CRT

Cross Timbers Royalty Trust 2007 Annual Report Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2007, for the Cross Timbers Royalty Trust, an express trust created under Texas law. The trust holds defined net profits interests (90% and 75%) in oil and gas properties owned by XTO Energy Inc. The trust is a passive entity with no employees; U.S. Trust, Bank of America Private Wealth Management serves as the trustee. The trust's income is derived solely from net proceeds of production from underlying properties in Texas, Oklahoma, and New Mexico, with approximately 69% of 2007 income attributable to natural gas.

Key Financial Metrics

Reserves: As of December 31, 2007, proved reserves totaled 1,737,400 barrels of oil and 27,658,700 Mcf of gas. The standardized measure of discounted future net cash flows was $145.3 million.

Liquidity: The trust has no debt and no off-balance sheet arrangements. Cash requirements are limited to monthly distributions and administrative expenses. The trust held $20.1 million in total assets at year-end.

Material Changes vs. Prior Period

• Revenue Decline: Net profits income decreased by approximately 21.6% from $25.8 million in 2006 to $20.2 million in 2007. This decline was driven by lower production volumes and a reversion agreement payout.
• Reversion Agreement Impact: Effective with the July 2007 distribution, a reversion agreement triggered a payout where 25% of XTO Energy's interest in certain underlying royalties was transferred to a third party. This reduced distributions by approximately 5% starting in July 2007.
• Production Volumes: Total oil sales attributable to net profits interests dropped from 143,067 barrels in 2006 to 111,307 barrels in 2007. Gas sales decreased from 2,329,603 Mcf in 2006 to 2,072,879 Mcf in 2007.
• Price Environment: Despite a decrease in volumes, average sales prices for oil increased from $59.05 per barrel in 2006 to $59.70 in 2007. Gas prices decreased from $8.79 per Mcf in 2006 to $8.01 in 2007.

Outlook, Risks, and Management Commentary

Outlook: The trust's future distributions are highly dependent on oil and natural gas prices and production levels from depleting assets. The trustee notes that the trust will eventually cease to produce in commercial quantities. No specific forward-looking guidance on future distribution amounts is provided beyond the inherent risks of commodity price volatility.

Risks and Contingencies:

• Commodity Price Volatility: Fluctuations in oil and gas prices directly impact net proceeds. Approximately 69% of income is gas-dependent.
• Depletion: The underlying assets are depleting. Without successful development projects by operators, production decline rates may accelerate.
• Operational Control: The trust and unitholders have no influence over the operations or future development of the underlying properties, which are controlled by XTO Energy and other operators.
• Accounting Basis: Financial statements are prepared on a modified cash basis, not U.S. GAAP. Net profits income is recognized when received, not accrued.
• Legal Structure: Unitholders have limited voting rights and limited ability to enforce rights against operators. The trust may be terminated if gross proceeds fall below $1 million for two consecutive years.

Investor Verification Checklist

• Verify the current status of the reversion agreement payout and its ongoing impact on the 5% reduction in distributions.
• Monitor monthly oil and natural gas price trends, as they are the primary drivers of cash flow.
• Review the annual reserve reports from Miller and Lents, Ltd. to track the rate of depletion versus new discoveries or revisions.
• Confirm the monthly overhead charges deducted by XTO Energy ($25,966 for 75% interests and $2,628 for the Penwell Unit) and their annual adjustments.
• Assess the risk of operators abandoning properties if they are deemed incapable of producing in paying quantities.