Item 2.  Trustee’s Discussion and Analysis.

The following discussion should be read in conjunction with the trustee’s discussion and analysis contained in the trust’s 2003 annual report, as well as the condensed financial statements and notes thereto included in this quarterly report on Form 10-Q.  The trust’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available on the trust’s web site at www.hugotontrust.com.

Distributable Income

Quarter

For the quarter ended JuneSeptember 30, 2004 net profits income was $18,289,557,$23,521,511, as compared to $24,681,304$21,446,124 for secondthird quarter 2003.  DecreasedIncreased net profits income is primarily the result of lower gashigher product prices, and volumes.partially offset by higher development costs.  See “Net Profits Income” on the following page.

After adding interest income of $6,751$9,303 and deducting administration expense of $117,748,$101,974, distributable income for the quarter ended JuneSeptember 30, 2004 was $18,178,560,$23,428,840, or $0.454464$0.585721 per unit of beneficial interest.  Administration expense for the quarter decreased 23%increased 35% from the prior year quarter primarily because of the timing of expenditures.  For secondthird quarter 2003, distributable income was $24,538,040$21,378,080, or $0.613451$0.534452 per unit.  Distributions to unitholders for the quarter ended JuneSeptember 30, 2004 were:

SixNine Months

For the sixnine months ended JuneSeptember 30, 2004, net profits income was $37,346,788,$60,868,299, compared with $41,093,482$62,539,606 for the same 2003 period.  This 9%3% decrease in net profits income is primarily the result of higherincreased development costs and production expense.lower sales volumes, partially offset by higher product prices.  See “Net Profits Income” on the following page.

After adding interest income of $10,853$20,156 and deducting administration expense of $202,321,$304,295, distributable income for the sixnine months ended JuneSeptember 30, 2004 was $37,155,320,$60,584,160, or $0.928883$1.514604 per unit of beneficial interest.  Administration expense for the first nine months of 2004 was 8% higher than in the first nine months of 2003 primarily because of increased costs and the timing of expenditures.  For the sixnine months ended JuneSeptember 30, 2003, distributable income was $40,903,600,$62,281,680, or $1.022590$1.557042 per unit.

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Net Profits Income

Net profits income is recorded when received by the trust, which is the month following receipt by XTO Energy, and generally two months after oil and gas production.  Net profits income is generally affected by three major factors:

•          oil and gas sales volumes,

•          oil and gas sales prices, and

•          costs deducted in the calculation of net profits income.

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The following is a summary of the calculation of net profits income received by the trust:

(a)       Because of the two-month interval between time of production and receipt of net profits income by the trust, (1) oil and gas sales for the quarter ended JuneSeptember 30 generally represent production for the period FebruaryMay through AprilJuly and (2) oil and gas sales for the sixnine months ended JuneSeptember 30 generally represent production for the period November through April.July.

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

(c)See Note 2 to Condensed Financial Statements.

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barrels beginning July 2004 and an additional 500,000 barrels beginning August 2004 to maintain market stability and prices.  Although OPEC recently decided to increase daily oil production by 1 million barrels beginning November 2004, oil prices have continued to increase.  Continued instability in the Middle East, political unrest in Nigeria and hurricanes in the Gulf of Mexico led to record oil prices exceeding $50 per Bbl in October.  The average NYMEX price for MayAugust and JuneSeptember 2004 was $39.11$45.34 per Bbl.  At JulyOctober 15, 2004, the average NYMEX futures price for the following twelve months was $38.87$51.00 per Bbl.  Recent trust oil prices have averaged approximately $0.40$1.00 per Bbl lower than the NYMEX price.

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Costs

Taxes

Taxes, transportation and other decreased 1%increased 8% for the quarter and 4%remained flat for the six-monthnine-month period.  In each period, because of lowerincreased production taxes and other deductions related to higher revenues andwere offset by decreased property taxes related to the timing of cash disbursements, partially offset by the effect of an increased Wyoming tax rate.disbursements.

Production

Production expense increased 14%3% for the quarter and 12%9% for the six-monthnine-month period primarily because of increased maintenance, fuel and labor costs.

Development

Development costs deducted in the calculation of net profits income are based on the 2004 annual budget.  These development costs increased 85%127% for the secondthird quarter and 56%74% for the six-monthnine-month period because of the timing of development projects.  During the first halfnine months of 2004, six12 wells were completed and five11 wells were pending completion on the underlying properties at JuneSeptember 30.  XTO Energy has informed the trustee that it plans to drill approximately 20an additional five wells during 2004.in 2004 on the underlying properties in Oklahoma for an annual total of 30 wells.  All 2004 drilling is expected to be in western Oklahoma and southwestern Wyoming.

As a result of the five additional wells to be drilled in 2004, XTO Energy increased the annual development cost budget from approximately $20 million to $22 million.  Because of this, XTO Energy increased the monthly development cost deduction from $1.7 million to $2 million beginning with the October distribution.  This increased monthly deduction is expected to be maintained through the March 2005 distribution, and will be evaluated and revised as necessary.

As of December 31, 2003, actual costs exceeded cumulative development costs deducted by $1.6 million.  In calculating net profits income, XTO Energy deducted budgeted development costs of $5.1 million for the quarter and $10.2$15.3 million for the six-monthnine-month period.  After considering actual development costs of $2.5$3.8 million for the quarter and $7.2$11 million for the six-monthnine-month period, cumulative development costs deducted exceeded actual development costs by $1.4$2.8 million at JuneSeptember 30, 2004.  See Note 2 to Condensed Financial Statements.

Overhead

Overhead decreased 7%increased 12% for the quarter and 8%decreased 1% for the six-month periodnine-month period.  Increased overhead for the quarter is primarily because of the annual rate adjustment based on an industry index and the timing of an annual Oklahoma administrative fee. Decreased overhead for the nine-month period is primarily because of adjustments related to prior periods in Wyoming, partially offset by the annual rate adjustment.

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Forward-Looking Statements

This Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  All statements other than statements of historical fact included in this Form 10-Q, including, without limitation, statements regarding the net profits interests, underlying properties, development activities, development, production and other costs, oil and gas prices, future drilling plans and industry and market conditions, are forward-looking statements that are subject to risks and uncertainties which are detailed in Part II, Item 7 of the trust’s Annual Report on Form 10-K for the year ended December 31, 2003, which is incorporated by this reference as though fully set forth herein.  Although XTO Energy and the trustee believe that the expectations reflected in such forward-looking statements are reasonable, neither XTO Energy nor the trustee can give any assurance that such expectations will prove to be correct.

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

There have been no material changes in the trust’s market risks, as disclosed in Part II, Item 7a of the trust’s Annual Report on Form 10-K for the year ended December 31, 2003.

Item 4.            Controls and Procedures.Procedures.

As of the end of the period covered by this report, the trustee carried out an evaluation of the effectiveness of the design and operation of the trust’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15.  Based upon that evaluation, the trustee concluded that the trust’s disclosure controls and procedures are effective in timely alerting the trustee to material information relating to the trust required to be included in the trust’s periodic filings with the Securities and Exchange Commission.  In its evaluation of disclosure controls and procedures, the trustee has relied, to the extent considered reasonable, on information provided by XTO Energy.  There has not been any change in the trust’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the trust’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1.            Legal Proceedings.

On October 17, 1997, an action, styled 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 by Jack J. Grynberg on behalf of the United States under the qui tam provisions of the U.S. False Claims Act against XTO Energy.  The plaintiff alleges that XTO Energy underpaid royalties on natural gas produced from federal leases and lands owned by Native Americans in amounts in excess of 20% as a result of mismeasuring the volume of natural gas, incorrectly analyzing its heating content and improperly valuing the natural gas during at least the past ten years.  The plaintiff seeks treble damages for the unpaid royalties (with interest, attorneys fees and expenses), civil penalties between $5,000 and $10,000 for each violation of the U.S. False Claims Act, and an order for XTO Energy to cease the allegedly improper measuring practices.  This lawsuit against XTO Energy and similar lawsuits filed by Grynberg against more than 300 other companies have been consolidated in the United States District Court for Wyoming.  In October 2002, the court granted a motion to dismiss Grynberg’s royalty valuation claims, and Grynberg’s appeal of this decision was dismissed for lack of appellate jurisdiction in May 2003.  The parties have completed discovery regarding whether the plaintiff has met the jurisdictional prerequisites for maintaining an action under the U.S. False Claims Act.  In June 2004, XTO Energy joined with other defendants in filing a motion to dismiss, contending that the plaintiff has not satisfied the jurisdictional requirements to maintain this action.  A hearing on this motion has not been scheduled. While XTO Energy is unable to predict the outcome of this case or estimate the amount of any possible loss, it has informed the trustee that it believes that the allegations of this lawsuit are without merit and intends to vigorously defend the action.  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 amount that is presently not determinable, but, in XTO Energy management’s opinion, is not currently expected to be material to the trust’s annual distributable income, financial position or liquidity.

Items 12 through 5.  Not applicable.

Item 6.            Exhibits and Reports on Form 8-K.8-K.

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