11. Term of Contracts. In exercising the rights and powers
granted hereunder, the Trustee is authorized to make the term of any transaction
or contract or other instrument extend beyond the term of the Trust.

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Section 3.12. Transactions between Related Parties. The Trustee shall not
be prohibited in any way in exercising its powers from making contracts or
having dealings with itself in any other capacity (fiduciary or otherwise) or
with Grantor.

Section 3.13. No Bond Required. The Trustee shall not be required to
furnish any bond or security of any kind.

Section 3.14. Timing of Trust Income and Expenses. The Trustee will use
all reasonable efforts to cause the Trust and the Unitholders to recognize
income and expenses on Monthly Record Dates. The Trustee will invoice the Trust
for services rendered by the Trustee only on a Monthly Record Date and shall
cause the Trust to pay any such invoices only on the Monthly Record Date on
which an invoice is rendered and will use all reasonable efforts to cause all
Persons to whom the Trust becomes liable to invoice the Trust for such liability
on a Monthly Record Date and to cause the Trust to pay any such liabilities on
the Monthly Record Date on which such liability is invoiced. In connection with
the requirements of any securities exchange on which the Units are listed or
market system through which Units are traded, the Trustee will, if required by
such securities exchange or market system, use all reasonable efforts to
determine the Monthly Distribution Amount and report such amount to the exchange
or market system at such time as may be required by such securities exchange or
market system. Nothing in this Section 3.14 shall be construed as requiring the
Trustee to cause payment to be made for Trust liabilities on any date other than
on such date as in its sole discretion it shall deem to be in the best interest
of the Unitholders.

Section 3.15. Divestiture of Units. If at any time the Trust or the
Trustee is named a party in any judicial or administrative proceeding which
seeks the cancellation or forfeiture of any property in which the Trust has an
interest because of the nationality, or any other status, of any one or more
Unitholders, the following procedures will be applicable:

(a) The Trustee will promptly give written notice ("Notice") to each
Unitholder ("Ineligible Holder") whose nationality or other status is an
issue in the proceeding as to the existence of such controversy related to
the Royalties, the Trust or the Trust Units. The Notice will contain a
reasonable summary of such controversy and will constitute a demand to each
Ineligible Holder that he dispose of his Units to a party which would not
be an Ineligible Holder within 30 days after the date of the Notice.

(b) If any Ineligible Holder fails to dispose of his Units as required
by the Notice, the Trustee will have the right to purchase, and will
purchase, any such Units at any time during the 90 days after the
expiration of the 30-day period specified in the Notice. The purchase price
on a per Unit basis will be determined as of the last Business Day
("determination day") preceding the end of the 30-day period specified in
the Notice and will equal the following per Unit amount: (i) if the Units
are then listed on a securities exchange the price will equal the closing
price of the Units on such exchange (or, if the Units are then listed on
more than one exchange, on the largest such exchange in terms of the volume
of Units traded thereon during the preceding twelve months) on the
determination day if any Units were sold on such exchange on such day or,
if not, on the last preceding day on which any Units were sold on such
exchange or (ii) if the Units are not then listed on any securities
exchange, but are traded through a market system, the price will equal the
mean between the

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closing bid and asked prices for the Units in such market system on the
determination day if quotations for such prices on such day are available
or, if not, on the last preceding day for which such quotations are
available or (iii) if the Units are not then listed on any stock exchange
or traded through any market system, the price will be determined by
multiplying the present value of the estimated future net revenues
attributable to proved reserves of the Royalties as reflected in the latest
Reserve Report prepared for the Trust (minus all liabilities of the Trust)
by 1.4 and by then dividing such amount by the number of Units (including
the Units to be purchased) then outstanding. Such purchase will be
accomplished by tender of the above cash price to the Ineligible Holder at
his address as shown on the records of the Trustee, either in person or by
mail as provided in Section 12.06, accompanied by notice of cancellation.
Concurrently with such tender the Trustee shall cancel or cause to be
cancelled all Certificates representing Units then owned by such Ineligible
Holder and for which tender has been made, and the Trustee shall issue or
cause to be issued to itself a Certificate or Certificates representing the
same number of Units as were so cancelled. Upon such cancellation, the
Ineligible Holder shall part with the Beneficial Interest attributable to
the Units theretofore owned by him and all interests, rights and benefits
of the Ineligible Holder as a Unitholder shall terminate. In the event the
tender is refused by the Ineligible Holder or if he cannot be located after
reasonable efforts to do so, the tendered sum shall be held by the Trustee
in an interest bearing account for the benefit of such Ineligible Holder,
until proper claim for same (together with interest accrued thereon) has
been made by such Holder, but subject to applicable laws concerning
unclaimed property.

(c) The Trustee may, in its sole discretion, cancel any Units acquired
in accordance with the foregoing procedures or may sell such Units, either
publicly or privately, in accordance with all applicable laws. The proceeds
of any such sale of Units, less the expenses of such sale, will constitute
revenues of the Trust.

Section 3.16. Filing of Registration Statements, Listing of Units.

(a) The Trustee shall, in connection with the initial public offering
of the Units and otherwise, upon the request of Grantor, on behalf of the
Trust, cooperate with Grantor and otherwise use its best efforts to cause:

(i) one or more Securities Act Registration Statements to be
prepared, signed, filed and declared effective by the SEC;

(ii) an Exchange Act Registration Statement to be prepared,
signed, filed and become effective;

(iii) the Units to be qualified or exempted from qualification
under the securities or Blue Sky laws of the several states; and

(iv) the Units to be listed for trading on the NYSE or another
national securities exchange, as it shall select, or, if listing on a
national securities exchange is not feasible or is undesirable, to
cause the Units to be admitted for quotation on the NASDAQ.

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<PAGE>

(b) Grantor shall be obligated and entitled, at its own expense except
as otherwise herein provided, to take or cause to be taken all steps
customary or appropriate to the accomplishment of the objectives set forth
above including, without limitation, engaging counsel for itself and
approving special counsel for the Trust, engaging accountants for the
Trust, contracting for all printing and engraving services, making all
filings and applications necessary to the foregoing and paying all filing
and application fees associated therewith. The Trustee shall execute, by
and on behalf of the Trust, any documents incidental or related to the
foregoing as reasonably requested by Grantor. Notwithstanding anything in
this Section 3.16 to the contrary, unless required by the SEC, the Trustee
shall not be required to sign any Securities Act Registration Statement or
Exchange Act Registration Statement in connection with the initial public
offering or any subsequent offering of the Units. If the Trustee does not
sign any Securities Act Registration Statement or Exchange Act Registration
Statement on behalf of the Trust in connection with the initial public
offering or any subsequent offering of the Units by Grantor, then Grantor
may sign on behalf of the Trust.

(c) Except as precluded in Article VI, the reasonable fees, charges,
expenses, disbursements and other costs incurred by the Trustee in
connection with the discharge of its duties under this Section 3.16 shall
be paid by Grantor.

(d) The Trustee shall cooperate with and assist Grantor in every
reasonable way and in good faith in accomplishing the foregoing. Among
other things, the Trustee shall permit counsel, special counsel and
accountants engaged by Grantor and other representatives of Grantor
reasonable access to information responsive to the requirements of the
Securities Act, the Exchange Act, the securities or Blue Sky laws of the
several states, the rules of any securities exchange upon which listing is
to be sought and the rules of the NASD, and to Trustee personnel having
such information, as fully and to the same extent as if the Trustee were
proceeding for its own purposes to accomplish such objectives. The Trustee
agrees to provide Grantor with the authority and, if required pursuant to
Section 3.16(b) above, the signatures required for the filing of the
Securities Act Registration Statements, the Exchange Act Registration
Statement, and registration statements, notices of exemption, applications
for exemption, consents to service of process and all other documents
necessary to comply with the Blue Sky laws of the several states, a listing
application with the NYSE or any other national securities exchange or an
application for quotation on the NASDAQ. The Trustee shall also provide
Grantor upon request with a Unitholders' list as of the latest Monthly
Record Date in such form as Grantor may reasonably request.

(e) After the registration of the Units pursuant to the Exchange Act
and/or the listing of the Units on the NYSE or another national securities
exchange or the admission for quotation of the Units on the NASDAQ, the
Trustee, on behalf of the Trust, shall cause the Trust to comply with all
of the rules, orders and regulations of the SEC, such exchange or the
NASDAQ, and take all such other actions necessary for the Units to remain
so registered, listed or admitted for quotation until the Trust is
terminated.

(f) The Trustee shall be empowered to, in connection with the initial
public offering of the Units or such other public offering of Units, upon
request of Grantor, in the

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name and on behalf of the Trust, enter into any underwriting or similar
securities purchase agreement for the purpose of causing the Trust to
provide certain warranties and agreements, including, without limitation,
providing, jointly and severally with the Grantor, indemnification in favor
of the underwriters and their control persons for material misstatements
and omissions made in connection with the public offering (and related
contribution agreements), and in connection therewith the Trustee shall,
upon request of Grantor, provide certificates and other documents (provided
that in no event shall the Trustee be required to sign any registration
statement under the Securities Act or Exchange Act unless required to do so
by the SEC) and engage legal counsel to provide opinions of counsel
reasonably requested by the underwriters under such agreements; provided
that the warranties and agreements or obligations of the Trust under this
paragraph (f) shall be limited soley to the assets of the Trust and shall
not result in the incurrence of any liability by the Trustee or any
Unitholder.

(g) To the fullest extent permitted by law, Grantor agrees to defend,
indemnify and hold the Trust and the Trustee harmless from and against any
loss, cost, claim, damage, expense or liability, joint or several, or any
action in respect thereof, to which the Trust or the Trustee or the
officers, employees or agents of the Trustee or any controlling person of
the Trustee becomes subject, under the Securities Act or the Exchange Act,
or otherwise, insofar as such loss, cost, claim, damage, expense or
liability or action arises out of, or is based upon, (i) any untrue
statement or alleged untrue statement of a material fact contained in any
Securities Act Registration Statement or Exchange Act Registration
Statement, or any other document filed by or on behalf of Grantor with the
SEC, or any other statement publicly made by or on behalf of Grantor, or
(ii) the omission or alleged omission to state in any Securities Act
Registration Statement or Exchange Act Registration Statement, or any other
document, or any other statement publicly made by or on behalf of Grantor,
any material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that Grantor shall
not be liable in any case to the extent that any such loss, cost, claim,
damage, expense, liability or action arises out of, or is based upon, (A)
any fraudulent misrepresentation, gross negligence or willful misconduct of
the Trustee or (B) any untrue statement or alleged untrue statement or
omission or alleged omission included in any such Securities Act
Registration Statement or Exchange Act Registration Statement, or any other
document filed by or on behalf of Grantor, the Trust or the Trustee with
the SEC, or any other statement publicly made by or on behalf of Grantor,
the Trust or the Trustee in reliance upon and in conformity with written
information furnished by or on behalf of the Trustee specifically for
inclusion therein. This provision shall in no way limit the general rights
to indemnification and contribution and limitations on liability of the
Trust and Trustee set forth in Article VI of this Indenture or elsewhere
herein.

Section 3.17. Reserve Reports. If a Reserve Report for the Royalties is
not provided by Grantor pursuant to Section 4.08 of the Conveyances, the Trustee
shall cause a Reserve Report for the Royalties to be prepared as of December 31
of each year, in accordance with criteria established by the SEC showing
estimated proved oil and gas reserves attributable to the Royalties as of
December 31 of such year and other reserve information required in order for the
Trustee to furnish the information required in Sections 5.03 and 5.04 of this
Indenture. The Reserve Reports shall be prepared by a firm of independent
petroleum engineers selected by the Trustee. Such Reserve Report

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shall also show estimated future net revenues and the net present value
(discounted at 10 percent or such other rate required by the SEC) of the
estimated future net revenues (calculated in accordance with criteria
established by the SEC) of proved reserves attributable to the Royalties. The
costs of such Reserve Reports, whether provided by Grantor or obtained by the
Trustee, shall constitute an administrative expense of the Trust payable out of
the Trust Estate pursuant to Section 3.07. Grantor shall assist the Trustee in
the preparation of the Reserve Reports by furnishing all current and existing
reserve, production and geophysical data in its possession relating to the
Royalties reasonably requested by or on behalf of the independent petroleum
engineers selected by the Trustee as necessary to prepare such Reserve Reports;
provided, that Grantor shall not be required to disclose or produce any
information, documents or other materials which (a) were generated for analysis
or discussion purposes or contain interpretative data or (b) are subject to the
attorney-client or attorney-work product privileges, or any other privileges to
which Grantor may be entitled pursuant to applicable law.

Section 3.18. Miscellaneous. Except as otherwise provided in this
Indenture, this Indenture and the Trust shall be governed, construed,
administered and controlled by and under the laws of the State of Texas, and the
rights, powers, duties and liabilities of the Trustee shall be in accordance
with and governed by the terms and provisions of the Texas Trust Code and other
applicable laws of the State of Texas as in effect at any applicable time.

ARTICLE IV. BENEFICIAL SHARES AND CERTIFICATES

Section 4.01. Creation and Distribution. The entire Beneficial Interest
shall be divided into 40,000,000 Units. The ownership of the Units shall be
evidenced by Certificates in substantially the form of Schedule 1 attached to
this Indenture, containing such changes or alterations of form, but not
substance, as the Trustee shall from time to time, in its discretion, deem
necessary or desirable.

Section 4.02. Beneficial Interest of Unitholders. Each Unit shall
represent pro rata undivided ownership of the Beneficial Interest and shall
entitle its holder to participate pro rata in the rights and benefits of the
Unitholders under this Indenture. A Unitholder (by assignment or otherwise)
shall take and hold each Unit subject to all the terms and provisions of this
Indenture and the Conveyances, which shall be binding upon and inure to the
benefit of the heirs, personal representatives, successors and assigns of the
Unitholder. By an assignment or transfer of one or more Units represented by a
Certificate, the assignor thereby shall, effective as of the close of business
on the date of transfer and with respect to such assigned or transferred Unit or
Units, part with, except as provided in Section 4.04 in the case of a transfer
after a Monthly Record Date and prior to the corresponding monthly payment date,
(i) all his Beneficial Interest attributable thereto; (ii) all his rights in, to
and under such Certificate; and (iii) all interests, rights and benefits under
this Trust of a Unitholder which are attributable to such Unit or Units as
against all other Unitholders and the Trustee. The Certificates, the Units and
the rights, benefits and interests evidenced by either or both (including,
without limiting the foregoing, the entire Beneficial Interest) are and shall be
held and construed to be in all respects intangible personal property, and the
Certificates and Units evidenced thereby shall be bequeathed, assigned, disposed
of and distributed as intangible personal property. No Unitholder as such shall
have any legal or equitable title in or to any real or personal property
interest which is a part of the Trust Estate, including, without limiting the
foregoing, the

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Royalties or any part thereof, but the sole interest of each Unitholder shall be
such Unitholder's Beneficial Interest and the obligation of the Trustee to hold,
manage and dispose of the Trust Estate and to account for the proceeds thereof
as herein provided. No Unitholder shall have the right to call for or demand or
secure any partition or distribution of the Royalties during the continuance of
the Trust or during the period of liquidation and winding up under Section 9.03
of this Indenture.

Section 4.03. Execution of Certificates.

(a) All Certificates shall be signed by a duly authorized officer of
the Trustee. Certificates may be signed on behalf of the Trustee by such
persons as at the actual date of the signing of such Certificates shall be
the proper officers of the Trustee, although at the nominal date of such
Certificates any such person shall not have been such officer of the
Trustee. Any such signature may be the manual or facsimile signature (to
the extent permitted by law or the rules or regulations of any stock
exchange or quotation system on which the Units are listed or traded) of
such officers and may be affixed, imprinted or otherwise reproduced on the
Certificate.

(b) Pending the preparation of definitive Certificates, the Trustee
shall execute, and the transfer agent and registrar for the Units appointed
in accordance with Section 3.06 of this Indenture shall countersign and
register, temporary Certificates, as directed in a certificate of an
officer of Grantor. Temporary Certificates may contain such references to
any provisions of this Indenture as may be appropriate. Each temporary
Certificate shall be executed by the Trustee and signed and registered upon
the same conditions and in substantially the same manner, and with like
effect as the definitive Certificates.

(c) As promptly as practicable, the Trustee shall execute and furnish
definitive Certificates and thereupon temporary Certificates may be
surrendered in exchange therefor without charge to the Unitholders at the
principal office of the transfer agent at which Certificates may be
presented for transfer pursuant to Section 4.04 hereof, and the Trustee (or
the transfer agent and registrar if the Trustee is not serving in such
capacities) shall sign and register in exchange for such temporary
Certificates a like aggregate amount of definitive Certificates. Until so
exchanged, the temporary Certificates shall be entitled to the same
benefits under this Indenture as definitive Certificates.

Section 4.04. Registration and Transfer of Units. The Units shall be
transferable as against the Trustee as provided herein, and then only on the
records of the Trustee and, except as provided in Section 3.15 hereof, upon the
surrender of Certificates, if any, and compliance with such reasonable
regulations as it may prescribe. No service charge shall be made to Unitholders
or Transferees for any transfer of a Unit, but the Trustee may require payment
of a sum sufficient to cover any tax or other governmental charge that may be
imposed in relation thereto. Until any such transfer is completed, the Trustee
may treat the owner of any Unit as shown by its records as the owner of the Unit
for all purposes and shall not be charged with notice of any claim or demand
respecting such Unit or the Beneficial Interest represented thereby by any other
party. Any such transfer of a Unit shall, as to the Trustee, transfer to the
Transferee as of the close of business on the date of transfer all of the
Beneficial Interest of the transferor; provided that a transfer of a Unit after
any Monthly Record Date shall not transfer to the Transferee the right of the
transferor to any sum

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payable to such transferor as title holder of the Certificate of record on said
Monthly Record Date. As to matters affecting the title, ownership, warranty or
transfer of Units and Certificates, except as provided to the contrary herein,
Article 8 of the Uniform Commercial Code, the Texas Uniform Act for
Simplification of Fiduciary Security Transfers under Chapter 33 of the Texas
Business and Commerce Code and other statutes and rules with respect to the
transfer of securities, each as adopted and then in force in the State of Texas,
shall govern and apply. The death of any Unitholder shall not entitle the
Transferee to an accounting or valuation for any purpose, but such Transferee
shall succeed to all rights of the deceased Unitholder under this Indenture upon
proper proof of title satisfactory to the Trustee.

Section 4.05. Mutilated, Lost, Stolen and Destroyed Certificates. If any
Certificate is lost, stolen, destroyed or mutilated, the Trustee, in its
discretion and upon proof satisfactory to the Trustee, together with receipt by
the Trustee of a surety bond sufficient in the opinion of the Trustee to
indemnify the Trustee and the Trust against all losses and expenses that may
reasonably be expected to be incurred in connection therewith (if deemed
advisable by the Trustee), and surrender of the mutilated Certificate, will
issue a new Certificate to the holder of such lost, stolen, destroyed or
mutilated Certificate as shown by the records of the Trustee, upon payment of a
reasonable charge of the Trustee and any reasonable expenses incurred by it in
connection therewith.

Section 4.06. Protection of Trustee. The Trustee shall be protected in
acting or relying upon any notice, certificate, assignment or other document or
instrument believed by the Trustee to be genuine and to be signed by the proper
party or parties, including, without limitation, any instructions or documents
received from Grantor in connection with this Indenture. Except as provided
herein to the contrary, the Trustee is specifically authorized to rely upon the
application of Article 8 of the Uniform Commercial Code, the application of the
Texas Uniform Act for Simplification of Fiduciary Security Transfers under
Chapter 33 of the Texas Business and Commerce Code and the application of other
statutes and rules with respect to the transfer of securities, each as adopted
and then in force in the State of Texas, as to all matters affecting title,
ownership, warranty or transfer of the Certificates and the Units represented
thereby, without any personal liability for such reliance, and the indemnity
granted under Section 6.02 of this Indenture shall specifically extend to any
matters arising as a result thereof.

Section 4.07. Determination of Ownership of Certificates. In the event of
any disagreement between persons claiming to be Transferees of any Unit, and in
addition to any other rights it may have under applicable law, the Trustee shall
be entitled, at its option, to refuse to recognize any such claim so long as
such disagreement shall continue. In so refusing, the Trustee may elect to make
no delivery or other disposition of the interest represented by the Certificate
involved, or any part thereof, or of any sum or sums of money, accrued or
accruing thereunder, and, in so doing, the Trustee shall not be or become liable
to any Person for the failure or refusal of the Trustee to comply with such
conflicting claims, and the Trustee shall be entitled to continue so to refrain
and refuse so to act, until

(a) the rights of the adverse claimants have been adjudicated by
arbitration (pursuant to Article XI) or by a final nonappealable judgment
of a court assuming and having jurisdiction of the parties and the interest
and money involved, or

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(b) all differences have been resolved by valid agreement between said
parties and the Trustee shall have been notified thereof in writing signed
by all of the interested parties.

ARTICLE V. ACCOUNTING AND DISTRIBUTION; REPORTS

Section 5.01. Fiscal Year and Accounting Method. The fiscal year of the
Trust shall be the calendar year. The Trustee shall maintain its books in
accordance with generally accepted accounting principles or such other method as
will provide appropriate financial data responsive to the needs of the
Unitholders and which shall comply with Sections 5.03 and 5.04.

Section 5.02. Distributions. The Trustee shall determine the Monthly
Distribution Amount for each month and shall establish a cash reserve equal to
such amount on the Monthly Record Date for such month. On the Distribution Date
for such Monthly Distribution Amount, the Trustee will distribute pro rata to
the Unitholders of record on such Monthly Record Date such Monthly Distribution
Amount.

Section 5.03. Income Tax Reporting. For federal or state income tax
purposes, the Trustee shall file for the Trust such returns and statements as in
its judgment are required to comply with applicable provisions of the Code and
regulations and any applicable state laws and regulations, in either case to
permit each Unitholder to report such Unitholder's share of the income and
deductions of the Trust. The Trustee will treat all income and deductions of the
Trust for each month as having been realized on the Monthly Record Date for such
month unless otherwise advised by its counsel or the Internal Revenue Service.
The Trustee will report as a grantor trust until and unless it receives an
opinion of tax counsel that such reporting is no longer proper. Within 75 days
following the end of each fiscal year, the Trustee shall mail, to each
Unitholder of record on a Monthly Record Date during such fiscal year, a report
which shall show in reasonable detail such information as is necessary to permit
all holders of record of Units on a Monthly Record Date during such fiscal year
to make calculations necessary for tax purposes, including depletion.

Section 5.04 Reports to Unitholders. As promptly as practicable
following the end of each calendar quarter except the fourth calendar quarter,
(a) the Trustee shall mail to each Person who was a Unitholder of record on a
Monthly Record Date during such quarter a report which shall show in reasonable
detail such information as is necessary to permit holders of Units to make all
calculations necessary for tax purposes including depletion, and (b) the Trustee
shall mail to each Person who was a Unitholder of record on the last Monthly
Record Date during such calendar quarter a report, which may be a copy of the
Trust's report on Form 10Q under the Exchange Act, which shall show the assets
and liabilities of the Trust at the end of such quarter and distributable income
of the Trust for such quarter. Within 120 days following the end of each fiscal
year, the Trustee shall mail, to each Unitholder of record on a date to be
selected by the Trustee, an annual report containing financial statements
audited by a nationally recognized firm of public accountants selected by the
Trustee. Notwithstanding the foregoing, the Trustee will furnish to the
Unitholders such reports, in such manner and at such times, as are at any time
required by law or by rules or regulations of any securities exchange or
quotation system on which the Units are listed or admitted for trading.

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Section 5.05. Filings. The Trustee is authorized to make all Exchange Act
filings on behalf of the Trust required by applicable law or regulation. It is
the intention of Grantor that the Units be listed on the NYSE, and, in this
regard, Grantor shall advise the Trustee of any actions (consistent with the
purposes of the Trust) that the Trustee should take in connection with the
effectuation of such listing. If listing is accomplished, the Trustee shall
take all reasonable actions necessary to maintain such listing, including
compliance with the stock exchange's rules and the filing of any reports
required by the stock exchange. Grantor shall prepare and file all filings and
reports required under the Securities Act or state securities or Blue Sky laws.
The Trustee is authorized to and shall take all reasonable actions to prepare
and mail to Unitholders, any reports, press releases or statements, financial or
otherwise, that Grantor notifies the Trustee in writing are required to be
provided by the Trust to Unitholders by law or governmental regulation or the
requirements of any securities exchange or quotation system on which the Units
are listed or admitted for trading, subject to receipt by the Trustee of a
satisfactory opinion of counsel confirming the necessity of such reports, if
such an opinion is deemed necessary by the Trustee.

Section 5.06. Information to be Supplied by Grantor and Trustee. Grantor
shall provide, or cause to be provided, to the Trustee on a timely basis (a) an
annual audited statement of revenues and direct operating expenses of the
Subject Interests and quarterly statements of revenues and direct operating
expenses of the Subject Interests, which quarterly statements may be on a
condensed basis and need not be audited by a firm of independent accountants and
(b) such other information as is not known to the Trustee or is otherwise more
easily available to Grantor than to the Trustee concerning the Royalties
(including information with respect to the properties burdened by the Royalties)
and related matters as shall be necessary for Trustee to comply with the
reporting obligations of the Trust pursuant to the Exchange Act, the
requirements of any securities exchange or quotation system on which the Units
are listed or admitted for trading and this Indenture, including, without
limitation, Sections 5.03, 5.04 and 5.05 hereof. For purposes of this Section
5.06, the phrase "timely basis" shall mean not less than 10 days prior to the
date on which the Trustee is required to comply with such reporting obligations
of the Trust. In addition, Grantor shall provide to the Trustee on a timely
basis, for use in connection with the Trust's Form 10-K annual report, a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" relating to such financial statements. Notwithstanding any
provision to the contrary in this Indenture or the Conveyances, Grantor and its
Affiliates shall not be required to disclose, produce or prepare any
information, documents or other materials which (i) were generated for analysis
or discussion purposes or contain interpretative data or (ii) are subject to the
attorney-client or attorney-work-product privileges, or any other privileges to
which they may be entitled pursuant to applicable law. At least one Business Day
prior to reporting the Monthly Distribution Amount to the securities exchange or
market system in accordance with Section 3.14, the Trustee shall provide to
Grantor a written and reasonably detailed report showing such Monthly
Distribution Amount and each administrative cost of the Trust paid or payable
for such Monthly Period, including, but not limited to, each out-of-pocket
expenditure, and all Trustee compensation. The Trustee will respond promptly to
Grantor's reasonable questions regarding such report.

Section 5.07. Reliance on Information. The Trustee, so long as acting in
good faith, shall be entitled to rely, without investigation, on all information
provided to it by Grantor for purposes of complying with the reporting
obligations of the Trust as contemplated by Section 5.06, including, without
limitation, information regarding depletion and entitlement to tax credits under
Section 29

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of the Code. Notwithstanding any time limit imposed by applicable laws or
regulations or by the provisions of this Indenture, if, due to the
unavailability prior to the expiration of any such time limit of information
necessary, or a delay in receipt by the Trustee of information necessary, for
preparation of a report required to be filed, made or delivered by the Trustee,
the Trustee shall be unable to prepare and file or mail such report within such
time limit, the Trustee shall prepare and file or mail such report as soon as
practicable after such information is received.

ARTICLE VI. LIABILITY OF TRUSTEE,
INDEMNIFICATION AND METHOD OF SUCCESSION

Section 6.01. Liability of Trustee.

(a) Except as otherwise provided herein and specifically except as
provided in subparagraph (b) below, the Trustee, in carrying out its powers
and performing its duties, may act in its discretion directly, or at the
expense of the Trust, through agents or attorneys pursuant to agreements
entered into with any of them, and shall be personally or individually
liable only for fraud or gross negligence or for acts or omissions in bad
faith as adjudicated by final, nonappealable judgment of a court of
competent jurisdiction and shall not individually or personally be liable
for any act or omission of any agent or employee of the Trustee unless the
Trustee has acted in bad faith or with gross negligence in the selection
and retention of such agent or employee.

(b) If the Trustee enters into a contract on behalf of the Trust
Estate without ensuring that any liability arising out of such contract
shall be satisfiable only out of the Trust Estate and shall not in any
event, including the exhaustion of the Trust Estate, be satisfiable out of
amounts at any time distributed to any Unitholder or out of any other
assets owned by any Unitholder, then Trustee, vis-a-vis the Unitholders,
shall be fully and exclusively liable for such liability, but shall have
the right to be indemnified and reimbursed from the Trust Estate to the
extent provided in Section 6.02.

Section 6.02. Indemnification of Trustee. The Trustee and its officers,
agents and employees when acting in such capacity shall be indemnified by, and
receive reimbursement from, the Trust Estate against and from any and all
liability, expense, claims, damages or loss incurred by it individually or as
Trustee in the administration of the Trust and the Trust Estate or any part or
parts thereof, including, without limitation, any liability, expense, claims,
damages or loss arising out of or in connection with any liability under
Environmental Laws, or in the doing of any act done or performed or omission
occurring on account of its being Trustee or acting in such capacity, except
such liability, expense, claims, damages or loss as to which it is liable under
Section 6.01. Trustee shall have a lien upon the Trust Estate to secure it for
such indemnification and reimbursement and for compensation to be paid to
Trustee. Except as provided in Section 4.05, neither the Trustee nor any
officer, agent or employee of the Trustee shall be entitled to any reimbursement
or indemnification from any Unitholder for any liability, expense, claims,
damages or loss incurred by the Trustee or any such officer, agent or employee,
their right of reimbursement and indemnification, if any, being limited solely
to the Trust Estate (and Grantor pursuant to Section 6.03), whether or not the
Trust Estate is exhausted without full reimbursement or indemnification of the
Trustee or any such officer, agent or employee.

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Section 6.03. Guaranty. If the Trust Estate is exhausted without the
Trustee (or any officer, agent or employee of the Trustee) being fully
reimbursed as provided in Section 6.02 above, then Grantor shall fulfill the
remaining indemnity obligation to the Trustee.

Section 6.04. Contribution. If the indemnification provided for in this
Indenture shall for any reason (including, without limitation, due to violation
of public policy) be unavailable to or insufficient to hold harmless the Trustee
in respect of any liability, expense, claims, damages or loss as to which the
Trustee would otherwise be entitled to indemnification pursuant to Section
3.16(f), 6.02 or 6.03, then Grantor and the Trust shall, in lieu of indemnifying
the Trustee, contribute to the amount paid or payable by the Trustee as a result
of such liability, expense, claims, damages or loss, in such proportion as shall
be appropriate to reflect the relative fault of Grantor (with respect to
contribution by the Trust or Grantor) or the Trustee with respect to the events,
acts or circumstances giving rise to the liability, expense, claims, damages or
loss, as well as any other relevant equitable considerations. For purposes of
determining contribution liability with respect to claims based upon the
Securities Act or Exchange Act, relative fault shall be determined by reference
to whether the untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by Grantor or by the Trustee. The Trustee shall look first to the
Trust Estate for contribution under this Section 6.04, and then to Grantor to
the extent the assets of the Trust Estate are not sufficient to reimburse the
Trustee fully for all such liability, expense, claims, damages or loss.

Section 6.05. Indemnification Procedures. If any action or proceeding
shall be brought or asserted against the Trust, or the Trustee or any officer,
agent or employee thereof (each referred to as an "Indemnified Party" and,
collectively, the "Indemnified Parties") in respect of which indemnity may be
sought from Grantor or the Trust (the "Indemnifying Party") pursuant to Sections
6.02 or 6.03 of this Indenture, of which the Indemnified Party shall have
received notice, the Indemnified Party shall promptly notify the Indemnifying
Party in writing, and the Indemnifying Party shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to the Indemnified
party and the payment of all costs and expenses; provided, however, that the
failure so to notify the Indemnifying Party of the commencement of any such
action or proceeding shall not relieve the Indemnifying Party from any liability
that it may have to any Indemnified Party unless the Indemnifying Party or
Grantor is prejudiced or damaged by the failure to receive prompt notice. The
Indemnified Party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall be at the expense of the Indemnified Party unless (i) the
Indemnifying Party has agreed to pay such fees and expenses, (ii) the
Indemnifying Party shall have failed to assume the defense of such action or
proceeding and employ counsel reasonably satisfactory (including the
qualifications of such counsel) to the Indemnified Party on any such action or
proceeding or (iii) the named parties to any such action or proceeding include
both the Indemnified Party and the Indemnifying Party and the Indemnified Party
shall have been advised by counsel that there may be one or more legal defenses
available to such Indemnified Party that are different from or in addition to
those available to the Indemnifying Party or any other Indemnified Party (in
which case, if the Indemnified Party notifies the Indemnifying Party in writing
that it elects to employ separate counsel at the expense of the Indemnifying
Party, the Indemnifying Party shall not have the right to assume the defense of
such action or proceeding on behalf of the Indemnified Party and the Indemnified
Party may employ such counsel for the

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defense of such action or proceeding as is reasonably satisfactory to the
Indemnifying Party; it being understood, however, that except in the case of the
addition of counsel caused by the existence or development of a conflict
rendering unified representation impermissible or unadvisable, the Indemnifying
Party shall not, in connection with any one such action or proceeding or
separate but substantially similar or related actions or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the fees and expenses of more than one separate firm of attorneys for
the Indemnified Parties at any time). The Indemnifying Party shall not be liable
for any settlement of any such action or proceeding effected without the written
consent of the Indemnifying Party, but, if settled with such written consent, or
if there be a final judgment for the plaintiff in any such action or proceeding,
the Indemnifying Party agrees (to the extent stated above) to indemnify and hold
harmless the Indemnified Party from and against any liability, expense, claims,
damages or loss by reason of such settlement or judgment. The Indemnified Party
and the Indemnifying Party (if not Grantor) shall, if so requested by Grantor,
provide reports to Grantor on the status of such actions or proceedings.

Section 6.06. Resignation of Trustee. The Trustee may resign, with or
without cause, at any time by notice to Grantor and each of the then Unitholders
of record. Such notice shall specify a date when such resignation shall take
effect, which shall be a Business Day not less than ninety days after the date
such notice is mailed; provided, however, that in no event shall any resignation
of the Trustee be effective until a qualified successor Trustee has accepted
appointment as successor Trustee. In case of such resignation, the Trustee will
use its best efforts to nominate a successor, and will call a meeting of
Unitholders for the purpose of appointing a successor, and will solicit proxies
for such meeting. If the Trustee has given notice of resignation in accordance
with this Section 6.06 and a successor has not accepted its appointment as
successor Trustee during the 180-day period following the receipt by Grantor of
such notice of resignation, the annual fee payable to the Trustee as set forth
on Schedule 2 attached hereto shall be increased as of the end of such 180-day
period by ten percent and shall further be increased by ten percent for each
month to a maximum of three times the fee payable at the time the notice of
resignation was received by Grantor until a successor has accepted its
appointment as successor Trustee.

Section 6.07. Removal of Trustee. The Trustee may be removed, with or
without cause, at a meeting held in accordance with the requirements of Article
VIII by the affirmative vote of the holders of a majority of all the Units then
outstanding; provided, however, that any removal of the Trustee shall be
effective only at such time as a qualified successor Trustee has accepted
appointment as successor Trustee.

Section 6.08. Appointment of Successor Trustee. In the event of a vacancy
in the position of Trustee or if the Trustee has given notice of its intention
to resign, the Unitholders present or represented at a meeting held in
accordance with the requirements of Article VIII may appoint a successor
Trustee. Nominees for appointment may be made by (i) the resigned or resigning
Trustee, (ii) any Unitholder or Unitholders owning of record at least 15% of the
Units then outstanding, or (iii) Grantor. Any such successor Trustee shall be a
bank or trust company having a capital, surplus and undivided profits (as of the
end of its last fiscal year prior to its appointment) of at least $100,000,000.
In the event that a vacancy in the position of Trustee continues for sixty days,
a successor Trustee may be appointed by any State or Federal District Court
having jurisdiction in Tarrant County, Texas, upon the application of Grantor or
any Unitholder, and in the event any such

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application is filed, such court may appoint a temporary trustee at any time
after such application is filed, which shall, pending the final appointment of a
Trustee, have such powers and duties as the court appointing such temporary
trustee shall provide in its order of appointment, consistent with the
provisions of this Indenture.

Immediately upon the appointment of any successor Trustee, all rights,
titles, duties, powers and authority of the predecessor Trustee hereunder shall
be vested in and undertaken by the successor Trustee which shall be entitled to
receive from the predecessor Trustee all of the Trust Estate held by it
hereunder and all records and files in connection therewith. Any resigning or
removed Trustee shall account to its successor for its administration of the
Trust. No successor Trustee shall be obligated to examine or seek alteration of
any account of any preceding Trustee, nor shall any successor Trustee be liable
personally for failing to do so or for any act or omission of any preceding
Trustee. The preceding sentence shall not prevent any successor Trustee or
anyone else from taking any action otherwise permissible in connection with any
such account.

Section 6.09. Laws of Other Jurisdictions. If, notwithstanding the other
provisions of this Indenture, the laws of jurisdictions other than Texas (each
being referred to below as "such jurisdiction") apply to the administration of
properties under this Indenture, the following provisions shall apply. If it is
necessary or advisable for a trustee to serve in such jurisdiction and if the
Trustee is disqualified from serving in such jurisdiction or for any other
reason fails or ceases to serve there, an ancillary trustee meeting the
requirements set forth in the third sentence of Section 6.08 shall be designated
in writing by the Trustee. To the extent permitted under the laws of such
jurisdiction, the Trustee may remove the ancillary trustee in such jurisdiction,
without cause and without necessity of court proceeding or Unitholder approval,
and may or may not appoint a successor ancillary trustee in such jurisdiction
from time to time. The ancillary trustee serving in such jurisdiction is
requested and authorized, to the extent not prohibited under the laws of such
jurisdiction, to appoint the Trustee to handle the details of administration in
such jurisdiction. The ancillary trustee in such jurisdiction shall have all
rights, powers, discretions, responsibilities and duties as are delegated in
writing by the Trustee, subject to such limitations and directions as shall be
specified by the Trustee in the instrument evidencing such appointment. Any
ancillary trustee in such jurisdiction shall be responsible for all assets with
respect to which such trustee is empowered to act. To the extent the provisions
of this Indenture and Texas law cannot be applicable to the administration in
such jurisdiction, the rights, powers, duties and liabilities of the ancillary
trustee in such jurisdiction shall be the same (or as near the same as permitted
under the laws of such jurisdiction if applicable) as if governed by Texas law.
In all events, the administration in such jurisdiction shall be as free and
independent of court control and supervision as permitted under the laws of such
jurisdiction. Whenever the term "Trustee" is applied in this Indenture to the
administration in such jurisdiction, it shall refer only to the trustee then
serving in such jurisdiction.

Section 6.10. Force Majeure. No party to this Indenture (or its
Affiliates) shall incur any liability to any other party to this Indenture or to
any Unitholder if, by reason of any current or future law or regulation
thereunder of the federal government or any other governmental authority, or by
reason of any act of God, war or other circumstance beyond its control, such
party is prevented or forbidden from doing or performing any act or thing
required by the terms hereof to be done or performed; nor shall any party to
this Indenture incur any liability to any other party to this Indenture or any
Unitholder by reason of any nonperformance or delay caused as aforesaid in the
performance

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of any act or thing required by the terms hereof to be done or performed, or by
reason of any exercise of, or failure to exercise, any discretion provided for
herein caused as set forth above.

ARTICLE VII. COMPENSATION OF THE TRUSTEE

Section 7.01. Compensation of Trustee. The Trustee shall receive
compensation for its services as Trustee hereunder and as transfer agent as set
forth in Schedule 2 attached hereto.

Section 7.02. Expenses. The reasonable out-of-pocket costs incurred by
the Trustee, including, but not limited to, charges for SEC, NYSE and other
fees, Reserve Reports (including those contemplated by Section 4.08 of each of
the Conveyances), the audit contemplated by Section 4.07 of each of the
Conveyances, long distance telephone calls, overtime necessitated by rush
orders, travel, legal, accounting and other professional services, printing,
stationery, binders, envelopes, ledger sheets, transfer sheets, checks,
Certificate list sheets, postage and insurance will be reimbursed to the Trustee
at actual cost.

Section 7.03. Other Services. The Trustee shall be reimbursed for actual
reasonable expenditures made on account of any unusual duties in connection with
matters pertaining to the Trust. In the event of litigation involving the Trust,
audits or inspection of the records of the Trust pertaining to the transactions
affecting the Trust or any other unusual or extraordinary services rendered in
connection with the administration of the Trust, Trustee shall be entitled to
receive reasonable compensation for the services rendered; provided, however,
the Trustee shall not be entitled to reimbursement or compensation for services
that unreasonably duplicate services provided by or through Grantor.

Section 7.04. Source of Funds. All compensation, reimbursements and other
charges owing to the Trustee will be payable by the Trust out of the Trust
Estate.

ARTICLE VIII. MEETINGS OF UNITHOLDERS

Section 8.01. Purpose of Meetings. A meeting of the Unitholders may be
called at any time and from time to time pursuant to the provisions of this
Article VIII to transact any matter that the Unitholders may be authorized to
transact.

Section 8.02. Call and Notice of Meetings. Any such meeting of the
Unitholders may be called by the Trustee in its discretion and will be called by
the Trustee at the written request of Grantor or Unitholders owning of record
not less than 15% in number of the Units then outstanding. All such meetings
shall be held at such time and at such place in Tarrant County, Texas, as the
notice of any such meeting may designate. Except as may otherwise be required by
applicable law or by any securities exchange or market system on which the Units
are admitted for trading, written notice of every meeting of the Unitholders
signed by the Trustee setting forth the time and place of the meeting and in
general terms the matters proposed to be acted upon at such meeting shall be
given in person or by mail not more than sixty nor less than twenty days before
such meeting is to be held to all of the Unitholders of record as of a record
date set by the Trustee (the "Record Date

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<PAGE>

Unitholders") which shall be not more than sixty days before the date of such
mailing. No matter other than that stated in the notice shall be acted upon at
any meeting. If such notice is given to any Unitholder by mail, it shall be
directed to him at his last address as shown by the ownership ledger of the
Trustee and shall be deemed duly given when so addressed and deposited in the
United States mail, postage paid. Only Record Date Unitholders shall be entitled
to notice of and to exercise rights at or in connection with the meeting. Any
action required by this Indenture to be taken at a meeting of the Unitholders,
or any action which may be taken at a meeting of the Unitholders, may not be
taken and shall not be effective without an actual meeting of the Unitholders,
prior written notice to the Unitholders thereof and a vote by the Unitholders
with respect thereto.

Section 8.03. Voting. Each Record Date Unitholder shall be entitled to
one vote for each Unit owned by him, and any Record Date Unitholder may vote in
person or by duly executed written proxy. At any such meeting the presence in
person or by proxy of Record Date Unitholders holding a majority of the Units
outstanding at the record date shall constitute a quorum, and, except as
otherwise specifically provided herein, any matter shall be deemed to have been
approved by the Unitholders if it is approved by the vote of a majority in
interest of such Record Date Unitholders constituting a quorum, although less
than a majority of all of the Units at the time outstanding, except that the
affirmative vote by the Record Date Unitholders of 80% or more of all the Units
outstanding at the record date shall be required to:

(a) approve or authorize any sale of all or any material part of the
assets of the Trust (excluding sales or dispositions authorized under
Sections 3.02(b), 3.05, 3.09 or 9.03), or

(b) terminate the Trust pursuant to Section 9.02(c), or

(c) approve any amendment to or affecting this Indenture, except that
amendments prohibited by Section 10.01 shall not be effected in any event
and amendments authorized by Section 10.02 shall not require the approval
of any Unitholder.

Section 8.04. Conduct of Meetings. The Trustee may make such reasonable
regulations consistent with the provisions hereof as it may deem advisable for
any meeting of the Unitholders, including regulations covering the closing of
the transfer books of the Trustee for purposes of determining Unitholders
entitled to notice of or to vote at any meeting, the appointment of proxies, the
appointment and duties of inspectors of votes, the submission and examination of
proxies, Certificates and other evidence of the right to vote, the preparation
and use at the meeting of a list authenticated by or on behalf of the Trustee of
the Unitholders entitled to vote at the meeting and such other matters
concerning the calling and conduct of the meeting as it shall deem advisable.

Section 8.05. Unitholder Proposals. In the event a meeting of Unitholders
is called for any purpose at the request of any Unitholder or Unitholders
pursuant to the provisions of this Article VIII, the Unitholder or Unitholders
requesting such meeting shall be required to prepare and file a proxy statement
with the SEC and the NYSE regarding such meeting in satisfaction of all
applicable SEC and NYSE rules and regulations and at the expense of such
requesting Unitholder or Unitholders. The Unitholder or Unitholders requesting
such meeting shall bear the expense of distributing to Unitholders the notice of
meeting and the proxy statement related thereto. The

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Trustee shall cooperate in the preparation of any such proxy statement and any
related materials and shall provide such information for inclusion therein as
and to the extent reasonably necessary at the expense of the Trust.

ARTICLE IX. DURATION, REVOCATION AND TERMINATION OF TRUST

Section 9.01. Revocation. The Trust is and shall be irrevocable and
Grantor, as such, retains no power to alter, amend or terminate the Trust. The
Trust shall be terminable only as provided in Section 9.02, and shall continue
until so terminated.

Section 9.02. Termination. The Trust shall terminate upon the first to
occur of the following events:

(a) the disposition of all of the Royalties pursuant to the terms of
this Indenture;

(b) at such time as the aggregate Gross Proceeds (as defined in the
Conveyances) with respect to the Subject Interests for each of two
successive years after the year 1999 is less than $1,000,000 per year;

(c) a vote in favor of termination by the Unitholders present or
represented at a meeting held in accordance with the requirements of
Article VIII; or

(d) the expiration of twenty-one years after the death of the last
survivor of the lawful descendants of any degree of the signers of the
Declaration of Independence in being on the date of execution hereof.

Section 9.03. Disposition and Distribution of Properties. For the purpose
of liquidating and winding up the affairs of the Trust at its termination, the
Trustee shall continue to act as such and exercise each power until its duties
have been fully performed and the Trust Estate finally distributed. Upon the
termination of the Trust, the Trustee shall sell for cash in one or more sales
all the properties other than cash then constituting the Trust Estate. The
Trustee shall as promptly as possible distribute the proceeds of any such sales
and any other cash in the Trust Estate according to the respective interests and
rights of the Unitholders, after paying, satisfying and discharging all of the
liabilities of the Trust, or, when necessary, setting up reserves in such
amounts as the Trustee in its discretion deems appropriate for contingent
liabilities. In the event that any property which the Trustee is required to
sell is not sold by the Trustee within two years after the termination of the
Trust, the Trustee shall cause such property to be sold at public auction to the
highest cash bidder. Notice of such sale by auction shall be mailed at least
thirty days prior to such sale to each Unitholder of record as of a date set by
the Trustee at such Unitholder's address as it appears upon the books of the
Trustee. Grantor may purchase all or any portion of the Trust Estate properties
at any sale pursuant to this Section. The Trustee shall not be required to
obtain approval of the Unitholders prior to selling property pursuant to this
Section 9.03. In connection with sales pursuant to this Section 9.03, the
Trustee may accept any offer to purchase the properties constituting the Trust
Estate that it deems reasonable in its discretion and shall have no liability in
connection with any such sales except under the circumstances described in
Section 6.01(a). The Trustee may engage the services of one or more investment
advisers or other parties deemed by the Trustee to be

24
<PAGE>

qualified as experts on such matters to assist with such sales and shall be
entitled to rely on the advice of such professionals as contemplated by Section
12.02. Upon making final distribution to the Unitholders, the Trustee shall be
under no further liability except as provided in Section 6.01(b).

ARTICLE X. AMENDMENTS

Section 10.01. Prohibited. After the Closing, no amendment may be made to
any provision of the Indenture which would

(a) alter the purposes of the Trust or permit the Trustee to engage in
any business or investment activities or any activity substantially
different from that specified herein;

(b) alter the rights of the Unitholders vis-a-vis each other; or

(c) permit the Trustee to distribute the Royalties in kind either
during the continuation of the Trust or during the period of liquidation or
winding up under Section 9.03.

Section 10.02. Permitted. Prior to the Closing, this Indenture may be
amended by Grantor and the Trustee, jointly, and no party shall have any
liability to any Unitholder therefor, including for any amendment that increases
or decreases any right, benefit or liability of any present or future
Unitholder. After the Closing, Grantor and the Trustee may, jointly, from time
to time, supplement or amend this Indenture, without the approval of the
Unitholders, in order to cure any ambiguity, to correct or supplement any
provision herein which may be defective or inconsistent with any other provision
hereof, or to change the name of the Trust, provided that such supplement or
amendment does not adversely affect the interests of the Unitholders. All other
amendments to the provisions of the Indenture shall be made only by a vote of
the Unitholders present or represented at a meeting held in accordance with the
requirements of Article VIII. The Trustee shall approve all amendments permitted
under this Section 10.02, provided all prior conditions are satisfied and there
is no adverse effect on the Trust or the Trustee. In connection with any
request by Grantor to supplement or amend this Indenture to cure any ambiguity,
defect or inconsistency, Grantor shall provide to the Trustee, and it shall be a
condition to the Trustee's approval thereof, an officer's certificate and an
opinion of counsel deemed satisfactory to the Trustee to support a determination
of the existence of an ambiguity, defect or inconsistency that may properly be
cured under this Section 10.01 and applicable law. The Trustee shall be
entitled to rely on such officers' certificate and opinion, and such officers'
certificate and opinion shall be full and complete authorization and protection
in respect of any action taken or suffered by it hereunder in good faith and in
accordance therewith.

ARTICLE XI. ARBITRATION

THE PARTIES TO THIS INDENTURE AGREE THAT ANY DISPUTE, CONTROVERSY OR CLAIM THAT
MAY ARISE BETWEEN OR AMONG GRANTOR (ON THE ONE HAND) AND THE TRUST OR THE
TRUSTEE (ON THE OTHER HAND) IN CONNECTION WITH OR OTHERWISE RELATING TO THIS
INDENTURE OR THE CONVEYANCES OR THE APPLICATION, IMPLEMENTATION, VALIDITY OR
BREACH OF THIS INDENTURE OR THE CONVEYANCES OR ANY PROVISION OF THIS INDENTURE
OR

25
<PAGE>

THE CONVEYANCES (INCLUDING, WITHOUT LIMITATION, CLAIMS BASED ON CONTRACT, TORT
OR STATUTE), SHALL BE FINALLY, CONCLUSIVELY AND EXCLUSIVELY SETTLED BY BINDING
ARBITRATION IN FORT WORTH, TEXAS IN ACCORDANCE WITH THE COMMERCIAL ARBITRATION
RULES (THE "RULES") OF THE AMERICAN ARBITRATION ASSOCIATION OR ANY SUCCESSOR
THERETO ("AAA") THEN IN EFFECT. THE PARTIES TO THIS INDENTURE (AND ON BEHALF OF
THE TRUST) HEREBY EXPRESSLY WAIVE THEIR RIGHT TO SEEK REMEDIES IN COURT,
INCLUDING, WITHOUT LIMITATION, THE RIGHT TO TRIAL BY JURY, WITH RESPECT TO ANY
MATTER SUBJECT TO ARBITRATION PURSUANT TO THIS ARTICLE XI. ANY PARTY TO THIS
INDENTURE MAY BRING AN ACTION, INCLUDING, WITHOUT LIMITATION, A SUMMARY OR
EXPEDITED PROCEEDING, IN ANY COURT HAVING JURISDICTION, TO COMPEL ARBITRATION OF
ANY DISPUTE, CONTROVERSY OR CLAIM TO WHICH THIS ARTICLE XI APPLIES. EXCEPT WITH
RESPECT TO THE FOLLOWING PROVISIONS (THE "SPECIAL PROVISIONS") WHICH SHALL APPLY
WITH RESPECT TO ANY ARBITRATION PURSUANT TO THIS ARTICLE XI, THE INITIATION AND
CONDUCT OF ARBITRATION SHALL BE AS SET FORTH IN THE RULES, WHICH RULES ARE
INCORPORATED IN THIS INDENTURE BY REFERENCE WITH THE SAME EFFECT AS IF THEY WERE
SET FORTH IN THIS INDENTURE.

(a) In the event of any inconsistency between the Rules and the
Special Provisions, the Special Provisions shall control. References in
the Rules to a sole arbitrator shall be deemed to refer to the tribunal of
arbitrators provided for under subparagraph (c) below in this Article XI.

(b) The arbitration shall be administered by AAA.

(c) The arbitration shall be conducted by a tribunal of three
arbitrators. Within ten days after arbitration is initiated pursuant to
the Rules, the initiating party or parties (the "Claimant") shall send
written notice to the other party or parties (the "Respondent"), with a
copy to the Dallas office of AAA, designating the first arbitrator (who
shall not be a representative or agent of any party but may or may not be
an AAA panel member and, in any case, shall be reasonably believed by the
Claimant to possess the requisite experience, education and expertise in
respect of the matters to which the claim relates to enable such person to
completely perform arbitral duties). Within ten days after receipt of such
notice, the Respondent shall send written notice to the Claimant, with a
copy to the Dallas office of AAA and to the first arbitrator, designating
the second arbitrator (who shall not be a representative or agent of any
party, but may or may not be an AAA panel member and, in any case, shall be
reasonably believed by the Respondent to possess the requisite experience,
education and expertise in respect of the matters to which the claim
relates to enable such person to competently perform arbitral duties).
Within ten days after such notice from the Respondent is received by the
Claimant, the Respondent and the Claimant shall cause their respective
designated arbitrators to select any mutually agreeable AAA panel member as
the third arbitrator. If the respective designated arbitrators of the
Respondent and the Claimant cannot so agree within said ten day period,
then the third arbitrator will be determined pursuant to the Rules. For
purposes of this Article XI, Grantor (on the one hand) and the

26
<PAGE>

Trust and the Trustee (on the other hand) shall each be entitled to the
selection of one arbitrator. Prior to commencement of the arbitration
proceeding, each arbitrator shall have provided the parties with a resume
outlining such arbitrator's background and qualifications and shall certify
that such arbitrator is not a representative or agent of any of the
parties. If any arbitrator shall die, fail to act, resign, become
disqualified or otherwise cease to act, then the arbitration proceeding
shall be delayed for fifteen days and the party by or on behalf of whom
such arbitrator was appointed shall be entitled to appoint a substitute
arbitrator (meeting the qualifications set forth in this Article XI) within
such fifteen day period; provided, however, that if the party by or on
behalf of whom such arbitrator was appointed shall fail to appoint a
substitute arbitrator within such fifteen day period, the substitute
arbitrator shall be a neutral arbitrator appointed by the AAA arbitrator
within fifteen days thereafter.

(d) All arbitration hearings shall be commenced within one hundred
twenty days after arbitration is initiated pursuant to the Rules, unless,
upon a showing of good cause by a party to the arbitration, the tribunal of
arbitrators permits the extension of the commencement of such hearing;
provided, however, that any such extension shall not be longer than sixty
days.

(e) All claims presented for arbitration shall be particularly
identified and the parties to the arbitration shall each prepare a
statement of their position with recommended courses of action. These
statements of position and recommended courses of action shall be submitted
to the tribunal of arbitrators chosen as provided hereinabove for binding
decision. The tribunal of arbitrators shall not be empowered to make
decisions beyond the scope of the position papers.

(f) The arbitration proceeding will be governed by the substantive
laws of the State of Texas and will be conducted in accordance with such
procedures as shall be fixed for such purpose by the tribunal of
arbitrators, except that (i) discovery in connection with any arbitration
proceeding shall be conducted in accordance with the Federal Rules of Civil
Procedure and applicable case law, (ii) the tribunal of arbitrators shall
have the power to compel discovery and (iii) unless the parties otherwise
agree and except as may be provided in this Article XI, the arbitration
shall be governed by the United States Arbitration Act, 9 U.S.C. (S)(S) 1-
16, to the exclusion of any provision of state law or other applicable law
or procedure inconsistent therewith or which would produce a different
result. The parties shall preserve their right to assert and to avail
themselves of the attorney-client and attorney-work-product privileges, and
any other privileges to which they may be entitled pursuant to applicable
law. No party to the arbitration or any arbitrator may compel or require
mediation and/or settlement conferences without the prior written consent
of all such parties and the tribunal of arbitrators.

(g) The tribunal of arbitrators shall make an arbitration award as
soon as possible after the later of the close of evidence or the submission
of final briefs, and in all cases the award shall be made not later than
thirty days following submission of the matter. The finding and decision
of a majority of the arbitrators shall be final and shall be binding upon
the parties. Judgment upon the arbitration award or decision may be
entered in any court

27
<PAGE>

having jurisdiction thereof or application may be made to any such court
for a judicial acceptance of the award and an order of enforcement, as the
case may be. The tribunal of arbitrators shall have the authority to assess
liability for pre-award and post-award interest on the claims, attorneys'
fees, expert witness fees and all other expenses of arbitration as such
arbitrators shall deem appropriate based on the outcome of the claims
arbitrated. Unless otherwise agreed by the parties to the arbitration in
writing, the arbitration award shall include findings of fact and
conclusions of law.

(h) Nothing in this Article XI shall be deemed to (i) limit the
applicability of any otherwise applicable statute of limitations or repose
or any waivers contained in this Indenture, (ii) constitute a waiver by any
party hereto of the protections afforded by 12 U.S.C. (S) 91 or any
successor statute thereto or any substantially equivalent state law, or
(iii) restrict the right of the Trustee to make application to any state or
federal district court having jurisdiction in Tarrant County, Texas, to
appoint a successor Trustee or to request instructions with regard to any
provision in this Indenture when the Trustee is unsure of its obligations
thereunder.

(i) This Article XI shall preclude participation by the Trust in any
class action brought against Grantor by any Person who is not a Unitholder
and the Trustee shall opt out of any such class action in which the Trust
is a purported class member.

ARTICLE XII. MISCELLANEOUS

Section 12.01. Inspection of Trustee's Books. Each Unitholder and such
Unitholder's duly authorized agents, attorneys and auditors shall have the
right, at such Unitholder's own expense and during reasonable business hours, to
examine and inspect the records of the Trust and the Trustee, including lists of
Unitholders, for any proper purpose in reference thereto. For purposes of
determining whether a purpose asserted by a Unitholder is a "proper purpose,"
the Trustee, in the absence of controlling precedent applicable to trusts
organized under the Texas Trust Code, may rely on any reasonably analogous
precedent, including laws and court decisions relating to corporations of the
State of Texas or other jurisdictions.

Section 12.02. Trustee's Employment of Experts. The Trustee may, but
shall not be required to, consult with counsel, who may be its own counsel,
accountants, geologists, engineers and other parties deemed by the Trustee to be
qualified as experts on the matters submitted to them, and the opinion or advice
of any such parties on any matter submitted to them by the Trustee shall be full
and complete authorization and protection in respect of any action taken or
suffered by it hereunder in good faith and in accordance with the opinion of any
such party. The Trustee is authorized to make payments of all reasonable and
necessary fees billed by third parties for services or expenses thus incurred
out of the Trust Estate.

Section 12.03. Merger or Consolidation of Trustee. Neither a change of
name of the Trustee nor any merger or consolidation of it or of its corporate
powers with another bank or with a trust company shall affect its right or
capacity to act hereunder. Upon any merger, consolidation, sale of assets or
other transaction involving the Trustee in which the Trustee is not the
surviving entity, the surviving entity in such transaction shall automatically
become Trustee of the Trust and succeed to

28
<PAGE>

all rights, titles, duties, powers and authority of the predecessor Trustee
hereunder, without the requirement of Unitholder approval or any other action,
provided such surviving entity has succeeded to the rights and obligations of
the predecessor Trustee in accordance with applicable law and is a bank or trust
company having capital, surplus and undivided profits (as of the end of its last
fiscal year prior to the consummation of such transaction) of at least
$100,000,000.

Section 12.04. Filing of this Indenture. Neither this Indenture nor any
executed copy hereof need be filed in any county in which any of the Trust
Estate is located, but the same may be filed for record in any county by the
Trustee. In order to avoid the necessity of filing this Indenture for record,
the Trustee agrees that for the purpose of vesting the record title to the
Royalties in any successor Trustee, the succeeded Trustee will, upon appointment
of any successor Trustee, execute and deliver to such successor Trustee
appropriate assignments or conveyances.

Section 12.05. Severability. If any provision of this Indenture or the
application thereof to any Person or circumstances shall be finally determined
by a court of proper jurisdiction to be illegal, invalid or unenforceable to any
extent, the remainder of this Indenture or the application of such provision to
Persons or circumstances, other than those as to which it is held illegal,
invalid or unenforceable, shall not be affected thereby, and every provision of
this Indenture shall be valid and enforced to the fullest extent permitted by
law.

Section 12.06. Notices. Any and all notices or demands permitted or
required to be given under this Indenture shall be in writing and shall be
validly given or made if (a) personally delivered, (b) delivered and confirmed
by telecopier or like instantaneous transmission service, or by Federal Express
or other overnight courier delivery service, which shall be effective as of
confirmation of receipt by the courier at the address for notice hereinafter
stated, (c) solely in the case of notice to any Unitholder, by press release in
a nationally recognized and distributed media, or (d) deposited in the United
States mail, first class, postage prepaid, certified or registered, return
receipt requested, addressed as follows:

If to the Trustee, to:

NationsBank, N.A.
901 Main Street, 17th Floor
Dallas, Texas 75202
Attention: Ron E. Hooper, Vice President
Telecopier No.: (214) 508-2431

If to Grantor, to:

Cross Timbers Oil Company
810 Houston Street, Suite 2000
Fort Worth, Texas 76102-6298
Attention: Corporate Secretary
Telecopier No. (817) 870-1671

If to a Unitholder, to:

29
<PAGE>

the Unitholder
at its last address as shown on the
ownership records maintained by the Trustee.

Notice which is mailed in the manner specified shall be conclusively deemed
given three days after the date postmarked or upon receipt, whichever is sooner.
Any party to this Indenture may change its address for the purpose of receiving
notices or demands by notice given as provided in this Section 12.06.

Section 12.07. Counterparts. This Indenture may be executed in a number
of counterparts, each of which shall constitute an original, but such
counterparts shall together constitute but one and the same instrument.

Section 12.08. Successors. This Indenture shall inure to the benefit of
and be binding upon the parties hereto and their respective successors and
assigns.

IN WITNESS WHEREOF, Grantor and Trustee have caused this Indenture to be
duly executed the day and year first above written at Fort Worth, Tarrant
County, Texas.

CROSS TIMBERS OIL COMPANY
ATTEST:

By:
- ------------------------------- ----------------------------------
Name: Frank G. McDonald Name: Louis G. Baldwin
Title: Assistant Secretary Title: Senior Vice President

- GRANTOR -

ATTEST: NATIONSBANK, N.A.

By:
- ------------------------------- ----------------------------------
Name: Name: Ron E. Hooper
-------------------------- Title: Vice President
Title:
-------------------------

- TRUSTEE -

30
<PAGE>

SCHEDULE 2

TRUSTEE COMPENSATION

A. Administrative Fee

1. For all administrative and other services to be provided by the Trustee
under the Indenture including, but not limited to, costs of Trustee's
personnel, the Trustee will be paid, from the Trust Estate, the sum of
$35,000 per year, with such fee to be paid in equal monthly installments.

2. The Administrative Fee provided above will be adjusted annually,
beginning April 1, 2000. The adjustment shall be computed by multiplying
the current Administrative Fee by the percentage increase or decrease in
the average weekly earnings of Crude Petroleum and Gas Production Workers
for the last calendar year compared to the calendar year preceding as
shown by the index of average weekly earnings of Crude Petroleum and Gas
Production Workers as published by the United States Department of Labor,
Bureau of Labor Statistics. The adjusted Administrative Fee shall be the
Administrative Fee currently in use, plus or minus the computed
adjustment.

B. Termination Fee

Upon termination of the Trust, the Trustee shall be paid a Termination Fee
of $15,000.

C. The fees provided above are in addition to out-of-pocket cost reimbursements
permitted under the Indenture.

<PAGE>

EXHIBIT 15.1

AWARENESS LETTER--UNAUDITED INTERIM FINANCIAL INFORMATION

Cross Timbers Oil Company
Fort Worth, Texas

We are aware that our reports dated April 20, 1998, July 22, 1998, and
October 21, 1998, which were included in the Cross Timbers Oil Company's
Quarterly Report on Form 10-Q for the quarters ended March 31, 1998, June 30,
1998, and September 30, 1998, are being incorporated by reference in the
Company's Registration Statement on Form S-3.

We also are aware that the aforementioned reports, pursuant to Regulation C
under the Securities Act of 1933, are not considered a part of the
Registration Statement prepared or certified by our firm within the meaning of
Sections 7 and 11 of that Act.

ARTHUR ANDERSEN LLP

Fort Worth, Texas
December 4, 1998

<PAGE>

EXHIBIT 23.1

INDEPENDENT PUBLIC ACCOUNTANTS' CONSENT

As independent public accountants, we hereby consent to the use in this
Registration Statement on Form S-1 of Hugoton Royalty Trust and on Form S-3 of
Cross Timbers Oil Company (the Company) of our reports dated December 3, 1998
and December 4, 1998, and to the incorporation by reference of our report
dated March 18, 1998 included in the Company's Form 10-K for the year ended
December 31, 1997, our report dated February 11, 1998 included in the
Company's Form 8-K/A Amendment No. 1 dated December 1, 1997 and our report
dated April 17, 1998 included in the Company's Form 8-K and Form 8-K/A
Amendment No.1 dated April 24, 1998, and to all references to our firm
included in this Registration Statement.

ARTHUR ANDERSEN LLP

Fort Worth, Texas
December 4, 1998

<PAGE>
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<NAME> HUGOTON ROYALTY TRUST

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<PERIOD-END> DEC-04-1998
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