BROWN TOM INC /DE, 424B4, 1997-10-14

BROWN TOM INC /DE
424B4, 1997-10-14
CRUDE PETROLEUM & NATURAL GAS

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<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-35537

4,800,000 SHARES

TOM BROWN, INC.

COMMON STOCK
LOGO (PAR VALUE $.10 PER SHARE)

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

All of the shares of Common Stock offered hereby are being sold by Tom
Brown, Inc.

The last reported sale price of the Common Stock, which is quoted under the
symbol "TMBR" on the Nasdaq National Market, on October 13, 1997, was $26.00 per
share. See "Price Range of Common Stock".

SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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

<TABLE>
<S> <C> <C> <C>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
---------------------- ---------------------- ----------------------
Per Share............................... $25.50 $1.34 $24.16
Total(3)................................ $122,400,000 $6,432,000 $115,968,000
</TABLE>

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

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting".

(2) Before deducting estimated expenses of $375,000 payable by the Company.

(3) The Company has granted to the Underwriters an option for 30 days to
purchase up to an additional 700,000 shares of Common Stock at the initial
public offering price per share, less the underwriting discount, solely to
cover over-allotments. If such option is exercised in full, the total
initial public offering price, underwriting discount and proceeds to Company
will be $140,250,000, $7,370,000 and $132,880,000, respectively. See
"Underwriting".

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

The shares of Common Stock offered hereby are offered severally by the
Underwriters, as specified herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. It is expected
that certificates for the shares will be ready for delivery in New York, New
York on or about October 17, 1997, against payment therefor in immediately
available funds.

GOLDMAN, SACHS & CO.
HOWARD, WEIL, LABOUISSE, FRIEDRICHS
INCORPORATED
PETRIE PARKMAN & CO.
SALOMON BROTHERS INC

---------------------
The date of this Prospectus is October 13, 1997.
<PAGE> 2

A map of Texas, Oklahoma, Colorado, Wyoming and Montana is shown to depict the
Company's areas of operations. Basins within these states in which the Company
holds acreage are shown as shaded areas and are labeled by name. In a box next
to the map is a table showing gross acreage and reserves by basin. Below the map
is a pie chart which shows the percentage of the Company's reserves attributable
to the Company's regions of operations.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE OFFERING.
IN ADDITION, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS, IF ANY) ALSO MAY
ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ
NATIONAL MARKET, IN ACCORDANCE WITH RULE 103 UNDER THE SECURITIES EXCHANGE ACT
OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus or
incorporated by reference herein. Unless otherwise indicated, the information in
this Prospectus assumes that the Underwriters' over-allotment option will not be
exercised. Certain oil and gas industry terms used in this Prospectus are
defined in "Certain Definitions."

THE COMPANY

GENERAL

Tom Brown, Inc. (together with its subsidiaries, the "Company" or "Tom
Brown") is an independent natural gas and crude oil exploration and production
company with core areas of activity in the Rocky Mountains and Texas. As of
December 31, 1996, the Company had net proved reserves of 433 Bcfe with a
reserve life of 11.2 years based on net production for the six months ended June
30, 1997. Approximately 83% of the Company's net proved reserves were natural
gas and approximately 72% were classified as proved developed as of December 31,
1996.

Through exploration, development and acquisitions, Tom Brown has been able
to significantly increase reserves, production volumes and cash flow. Over the
five-year period ended December 31, 1996, the Company's reserves, production and
cash flow from operating activities (before changes in working capital) grew at
compound annual growth rates of 32%, 26%, and 48%, respectively. For the six
months ended June 30, 1997, the Company's average daily net production increased
98% to 107 Mmcfe from 54 Mmcfe during the same period in 1996.

Tom Brown focuses its operations in areas where it has developed
significant geologic expertise and established critical mass through the
strategic accumulation of large, contiguous acreage positions. The Company's
principal exploration, development and production activities are conducted in
the Rocky Mountains and Texas, including the Wind River, Green River and Big
Horn Basins of Wyoming; the Piceance Basin of Colorado; and the Val Verde and
Permian Basins and the Cotton Valley Pinnacle Reef Trend of Texas. At December
31, 1996, 85% of the Company's net proved reserves were in the Rocky Mountains
and Texas. The Company seeks to serve as operator of properties in its core
areas. In its key Rocky Mountains area, the Company owned working interests in
1,035 producing wells and operated 648, or 63%, of these wells as of June 30,
1997.

As of June 30, 1997, Tom Brown held leases on 2,962,255 gross acres
(including lease options) which provide the Company with substantial exploration
and development opportunities. In order to further exploit its inventory of
drilling prospects, the Company has increased its drilling budget from $16
million in 1996 to an estimated $48 million in 1997, approximately 30% of which
will be spent on exploratory drilling. The Company expects its drilling
expenditures to increase to $60 million in 1998, with approximately 25% expected
to be dedicated to exploratory drilling.

Tom Brown also engages in the gathering, processing, marketing and
transportation of natural gas through Wildhorse Energy Partners, L.L.C.
("Wildhorse"), a joint venture with KN Energy, Inc. ("KNE") which is owned 45%
by the Company and 55% by KNE. Wildhorse's gathering and processing assets
overlap with many of the Company's core properties located in the Rocky
Mountains. Through Wildhorse, the Company has contracted for firm transportation
for substantially all of its current natural gas production from the Rocky
Mountains.
3
<PAGE> 4

BUSINESS STRATEGY

For over ten years, Tom Brown has concentrated on exploring, developing and
adding to its long-lived reserve base, building a team of professionals capable
of maximizing its assets and opportunities, and maintaining a strong balance
sheet. This, together with the accumulation of a substantial inventory of
exploration and development opportunities, has positioned the Company to pursue
the following strategic objectives:

- - Focus on Domestic Onshore with Concentrations in the Rocky Mountains and
Texas. With approximately 62% of its net proved reserves located in the Rocky
Mountains area and approximately 23% located in Texas, the Company is focusing
its operations in select oil and gas basins characterized by multiple pay
sands and significant amounts of potential reserves in place. This strategy
has allowed Tom Brown to develop specialized geologic expertise and achieve
economies of scale, enabling the Company to find, develop and produce oil and
gas reserves at competitive costs.

- - Capitalize on Extensive Land Position. The Company has increased its lease
acreage position significantly in recent years through acquisitions and
leasing activity, resulting in the Company holding, or having options on,
546,492 gross (209,307 net) developed and 2,415,763 gross (1,395,311 net)
undeveloped acres of land as of June 30, 1997. Approximately 79% of this gross
acreage position is located in the Rocky Mountains, making the Company one of
the largest holders of lease acreage in this area. Much of the Company's
recently acquired undeveloped acreage is contiguous to its existing operations
and is located in basins where the Company has significant geologic expertise.
These holdings provide Tom Brown with substantial opportunities for its future
exploration and development activities.

- - Growth through Exploration and Development Drilling. While Tom Brown has
pursued acquisitions on a selective basis, the Company's growth strategy is
founded primarily on exploration and development drilling. Over the three
years ended December 31, 1996, Tom Brown replaced 285% of its production
through drilling activities at an average finding cost of $0.53 per Mcfe. The
Company maintains a large portfolio of higher risk, higher potential
exploration prospects complemented by lower risk development projects. The
Company has allocated approximately 85% of both its $55 million 1997 capital
expenditure budget and its $70 million expected 1998 capital expenditures to
drilling activities to exploit these opportunities.

- - Transfer of Advanced Technology. In order to effectively exploit the potential
of its assets, Tom Brown seeks to apply technology that has proven effective
in other regions to its significant undeveloped land position and producing
properties, particularly in the Rocky Mountains. Such technology includes
magnetic resonance imaging logging tools, advanced tight gas sand stimulation
techniques, modern 3-D seismic acquisition and interpretation methods and
other techniques.

- - Pursue Opportunistic Acquisitions. Tom Brown will continue to selectively
pursue acquisitions of oil and gas properties, leasehold acreage and gas
gathering and processing assets which complement operations in its core areas
of activity. During 1996, the Company completed two significant acquisitions
which added 212 Bcfe of net proved reserves and 1,172,000 gross leasehold
acres. These acquisitions served to augment Tom Brown's substantial presence
in the Rocky Mountains area.

- - Expand Participation in the Growing Midstream Segment of the Rocky
Mountains. Through its Wildhorse joint venture, the Company has strengthened
its ability to control and market its gas production in the Rocky Mountains.
Wildhorse performs gas gathering, processing, marketing and transportation
services for the Company and for a number of third parties. In addition,
Wildhorse is expected to continue to pursue the construction or acquisition of
gathering, processing and storage assets in the Rocky Mountains. Wildhorse
provides a vehicle through which Tom Brown is able to participate in the
growing midstream segment of the oil and gas
4
<PAGE> 5

industry in the Rocky Mountains area. In 1996, the Company's interest in
Wildhorse generated approximately $1.8 million in net income and $3.1 million in
cash flow from operating activities.

- - Financial Flexibility. The Company emphasizes maintaining a strong balance
sheet in order to provide operating and financial flexibility. The Company
will use proceeds from this offering to repay all outstanding indebtedness
under its revolving credit facility. Tom Brown believes that its strengthened
balance sheet and increased borrowing capacity under its credit facility as a
result of this offering will allow the Company to take advantage of its
significant exploration and development prospects and selectively pursue
acquisition opportunities.

RECENT EVENT

On September 25, 1997, the Company signed a letter of intent with Genesis
Gas and Oil, L.L.C. ("Genesis") to acquire all of the assets of Genesis for $35
million. The Genesis assets consist of interests in oil and gas properties
located primarily in the Piceance Basin of western Colorado. The Company also
owns an interest in and is the operator of most of the Genesis properties. The
Genesis properties provide current net production to Genesis of approximately 6
Mmcf of gas and 150 Bbl of oil per day and have net proved reserves of
approximately 30 Bcfe of gas at September 30, 1997. The Company has plans to
drill eight additional wells on these properties by year end. This acquisition
will increase the Company's acreage position in the Piceance Basin from
approximately 54,000 to 86,000 net developed acres and from approximately
100,000 to 148,000 net undeveloped acres. In the event the Company closes the
Genesis acquisition, Tom Brown plans to increase its capital drilling budget
approximately $5 million in 1997 and $14 million in 1998 to fund development
activities on the acquired working interests. As a result, the Company's total
drilling budget would increase to $53 million and $74 million in 1997 and 1998,
respectively. The Company intends to finance this acquisition through borrowings
under its existing credit facility.

The acquisition is subject to execution of a definitive agreement between
the Company and Genesis and is expected to be consummated on or about October
31, 1997.

THE OFFERING (1)

Common Stock offered by the
Company............................. 4,800,000 shares

Common Stock to be outstanding after
the offering........................ 28,962,554 shares(2)

Use of proceeds..................... To repay all outstanding indebtedness
under the Company's revolving credit
facility ($96.0 million at September
30, 1997), thereby creating additional
borrowing capacity which, together with
the remaining net proceeds, will be
used to fund the Company's planned
exploration and development activities
and possible future acquisitions, as
well as other general corporate
purposes. See "Use of Proceeds."

Nasdaq National Market symbol....... TMBR
- ---------------

(1) Assumes that the Underwriters' over-allotment option is not exercised. See
"Underwriting."

(2) Based on the number of shares of Common Stock outstanding as of August 31,
1997. Does not include (i) 1,666,000 shares issuable upon conversion of the
Company's outstanding $1.75 Convertible Preferred Stock, Series A
("Convertible Preferred Stock") at a conversion rate of 1.666 shares of
Common Stock for each share of such preferred stock or (ii) 1,957,490 shares
issuable upon exercise of outstanding stock options under the Company's
stock option plans as of such date.
5
<PAGE> 6

SUMMARY GAS AND OIL RESERVE INFORMATION

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
----------------------------------
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- ------
<S> <C> <C> <C>
Net proved reserves:
Gas (Bcf).............................................. 257.2 101.9 359.2
Oil (MmBbls)........................................... 9.0 3.3 12.3
------ ------ ------
Total (Bcfe)................................... 311.2 121.8 433.0
Present value of estimated future net revenues before
income taxes discounted at 10% ($ in millions)(1)...... $478.9 $129.8 $608.7
</TABLE>

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

(1) The present value of estimated future net revenues is based on weighted
average prices of $3.42 per Mcf of gas and $24.03 per Bbl of oil realized by
the Company at December 31, 1996. Subsequent to December 31, 1996, natural
gas prices have declined. Accordingly, the present value of estimated future
net revenues would be lower if it were calculated using prices in effect at
the end of the second quarter of 1997.

SUMMARY PRODUCTION, PRICE AND COST DATA

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ----------------
1994 1995 1996(1) 1996(1) 1997
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Total production:
Gas (Bcf).................................... 7.1 10.6 16.8 8.2 15.6
Oil (MmBbls)................................. 0.3 0.4 0.5 0.3 0.6
Total (Bcfe)......................... 8.7 12.9 20.0 9.8 19.4
Average daily net production:
Gas (Mmcf/d)................................. 19.4 29.0 45.8 45.4 85.9
Oil (MBbls/d)................................ 0.8 1.1 1.5 1.4 3.5
Total (Mmcfe/d)...................... 24.0 35.4 54.7 54.0 107.1
Average sales prices:
Gas ($/Mcf).................................. 1.62 1.31 1.77 1.45 2.30
Oil ($/Bbl).................................. 15.73 16.80 20.45 18.80 18.98
Average production costs ($/Mcfe)(2)........... 0.69 0.53 0.49 0.44 0.61
</TABLE>

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

(1) Includes production volumes, sales prices and costs from the effective date
of acquisition for properties acquired in the Company's acquisitions of (i)
KN Production Company, a subsidiary of KNE, effective January 1, 1996 and
(ii) Presidio Oil Company effective December 23, 1996.

(2) Includes lease operating expenses and production taxes.
6
<PAGE> 7

SUMMARY CONSOLIDATED FINANCIAL INFORMATION

The consolidated financial data of the Company as of and for each of the
three years in the period ended December 31, 1996, has been derived from the
Company's audited consolidated financial statements. The consolidated financial
data as of and for the six months ended June 30, 1996 and 1997, has been derived
from the unaudited consolidated financial statements of the Company that in the
opinion of management reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of its financial
condition and results of operations as of such dates and for such periods. The
results for the six months ended June 30, 1997, are not necessarily indicative
of the results that may be expected for the full year. The financial information
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto appearing elsewhere in this Prospectus and in the
documents incorporated herein by reference.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------- ---------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Total revenues........................... $29,071 $41,053 $66,720 $27,276 $63,238
Cost of gas sold......................... 10,022 13,146 20,496 7,486 11,884
Production costs(1)...................... 5,999 6,877 9,834 4,261 11,885
Depreciation, depletion and
amortization........................... 7,288 9,994 15,140 7,697 17,351
Exploration costs........................ 1,184 3,644 3,471 926 2,648
General and administrative expenses...... 3,546 4,184 5,786 2,757 5,061
Interest expense......................... 20 1,369 389 17 3,667
Income (loss) before income taxes........ 102 (7,111)(2) 11,273 4,065 10,382
Income tax expense (benefit)............. 262 (12,896) 3,338 1,386 3,240
Net income (loss)........................ (160) 5,785 7,935 2,679 7,142
Preferred stock dividends................ -- -- 1,672 797 875
Net income (loss) attributable to common
stock.................................. (160) 5,785 6,263 1,882 6,267
Net income (loss) per common share....... $(0.01) $0.34 $0.28 $0.09 $0.25
Weighted average number of common shares
outstanding(3)......................... 15,464 16,852 22,223 21,117 25,110

OTHER FINANCIAL DATA:
EBITDAX(4)............................... $ 8,594 $16,264 $30,273 $12,705 $34,048
Cash flows from operating activities
before changes in working capital(4)... 9,376 10,898 27,661 11,789 29,412
Capital and exploration
expenditures(5)........................ 17,558 28,814 33,929 9,658 23,013
</TABLE>

7
<PAGE> 8

<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30, 1997
------------------------------ -------------------------
1994 1995 1996 ACTUAL AS ADJUSTED(6)
-------- -------- -------- -------- --------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....... $ 19,147 $ 4,982 $ 20,504 $ 10,658 $ 36,251
Working capital................. 16,565 5,373 20,252 12,230 37,823
Total assets.................... 115,092 164,174 406,374 375,038 400,631
Long-term debt.................. -- -- 119,000 90,000 --
Stockholders' equity(7)......... 102,869 156,659 246,136 254,185 369,778
</TABLE>

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(1) Includes lease operating expenses and production taxes.

(2) Includes a writedown of properties of $8.4 million taken in 1995.

(3) Includes common stock equivalents as applicable.

(4) EBITDAX reflects income before income taxes, plus interest expense,
depreciation, depletion and amortization expense and exploration costs.
EBITDAX and cash flows from operating activities before changes in working
capital are not measures determined pursuant to generally accepted
accounting principles ("GAAP") and are not intended to be used in lieu of
GAAP presentations of net income or cash flows from operating activities.
EBITDAX for 1995 excludes an $8.4 million writedown of properties, which
writedown was a non-cash charge.

(5) Does not include amounts expended in connection with the Company's
acquisition of (i) KN Production Company, a subsidiary of KNE, in January
1996 or (ii) Presidio Oil Company in December 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

(6) As adjusted to reflect the offering of 4,800,000 shares of Common Stock
hereby and the application of the estimated net proceeds therefrom to repay
outstanding indebtedness under the Company's credit facility. See "Use of
Proceeds."

(7) Includes the Company's Convertible Preferred Stock. See "Description of
Capital Stock -- Preferred Stock."
8
<PAGE> 9

RISK FACTORS

In addition to the other information contained in or incorporated by
reference in this Prospectus, prospective purchasers of the shares of Common
Stock offered hereby should carefully consider the following factors relating to
the business of the Company and the Common Stock. The information contained in
or incorporated by reference in this Prospectus may include "forward-looking
statements" and information that are based on management's belief as well as
assumptions made by and information currently available to management. When used
in this document, the words "anticipate," "estimate," "expect," and similar
expressions are intended to identify forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, no assurance can be given that such expectations will
prove to have been correct. Such statements are subject to certain risks,
uncertainties and assumptions. The following cautionary statements identify
certain important risks and uncertainties that could cause actual results to
vary materially. In addition, prospective purchasers should consider carefully
the information set forth under the captions "Business -- Markets,"
" -- Competition," and "-- Regulation" in Part I of the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 (the "Form 10-K"), which is
incorporated herein by reference. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
expected.

VOLATILITY OF GAS AND OIL PRICES

The Company's revenues, profitability and rate of growth are substantially
dependent upon prevailing prices for natural gas and oil. Natural gas and oil
prices can be extremely volatile and in recent years have been depressed by
excess total domestic and imported supplies. Prices are also affected by actions
of state and local agencies, the United States and foreign governments and
international cartels. All of these factors are beyond the control of the
Company. These external factors and the volatile nature of the energy markets
make it difficult to estimate future prices of natural gas and oil. Any
substantial or extended decline in the price of natural gas would have a
material adverse effect on the Company's financial condition and results of
operations, including reduced cash flow and borrowing capacity.

For the year ended December 31, 1996, the Company's production and reserve
base were approximately 84% and 83% natural gas, respectively, on an energy
equivalent basis. As a result, the Company's earnings and cash flow are more
sensitive to fluctuations in the price of natural gas than to fluctuations in
the price of oil. When natural gas prices are deemed by the Company to be too
low, the Company may curtail production from certain wells, which further
restricts the Company's cash flow. Natural gas prices are generally lower in the
summer, leading to substantial differences in revenues and cash flows between
seasons.

The marketability of the Company's production depends in part upon the
availability, proximity and capacity of natural gas gathering systems, pipelines
and processing facilities. Federal and state regulation of natural gas and oil
production and transportation, general economic conditions and changes in supply
and demand all could adversely affect the Company's ability to produce and
market its natural gas and oil. If market factors were to change dramatically,
the financial impact on the Company could be substantial. The availability of
markets and the volatility of product prices are beyond the control of the
Company and thus, represent a significant risk.

GENERAL RISKS OF NATURAL GAS AND OIL OPERATIONS

The Company competes in areas of natural gas and oil exploration,
development and transportation with other companies, many of which have
substantially greater financial and other resources. The natural gas and oil
business also involves a variety of risks, including the risks of operating
hazards such as fires, explosions, cratering, blow-outs and encountering
formations with abnormal pressures, the occurrence of any of which could result
in losses to the Company. Operation of

9
<PAGE> 10

natural gas gathering systems also involves certain risks, including explosions
and environmental hazards caused by pipeline leaks and ruptures. Drilling for
natural gas and oil involves a high degree of risk, and is often marked by
unprofitable efforts, not only from dry holes but from wells that, though
productive, do not produce natural gas and oil in sufficient quantities to
return a profit on the amounts expended. The Company maintains insurance against
some, but not all, of these risks in amounts that management believes to be
reasonable in accordance with customary industry practices. The occurrence of a
significant event, however, that is not fully insured could have a material
adverse effect on the Company's financial condition and results of operations.

The Company's strategy includes increasing its production and revenues
primarily through exploration and development drilling. There can be no
assurance that the Company's planned exploration and development projects will
result in additional reserves or that the Company will have future success in
drilling productive wells. Except to the extent that the Company acquires
properties containing proved reserves or conducts successful exploration and
development activities, or both, the net proved reserves of the Company will
decline as reserves are produced.

ESTIMATES OF PROVED RESERVES AND FUTURE NET REVENUES

This Prospectus contains estimates of the Company's natural gas and oil
reserves and the future net revenues therefrom prepared by the Company's
independent petroleum engineers. Petroleum engineering is not an exact science
and includes estimates based on various assumptions and, therefore, is
inherently imprecise. Actual future production, reserves, taxes, development
expenditures, operating expenses and quantities of recoverable natural gas and
oil reserves may vary substantially from those assumed in the estimates. In
addition, the Company's net proved reserves may be subject to downward or upward
revision, based upon production history, results of future exploration and
development, prevailing natural gas and oil prices and other factors. Estimates
of reserves are very sensitive to market prices for natural gas and oil.
Subsequent to December 31, 1996, natural gas prices declined and as a result,
the estimated reserves and future net reserves shown in this Prospectus would be
lower if they were calculated using prices in effect at the end of the second
quarter of 1997.

ACQUISITION RISKS

In connection with acquisitions of gas and oil properties, the Company
makes an assessment of recoverable reserves, future oil and natural gas prices,
operating costs, potential environmental and other liabilities and other
factors. Such assessments are necessarily inexact and their accuracy inherently
uncertain. In connection with such an assessment, the Company performs a review
of the subject properties that it believes to be generally consistent with
industry practices, which generally includes on-site inspections and the review
of reports filed with various regulatory entities. Such a review, however, will
not reveal all existing or potential problems nor will it permit a buyer to
become sufficiently familiar with the properties to fully assess their
deficiencies and capabilities. Inspections may not always be performed on every
well, and structural and environmental problems are not necessarily observable
even when an inspection is undertaken. Even when problems are identified, the
seller may be unwilling or unable to provide effective contractual protection
against all or part of such problems. There can be no assurances that any
acquisition of gas and oil property interests by the Company will be successful
and, if unsuccessful, that such failure will not have a material adverse effect
on the Company's future results of operations and financial condition.

SUBSTANTIAL CAPITAL REQUIREMENTS

The Company makes, and will continue to make, substantial expenditures for
the development, exploration, acquisition and production of oil and gas
reserves. The Company made capital expenditures of $25.2 million during 1995 and
$30.5 million ($281 million including the acquisition of KN Production Company
and Presidio Oil Company) during 1996. The Company plans to make capital
expenditures of approximately $55 million in 1997 and $70 million in 1998, none
of which

10
<PAGE> 11

amounts include expenditures for future acquisition costs. Management believes
that the cash provided by operating activities, borrowings under the credit
facility and the proceeds from this offering will be sufficient to fund planned
capital expenditures in 1997 and 1998. However, if revenues or cash flow from
operating activities decrease as a result of lower natural gas and oil prices,
operating difficulties or other factors, many of which are beyond the control of
the Company, or if the Company's borrowing capacity is reduced due to a
redetermination of its borrowing base as a result of lower natural gas or oil
prices or other factors, the Company may not have sufficient capital from such
sources to fund all of its planned expenditures relating to its drilling
program, or it may be forced to raise additional debt or equity proceeds to fund
such expenditures. There can be no assurance that additional debt or equity
financing will be available to fund these planned expenditures. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

GOVERNMENT REGULATION AND ENVIRONMENTAL RISKS

The Company's business is regulated by certain federal, state and local
laws and regulations relating to the development, production, marketing and
transmission of natural gas and oil, as well as environmental and safety
matters. Certain of these laws and regulations have adversely affected the
Company's operations in the past, and there is no assurance that laws and
regulations enacted in the future will not adversely affect the Company's
exploration for, and the production and marketing of, natural gas and oil. See
"Business and Properties -- Regulation" in the Form 10-K.

NO DIVIDENDS

The Company has never declared or paid any cash dividends to holders of
Common Stock and has no present intention to pay cash dividends to holders of
Common Stock in the future. Under the terms of its credit facility, the Company
is prohibited from paying cash dividends without the written consent of the
banks. Although the proceeds from this offering will be used to repay all
amounts presently outstanding under the credit facility, the Company intends to
maintain the credit facility and, consequently, will be prohibited from paying
dividends without the banks' prior written consent. In addition, the Company is
required to pay annual dividends of $1.75 million on its Convertible Preferred
Stock owned by KNE prior to the payment of any cash dividends to holders of
Common Stock. See "Description of Capital Stock -- Preferred Stock."

ANTI-TAKEOVER PROVISIONS

Certain provisions of the Delaware General Corporation Law, the Company's
Certificate of Incorporation and Bylaws as well as the Company's Rights Plan may
have the effect of discouraging, delaying or preventing an unsolicited
acquisition proposal or a change in control of the Company. See "Description of
Capital Stock."

THE COMPANY

The Company was incorporated in Nevada in 1931 and was reincorporated in
Delaware in April 1987. The executive offices of the Company are located at 508
W. Wall St., 500 Empire Plaza, Midland, Texas 79701, and its telephone number is
(915) 682-9715.

11
<PAGE> 12

USE OF PROCEEDS

The proceeds to the Company from this offering, after deducting
underwriting discounts and estimated offering expenses, will be approximately
$115.6 million ($132.5 million if the Underwriters' over-allotment option is
exercised in full). The Company intends to use a portion of the net proceeds to
repay the outstanding indebtedness under its credit facility ($96.0 million at
September 30, 1997), thereby creating additional borrowing capacity which,
together with the remaining net proceeds, will be used to fund the Company's
planned exploration and development activities and possible future acquisitions,
as well as other general corporate purposes.

The Company's credit agreement with commercial lenders provides for a $125
million facility with a current borrowing base of $125 million that matures in
December 1999 (the "Credit Facility"). The amount of the borrowing base at any
time is determined by reference to the collateral value of the Company's proved
reserves. Borrowings under the Credit Facility are unsecured and bear interest,
at the election of the Company, at a rate equal to (i) the greater of the agent
bank's prime rate or the federal funds effective rate plus 0.50% or (ii) the
agent bank's Eurodollar rate plus a margin ranging from 0.75% to 1.00%. On
August 31, 1997, the interest rate on the outstanding borrowings under the
Credit Facility was 6.7% per annum. Amounts currently outstanding under the
Credit Facility were incurred primarily to fund the Company's acquisition of
Presidio Oil Company in December 1996. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Capital Resources and
Liquidity."

12
<PAGE> 13

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company as of June 30, 1997, and as adjusted to reflect the issuance and sale of
4,800,000 shares of Common Stock by the Company and the application of the
estimated net proceeds therefrom as described in "Use of Proceeds." This table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto appearing elsewhere in this Prospectus and in the documents
incorporated herein by reference.

<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------
ACTUAL AS ADJUSTED(1)
-------------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 10,658 $ 36,251
======== ========
Long-term debt (including current maturities)............... $ 90,000 $ --
Stockholders' equity:
Convertible Preferred Stock, $.10 par value per share;
2,500,000 shares authorized; 1,000,000 shares issued
and outstanding with a liquidation preference of
$25,000,000............................................ 100 100
Common Stock, $.10 par value per share; 40,000,000 shares
authorized; 24,135,714 shares issued and outstanding;
28,935,714 shares issued and outstanding, as
adjusted(2)............................................ 2,414 2,894
Additional paid-in capital................................ 309,389 424,502
Accumulated deficit....................................... (57,718) (57,718)
-------- --------
Total stockholders' equity........................ $254,185 $369,778
-------- --------
Total capitalization.............................. $344,185 $369,778
======== ========
</TABLE>

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

(1) Assumes the Underwriters' over-allotment option is not exercised.

(2) Does not include (i) 1,666,000 shares issuable upon conversion of the
Company's outstanding Convertible Preferred Stock at a conversion of 1.666
shares of Common Stock for each share of such preferred stock or (ii)
1,983,830 shares issuable upon exercise of outstanding stock options under
the Company's stock option plans as of such date.

13
<PAGE> 14

PRICE RANGE OF COMMON STOCK

The Common Stock is traded on The Nasdaq National Market under the symbol
"TMBR." The following table sets forth, on a per share basis for the periods
indicated, the range of high and low closing sales prices of the Common Stock as
reported by The Nasdaq National Market during the periods shown.

<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1995
First Quarter............................................. $15.500 $10.875
Second Quarter............................................ 15.750 13.875
Third Quarter............................................. 16.625 13.125
Fourth Quarter............................................ 15.375 11.000
1996
First Quarter............................................. $15.375 $12.125
Second Quarter............................................ 17.875 12.875
Third Quarter............................................. 19.250 14.250
Fourth Quarter............................................ 22.375 16.875
1997
First Quarter............................................. $23.625 $16.875
Second Quarter............................................ 20.750 17.250
Third Quarter............................................. 25.500 19.625
Fourth Quarter (through October 13, 1997)................. 26.000 24.875
</TABLE>

On October 13, 1997, the last sale price for the Common Stock as reported
by The Nasdaq National Market was $26.00 per share. On October 10, 1997, the
outstanding shares of the Common Stock were held by approximately 2,400 holders
of record.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends to the holders of
Common Stock and has no present intention to pay cash dividends to the holders
of Common Stock in the future. Under the terms of the Credit Facility, the
Company is prohibited from paying cash dividends to the holders of Common Stock
without the written consent of the banks. In addition, the Company's outstanding
Convertible Preferred Stock prohibits payment of cash dividends to holders of
Common Stock unless full cumulative dividends on the Convertible Preferred Stock
have been paid. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" and "Description
of Capital Stock -- Preferred Stock."

14
<PAGE> 15

SELECTED CONSOLIDATED FINANCIAL DATA

The consolidated financial data of the Company as of and for each of the
three years in the period ended December 31, 1996, has been derived from the
Company's audited consolidated financial statements. The consolidated financial
data as of and for the six months ended June 30, 1996 and 1997, has been derived
from the unaudited consolidated financial statements of the Company that in the
opinion of management reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of its financial
condition and results of operations as of such dates and for such periods. The
results for the six months ended June 30, 1997, are not necessarily indicative
of the results that may be expected for the full year. The selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operation" and the financial
statements and notes thereto appearing elsewhere in this Prospectus and in the
documents incorporated herein by reference.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues............................. $29,071 $41,053 $66,720 $27,276 $63,238
Cost of gas sold........................... 10,022 13,146 20,496 7,486 11,884
Production costs(1)........................ 5,999 6,877 9,834 4,261 11,885
Depreciation, depletion and amortization... 7,288 9,994 15,140 7,697 17,351
Exploration costs.......................... 1,184 3,644 3,471 926 2,648
General and administrative expenses........ 3,546 4,184 5,786 2,757 5,061
Interest expense........................... 20 1,369 389 17 3,667
Income (loss) before income taxes.......... 102 (7,111)(2) 11,273 4,065 10,382
Income tax expense (benefit)............... 262 (12,896) 3,338 1,386 3,240
Net income (loss).......................... (160) 5,785 7,935 2,679 7,142
Preferred stock dividends.................. -- -- 1,672 797 875
Net income (loss) attributable to common
stock.................................... (160) 5,785 6,263 1,882 6,267
Net income (loss) per common share......... $(0.01) $0.34 $0.28 $0.09 $0.25
Weighted average number of common
shares outstanding(3).................... 15,464 16,852 22,223 21,117 25,110
OTHER FINANCIAL DATA:
EBITDAX(4)................................. $ 8,594 $16,264 $30,273 $12,705 $34,048
Cash flows from operating activities before
changes in working capital(4)............ 9,376 10,898 27,661 11,789 29,412
Capital and exploration expenditures(5).... 17,558 28,814 33,929 9,658 23,013
</TABLE>

15
<PAGE> 16

<TABLE>
<CAPTION>
AT JUNE 30, 1997
AT DECEMBER 31, ----------------------
------------------------------ AS
1994 1995 1996 ACTUAL ADJUSTED(6)
-------- -------- -------- -------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 19,147 $ 4,982 $ 20,504 $ 10,658 36,251
Working capital........................ 16,565 5,373 20,252 12,230 37,823
Total assets........................... 115,092 164,174 406,374 375,038 400,631
Long-term debt......................... -- -- 119,000 90,000 --
Stockholders' equity(7)................ 102,869 156,659 246,136 254,185 369,778
</TABLE>

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

(1) Includes lease operating expenses and production taxes.

(2) Includes a writedown of properties of $8.4 million taken in 1995.

(3) Includes common stock equivalents as applicable.

(4) EBITDAX reflects income before income taxes plus interest expense,
depreciation, depletion and amortization expense and exploration costs.
EBITDAX and cash flows from operating activities before changes in working
capital are not measures determined pursuant to GAAP and are not intended to
be used in lieu of GAAP presentations of net income or cash flows from
operating activities. EBITDAX for 1995 excludes an $8.4 million writedown of
properties, which writedown was a non-cash charge.

(7) Includes the Company's Convertible Preferred Stock. See "Description of
Capital Stock -- Preferred Stock."

16
<PAGE> 17

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion of the Company's financial condition, results of
operations, capital resources and liquidity should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this
Prospectus and in the documents incorporated herein by reference.

The Company's total assets have grown from $115 million at December 31,
1994 to $375 million at June 30, 1997. From December 31, 1994 to December 31,
1996, the Company's net proved reserves increased from 207 Bcfe to 433 Bcfe. The
growth of the Company is the result of its successful exploration and
development drilling program, which added approximately 54 Bcfe of net proved
reserves during the two years ended December 31, 1996, and two significant
acquisitions, the acquisition of KN Production Company, a wholly owned
subsidiary of KNE, and the acquisition of Presidio Oil Company, which together
added approximately 212 Bcfe of net proved reserves.

The Company completed the acquisition of Presidio Oil Company and its
subsidiaries (collectively, "Presidio") on December 23, 1996, following the
issuance by the U.S. Bankruptcy Court, District of Delaware, of an Order
confirming Presidio's reorganization under Chapter 11 of the U.S. Bankruptcy
Code (the "Presidio Acquisition"). The assets acquired consist primarily of
proved gas and oil reserves and undeveloped and developed acres located in
Wyoming, North Dakota, Oklahoma and Louisiana. The Wyoming properties are
concentrated in the Green River and Powder River Basins of Wyoming. The purchase
price was approximately $207 million consisting of the payment of $105 million
in cash, the issuance of approximately 2.71 million shares of the Company's
Common Stock, the assumption of certain liabilities and the $51 million paid by
the Company to purchase $56.1 million principal amount of Presidio's Senior Gas
Indexed Notes (the "GINS"). The GINS were purchased in June 1995 as a strategic
part of the Company's efforts to acquire Presidio. In connection with the
bankruptcy proceeding, the GINS were canceled. The Presidio Acquisition has been
accounted for using the purchase method.

In January 1996, the Company and KNE closed transactions that resulted in
the Company's acquisition of all of the issued and outstanding stock of KN
Production Company ("KNPC"), a wholly owned subsidiary of KNE (the "KNPC
Acquisition"). The properties acquired by the Company include undeveloped and
developed acres in Colorado, Wyoming, Kansas and Nebraska. In connection with
the acquisition, Wildhorse, a joint venture owned 45% by the Company and 55% by
KNE, was created to provide gas gathering, processing, marketing and storage
services in the Rocky Mountains region. In connection with the formation of
Wildhorse, the Company dedicated significant amounts of its Rocky Mountain gas
production to Wildhorse for gathering, processing and marketing, and KNE
contributed gas marketing contracts and storage assets in western Colorado.
Wildhorse is operated by KNE under the direction of an operating team with equal
representation from the Company and KNE. The price paid to KNE in connection
with the KNPC Acquisition was $36.25 million, $25 million of which was paid by
the issuance of 1.0 million shares of the Company's Convertible Preferred Stock,
and the remaining $11.25 million was paid by the issuance of 918,367 shares of
the Company's Common Stock. The KNPC Acquisition has been accounted for using
the purchase method.

As part of the expansion of its facilities in November 1996, Wildhorse
purchased the gathering and processing assets of Williams Field Services located
in western Colorado and eastern Utah. As a result, the assets of Wildhorse
currently include approximately 1,065 miles of natural gas gathering lines, two
processing plants, a carbon dioxide plant and a dew point control plant. These
facilities are currently processing and treating more than 70 Mmcf of natural
gas per day from more than 700 wells. In August 1997, KNE announced that it had
entered into a binding agreement to acquire Interenergy Corp. ("Interenergy") in
exchange for shares of its common stock. Interenergy's assets include
approximately 650 miles of natural gas gathering lines and two natural gas
liquids processing facilities, one in Wyoming and one in North Dakota.
Interenergy's gathering capacity is approximately 53 Mmcf per day and its
natural gas liquids processing capacity is

17
<PAGE> 18

approximately 35 Mmcf per day. Pursuant to the terms of the Wildhorse joint
venture, each party is obligated to offer to Wildhorse any natural gas gathering
and processing facilities acquired by it in the Rocky Mountains area. As a
result, if the Interenergy transaction is consummated, the Company believes that
Wildhorse will have an opportunity to acquire certain of the Interenergy assets
and will do so if the pricing terms are determined to be acceptable by the
Company. If Wildhorse acquires these properties, the Company will be required to
fund a portion of the acquisition cost based on its ownership share in
Wildhorse. There can be no assurance, however, that the transaction will be
consummated or that Wildhorse will acquire any of Interenergy's assets.

The Company continues to pursue opportunities which will add value by
increasing its reserve base and presence in its core natural gas areas and
further developing the Company's ability to control and market the production of
natural gas from these areas. Wildhorse is expected to continue to pursue the
construction or acquisition of gathering, processing and storage assets in the
Rocky Mountains region.

RESULTS OF OPERATIONS

The Company's results of operations have been materially affected by the
acquisitions described above, making comparisons of individual line items
between periods less meaningful.

The following table sets forth selected financial and operating data for
the periods presented:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -----------------
1994 1995 1996 1996 1997
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Revenues (in millions):
Natural gas sales....................... $ 11.4 $ 13.9 $ 29.6 $ 11.9 $ 35.7
Oil sales............................... 4.3 6.5 11.2 4.9 12.1
Marketing, gathering and processing..... 11.9 15.6 25.1 10.3 14.5
Other................................... 1.4 5.0 0.8 0.2 0.9
------ ------ ------ ------ ------
Total revenues.................. $ 29.0 $ 41.0 $ 66.7 $ 27.3 $ 63.2
====== ====== ====== ====== ======
Net income (loss) attributable to common
stock (in millions)..................... $ (0.2) $ 5.8 $ 6.3 $ 1.9 $ 6.3
Natural gas production (Bcf).............. 7.1 10.6 16.8 8.2 15.6
Oil production (MmBbls)................... 0.3 0.4 0.5 0.3 0.6
Average natural gas sales price ($/Mcf)... 1.62 1.31 1.77 1.45 2.30
Average crude oil sales price ($/Bbl)..... 15.73 16.80 20.45 18.80 18.98
Average production costs ($/Mcfe)......... 0.69 0.53 0.49 0.44 0.61
</TABLE>

Revenues. During the six months ended June 30, 1997, revenues from natural
gas and oil production increased $31.1 million to $47.8 million compared to the
same period in 1996. The increase in natural gas and oil revenues was the result
of (i) an 89% increase in natural gas sales volumes which increased revenues by
approximately $16.9 million, (ii) an increase in average natural gas prices
received by the Company from $1.45 per Mcf to $2.30 per Mcf which increased
revenues by approximately $7.0 million, and (iii) a 148% increase in oil sales
volumes which increased revenues by approximately $7.2 million, and (iv) an
increase in the average crude oil sales price from $18.80 per Bbl to $18.98 per
Bbl.

Marketing, gathering and processing revenues increased $4.2 million for the
six months ended June 30, 1997 as a result of increased activity in Wildhorse's
natural gas marketing operations and the addition of gathering revenues from the
November 1996 purchase of gathering facilities from Williams Field Services.

18
<PAGE> 19

Other revenues reflect the fact that there were no significant property
sales in the six months ended June 30, 1997 or in 1996 or 1994, but in 1995, the
Company sold all of its properties in Arkansas for a gain of approximately $4.1
million.

During 1996, revenues from gas and oil production increased 100% to $40.8
million from $20.4 million in 1995. The increase in gas and oil revenues was the
result of (i) an increase in average gas prices received by the Company from
$1.31 per Mcf to $1.77 per Mcf which increased revenues by approximately $4.9
million, (ii) a 58% increase in gas sales volumes which increased revenues by
approximately $10.9 million, (iii) an increase in average oil prices received
from $16.80 per barrel to $20.45 per barrel which increased revenues by
approximately $1.4 million, and (iv) a 41% increase in oil sales volumes which
increased revenues by approximately $3.2 million. The increase in gas and oil
production levels was primarily due to the KNPC Acquisition and to a lesser
extent, successful drilling results, primarily in the Val Verde Basin of west
Texas.

During 1995, revenues from gas and oil production increased by $4.6 million
to a total of $20.4 million as compared to $15.8 million in 1994. A decrease in
average gas prices received by the Company, from $1.62 per Mcf to $1.31 per Mcf,
decreased revenues by approximately $2.2 million. This decrease was more than
offset by (i) a 49% increase in gas sales volumes which increased revenues by
approximately $4.6 million, (ii) an increase in average oil prices from $15.73
per barrel to $16.80 per barrel which increased revenues by approximately $0.3
million, and (iii) a 40% increase in oil sales volumes which increased revenues
by approximately $1.9 million. Natural gas and oil sales volumes increased
dramatically as the Company increased its deliverability through successful
development drilling in 1995.

Marketing, gathering and processing revenues increased 61% in 1996 as
compared to 1995 and 31% in 1995 as compared to 1994. The 1996 increase was due
to higher gas prices and higher volumes of gas marketed as a result of the
Company's increased production and marketing of additional third party gas. A
significant factor contributing to the increase in 1996 was the formation of
Wildhorse in January 1996 and the related expansion of gathering, processing,
marketing and storage capacity. The 1995 increase was due to higher volumes of
gas marketed.

Costs and Expenses. Total costs and expenses for the six months ended June
30, 1997, increased to $52.9 million from $23.2 million in the same period in
1996. Natural gas and oil production expense increased to $8.2 million or $0.42
per Mcfe for the six months ended June 30, 1997 from $3.1 million or $0.32 per
Mcfe for the comparable period in 1996. The increase was due to the higher
average costs of operations for the properties acquired in the Presidio
Acquisition. The Company has sold certain of the higher cost properties acquired
in the Presidio Acquisition and has implemented changes to increase the
operating efficiencies on the remaining acquired properties to reduce unit
production expenses going forward. Taxes on gas and oil production increased
$2.5 million to $3.7 million or 8% of gas and oil sales for the six months ended
June 30, 1997, compared to $1.2 million or 7% of gas and oil sales for the
comparable period in 1996 principally due to increased gas production.
Exploration costs increased $1.7 million in the first half of 1997 compared to
the comparable period in 1996 primarily as a result of an exploratory dry hole
and related cost incurred in the second quarter of 1997. Compared to the first
six months of 1996, general and administrative expenses increased $2.3 million,
depreciation, depletion and amortization increased $9.7 million, and interest
expense increased $3.7 million for the six months ended June 30, 1997, in each
case primarily as a result of the Presidio Acquisition.

Expenses related to gas and oil production, production taxes, and
depreciation, depletion and amortization increased in each of 1996 and 1995 due
to increased production and revenue levels resulting from successful drilling
operations as well as the KNPC Acquisition in January 1996. On an Mcfe basis,
the Company's costs decreased during the past two years as a result of operating
efficiencies obtained by the Company. Costs of gas and oil production declined
to $.33 per Mcfe in 1996, as compared to $.37 per Mcfe and $.47 per Mcfe in 1995
and 1994, respectively. Taxes on gas and oil production, which are generally
calculated as a percentage of gas and oil sales, have also

19
<PAGE> 20

decreased during the last two years. Taxes on gas and oil production have
declined to 8% of gas and oil sales in 1996 as compared to 10% and 12% of gas
and oil sales during 1995 and 1994, respectively. Such decline is due to the
increase of natural gas and oil produced in the Val Verde Basin where the
Company experiences lower production tax rates as compared to its other areas of
operation.

The Company's depletion, depreciation and amortization rate remained
relatively unchanged on an Mcfe basis from 1995 to 1996 totaling $.77 and $.76
per Mcfe, respectively. The Company's depletion, depreciation and amortization
rate dropped from $.83 per Mcfe in 1994 to $.77 per Mcfe in 1995 due to the
Company's $8.4 million writedown of gas and oil properties in the first quarter
of 1995.

The cost of gas sold in connection with the Company's marketing, gathering
and processing operations has increased in each of the last two years,
consistent with the increases in the associated revenues. The gross profit
percentage increased slightly to 18% of revenues in 1996 as compared to 16% in
both 1995 and 1994.

Costs associated with exploration activities and impairments of leasehold
costs remained relatively unchanged in 1996 as compared to 1995.

General and administrative expenses increased in each of the last two years
as a result of the Company's significantly higher level of operations, due in
part to the KNPC Acquisition in January 1996. The Company has benefitted from
the economies of scale in its growth, resulting in a decrease in general and
administrative expenses on an Mcfe of production basis to $.29 in 1996 as
compared to $.32 and $.41 per Mcfe of production in 1995 and 1994, respectively.

Interest expense increased in 1995 as compared to 1994 as a result of the
debt incurred in connection with the purchase of the Presidio GINs in June 1995.
Interest expense then decreased in 1996 as such debt was repaid in November 1995
with the proceeds from the sale of 4.6 million shares of the Company's Common
Stock.

Total costs and expenses for 1995 were $48.2 million as compared to $29.0
million for 1994. Gas and oil production expenses increased $.7 million due to
additional wells drilled in the Val Verde Basin in 1995. Taxes on gas and oil
production increased $.2 million as a result of increased gas production levels.
The cost of gas sold increased 31% in 1995 compared to 1994 reflecting a higher
level of gas purchased in 1995 by Retex Gathering Company, Inc. ("Retex"), the
Company's gas marketing subsidiary. Exploration costs increased $2.5 million as
a result of exploratory 3-D seismic and dry hole costs in 1995. Impairments of
leasehold costs decreased $.3 million due to a lower inventory of acreage during
1995. General and administrative expenses increased $.7 million primarily as a
result of increases in legal fees and salaries. Interest expense increased $1.3
million as a result of the Company's debt borrowings made during the year to
finance the Company's investment in Presidio's GINs in June 1995.

Costs and expenses also increased in 1995 as a result of an $8.4 million
writedown of non-strategic properties due to the adoption of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-lived Assets . . . ," which generally requires a separate assessment for
potential impairment of each of the Company's producing property cost centers,
in contrast to the Company's prior policy of evaluating the producing property
accounts for impairment in total. The $8.4 million charge reduced the carrying
value of a portion of the Company's non-core properties to their estimated fair
values.

A valuation allowance of approximately $7.8 million and $7.6 million at
June 30, 1997 and December 31, 1996, respectively, has been provided against the
Company's net deferred tax assets based on management's estimate of the
recoverability of future tax benefits. The valuation allowance relates primarily
to the ability to use net operating loss and investment tax credit
carryforwards. The Company evaluated all appropriate factors to determine the
proper valuation allowance for these carryforwards, including any limitations
concerning their use, and the levels of

20
<PAGE> 21

taxable income necessary for utilization. In this regard, full valuation
allowances were provided for investment tax credit carryforwards. Based on its
recent operating results and its expected levels of future earnings, the Company
believes it will, more likely than not, generate sufficient taxable income to
realize the benefit attributable to the net operating loss carryforwards for
which valuation allowances were not provided. The deferred tax assets and
related valuation allowance will be adjusted as future events so warrant.

The Company incurred a current tax liability in the amount of $290,000,
$77,000 and $24,000 in 1996, 1995 and 1994, respectively, as a result of the
application of the alternate minimum tax rules as provided under the Internal
Revenue Code. The Company had not paid, prior to the year ended December 31,
1990, Federal income taxes for the past seven years due to its net operating
loss carryforward. At December 31, 1996, such carryforward for tax purposes was
approximately $53.4 million.

CAPITAL RESOURCES AND LIQUIDITY

The Company's capital expenditures increased to $30.5 million ($281 million
including the KNPC and Presidio Acquisitions) for 1996 as compared to capital
expenditures of $25.2 million and $16.4 million for 1995 and 1994, respectively.
The Company's capital expenditures for the six months ended June 30, 1997 were
approximately $20.4 million as compared to $8.7 million in the same period in
1996. Through August 31, 1997, the Company estimates that it has made capital
expenditures of approximately $25 million and anticipates approximately $30
million of capital expenditures for the remainder of 1997. Of the Company's $55
million total 1997 capital expenditure budget, $48 million is allocated for
drilling activities and the remainder is for acquisitions of leasehold acreage,
gas gathering lines and other facilities. The Company expects its capital
expenditures for 1998 to be approximately $70 million of which approximately $60
million is allocated for drilling activities.

The property acquisitions over the last several years, together with the
KNPC and Presidio Acquisitions, have given the Company significant opportunities
to explore for and develop new reserves. As a result, the Company significantly
increased its drilling activity in 1997 and plans to drill or participate in the
drilling of approximately 100 wells in 1997. In the first eight months of 1997,
the Company drilled, participated in or was in the process of drilling or
completing, 43 wells.

The timing of most of the Company's capital expenditures is discretionary
and there are no material long-term commitments associated with the Company's
capital expenditure plans. Consequently, the Company has significant flexibility
to adjust the level of its capital expenditures as circumstances warrant. The
level of capital expenditures by the Company will vary in future periods
depending on energy market conditions and other related economic factors.

The Company has historically funded capital expenditures and working
capital requirements with internally generated cash, borrowings and the issuance
of equity securities. During the six months ended June 30, 1997, net cash
provided by operating activities was $29.3 million as compared to $11.3 million
for the same period of 1996. Net cash provided by operating activities increased
to $24.9 million in 1996 as compared to $8.8 million and $7.6 million in 1995
and 1994, respectively.

The Company's Credit Facility provides for a $125 million revolving line of
credit with a current borrowing base of $125 million. The amount of the
borrowing base is determined by reference to the collateral value of the
Company's net proved reserves. At August 31, 1997, the aggregate outstanding
balance under the Credit Facility was $90 million, bearing interest at 6.7% per
annum, and the Company was in compliance with the covenants contained in the
Credit Facility. The Company intends to repay the outstanding balance under its
Credit Facility with a portion of the net proceeds from the offering of Common
Stock described in this Prospectus. Borrowings under the Credit Facility are
unsecured and bear interest, at the election of the Company, at (i) the greater
of the agent bank's prime rate or the federal funds effective rate, plus 0.50%
or (ii) the agent bank's

21
<PAGE> 22

Eurodollar rate, plus a margin ranging from 0.75% to 1.00%. The Credit Facility
contains certain financial covenants which require the Company to maintain a
minimum consolidated tangible net worth as well as certain financial ratios. See
Note 4 to Notes to Consolidated Financial Statements of the Company included
elsewhere herein.

In connection with the KNPC Acquisition, the Company issued 1.0 million
shares of its Convertible Preferred Stock. KNE, as the holder of the Convertible
Preferred Stock, is entitled to receive dividends at an annual rate of $1.75 per
share, payable in cash quarterly in March, June, September and December. Shares
of the Convertible Preferred Stock are convertible into shares of Common Stock
at the option of the holder at any time at the initial conversion rate of 1.666
shares of Common Stock for each share of Convertible Preferred Stock, subject to
adjustment under certain circumstances. In addition, under certain circumstances
after March 15, 1999 the Company may exchange the Convertible Preferred Stock
for shares of Common Stock and after March 15, 2001 may redeem all or any part
of the Convertible Preferred Stock at a redemption price of $25.00 per share,
plus accrued and unpaid dividends. See "Description of Capital
Stock -- Preferred Stock" and Note 6 to Notes to Consolidated Financial
Statements of the Company included elsewhere herein.

After the completion of this offering of Common Stock and application of a
portion of the net proceeds to repay the outstanding balance under the Credit
Facility, the Company will have $125 million of availability under the Credit
Facility. This availability, combined with available cash (including the portion
of the net proceeds from this offering of Common Stock not used to repay amounts
outstanding under the Credit Facility), and cash generated from operations are
expected to be sufficient to fund preferred stock dividend requirements, the
Company's operations, planned exploration and development program and other
capital expenditures for the foreseeable future.

RECENT ACCOUNTING PRONOUNCEMENTS

In October 1996 the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 96-1 ("SOP 96-1") which provides
authoritative guidance intended to improve and narrow the manner in which
existing accounting literature is applied to the recognition, measurement,
display, and disclosure of environmental remediation liabilities arising
pursuant to existing federal, state and local laws and regulations. SOP 96-1
addresses the nature of items that are to be included in the measurement of a
company's liability related to any environmental remediation efforts it is
currently undertaking or required to complete in the future. In this regard, SOP
96-1 requires that all incremental direct third party costs, as well as any
internal compensation costs (including benefits) for employees expected to
devote a significant amount of the time directly to remediation efforts, should
be included in the determination of the estimated liability. The term
"remediation effort" is defined in SOP 96-1 to include such things as remedial
risk assessment, feasibility studies and operations and maintenance associated
with corrective actions. The Company adopted SOP 96-1 in the first quarter of
1997. The adoption of SOP 96-1 had no impact on the Company's financial
position, results of operations or liquidity for the first six months of 1997,
and the Company does not expect SOP 96-1 to have a material impact on the
Company's financial position, results of operations or liquidity in the future.

In March 1997, the Financial Accounting Standards Board ("FASB") issued
FASB Statement 128, Earnings per Share, which is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
This Statement requires all entities who have issued common stock or potential
common stock (e.g., options, convertible securities, etc.) to calculate basic
EPS which replaces primary EPS, and diluted EPS which replaces fully diluted
EPS. Basic EPS for the six month period ended June 30, 1997 was $.26. Diluted
EPS for the six month period ended June 30, 1997 was $.25.

22
<PAGE> 23

BUSINESS AND PROPERTIES

GENERAL

Tom Brown is an independent natural gas and crude oil exploration and
production company with core areas of activity in the Rocky Mountains and Texas.
As of December 31, 1996, the Company had net proved reserves of 433 Bcfe with a
reserve life of 11.2 years based on net production for the six months ended June
30, 1997. Approximately 83% of the Company's net proved reserves were natural
gas and approximately 72% were classified as proved developed as of December 31,
1996.

Tom Brown also engages in the gathering, processing, marketing and
transportation of natural gas through Wildhorse, a joint venture with KNE which
is owned 45% by the Company and 55% by KNE. Wildhorse's gathering and processing
assets overlap with many of the Company's core properties located in the Rocky
Mountains. Through Wildhorse, the Company has contracted for firm transportation
for substantially all of its current natural gas production from the Rocky
Mountains.

BUSINESS STRATEGY

23
<PAGE> 24

mies of scale, enabling the Company to find, develop and produce oil and gas
reserves at competitive costs.

- - Financial Flexibility. The Company emphasizes maintaining a strong balance
sheet in order to provide operating and financial flexibility. The Company
will use proceeds from this offering to repay all outstanding indebtedness
under its Credit Facility. Tom Brown believes that its strengthened balance
sheet and increased borrowing capacity under its credit facility as a result
of this offering will allow the Company to take advantage of its significant
exploration and development prospects and selectively pursue acquisition
opportunities.

24
<PAGE> 25

AREAS OF ACTIVITY

The Company's oil and gas activities are concentrated in the Rocky
Mountains and in Texas. In addition, the Company conducts oil and gas activities
in certain other domestic areas. The following table sets forth certain
information concerning these areas of activity:

<TABLE>
<CAPTION>
AVERAGE DAILY NET
PRODUCTION DURING
NET PROVED THE SIX MONTHS
RESERVES AT ENDED ACREAGE AT JUNE 30, 1997 1997 DRILLING
DECEMBER 31, JUNE 30, 1997 ------------------------ BUDGET
LOCATION 1996 (BCFE) (MMCFE/D) GROSS NET (IN MILLIONS)
-------- ------------ ----------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Rocky Mountains:
Wind River Basin........ 132.1 16.6 1,066,508(1) 637,947(1) $19.2
Green River Basin....... 81.0 19.8 490,346 279,930 4.1
Piceance Basin.......... 24.3 6.8 282,105 152,195 8.8
Paradox Basin........... 1.6 0.6 128,814 126,079 1.4
Big Horn Basin.......... -- -- 51,260 51,052 --
Powder River Basin...... 16.9 7.3 71,244 21,938 0.8
Other................... 12.7 3.0 235,876 85,359 --
Texas:
Val Verde Basin......... 53.0 34.9 37,323 18,332 9.2
Permian Basin........... 34.4 3.0 88,087 26,442 --
Cotton Valley Pinnacle
Reef Trend........... -- -- 92,600 39,070 1.5
Other................... 13.2 1.8 49,107 9,006 --
Other areas............... 63.8 13.3 368,985 157,268 2.5
----- ------- --------- --------- -----
Total........... 433.0 107.1 2,962,255 1,604,618 $47.5
===== ======= ========= ========= =====
</TABLE>

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

(1) Includes 942,175 gross (536,343 net) acres under option.

The Company's most significant areas of activity within the Rocky Mountains
and Texas are the Wind River, Green River, Piceance, Val Verde and Permian
Basins and the Cotton Valley Pinnacle Reef Trend.

Wind River Basin. The Wind River Basin, located in Wyoming, is the major
focus of the Company's current and anticipated exploration and development
activities and accounted for approximately 31% of the Company's net proved
reserves as of December 31, 1996. The Company's primary properties in this basin
are in the Muddy Ridge, Pavillion and Frenchie Draw Fields, each of which the
Company operates. Production in these fields is primarily from the Wind River,
Fort Union and Mesa Verde formations at depths ranging from 3,500 to 13,000
feet. Other prospective zones in these fields include the Lance and Meeteetsee
and deeper Cody, Frontier and Madison formations at depths ranging from 16,000
feet to 21,000 feet.

As of December 31, 1996, the Company had net proved reserves in the Wind
River Basin of 129 Bcf of natural gas and 505 MBbls of oil. As of August 31,
1997, the Company operated 80 wells and had leases on approximately 28,000 gross
(14,250 net) developed acres and had leases or options to lease approximately
1,039,000 gross (624,000 net) undeveloped acres in this basin. The Company's
average working interest in the producing fields in this basin is approximately
50%. Of the 942,175 gross option acres, the Company has a 50% working interest
in 300,000 acres and a 60% working interest in 642,175 acres. The Company's net
cost of this option acreage was approximately $3.00 per acre. For future
drilling, the Company can exercise its option to lease in increments of 640
acres by paying its share of $50.00 per acre.

25
<PAGE> 26

The Company plans to spend approximately $41.5 million for capital
expenditures in this basin during 1997 and 1998 to drill 16 exploratory and 37
development wells. Currently, three exploratory wells are being drilled.

Green River Basin. The Company acquired its interest in the Green River
Basin in the Presidio Acquisition. The Company's net proved reserves in this
basin were 76.3 Bcf of gas and 785 MBbls of oil, or approximately 19% of the
Company total, at December 31, 1996. The Company controls approximately 490,000
gross (280,000 net) acres with a 30% average working interest. Geologic
structures in the Moxa Arch and Red Desert areas of the basin, where the Company
operates, are similar to those in the Company's Wind River Basin properties. As
a result, the Company may be able to transfer proven technology and recovery
techniques between the Wind River Basin and the Green River Basin. The Company
estimates that it will spend approximately $11.3 million on capital expenditures
in this basin in 1997 and 1998 to drill three exploratory wells and 45
development wells.

Piceance Basin. The Company's position in the Piceance Basin was
established through the KNPC Acquisition in early 1996. The Company's net proved
reserves in this basin were 23.7 Bcf of gas and 95 MBbls of oil, or
approximately 6% of the Company total, at December 31, 1996. In this basin, the
Company controls approximately 282,000 gross (152,000 net) acres with a 31%
average working interest. The Company's operations in this basin include the
Rulison, White River Dome, and Parachute fields. The main producing horizons are
the Mesa Verde and the Dakota at depths of 2,500 to 8,000 feet and 6,000 to
9,000 feet respectively. In 1997 and 1998, the Company plans to spend
approximately $31 million to drill 76 development wells in the basin.

In addition, through Wildhorse, the Company and its joint venture partner
control approximately 955 miles of gathering lines as well as three processing
plants. These assets serve third party and Company owned production in the
Piceance and Uinta basins and strengthen the Company's ability to control and
market production in this region.

Val Verde Basin. Approximately 12% of the Company's net proved reserves,
totalling 42.9 Bcf of gas and 1.7 MmBbls of oil, as of December 31, 1996 were
located in the Val Verde Basin of west Texas. The Company holds a 50% working
interest in 28 producing wells and approximately 37,300 gross (18,300 net) acres
in this basin. Production is from the Wolfcamp, Thrusted Penn Sand and Thrusted
Strawn formations at depths ranging from 5,000 to 12,000 feet. The Company
expects to spend $9.2 million in 1997 to drill 10 development wells.

Permian Basin. Approximately 8% of the Company's net proved reserves,
totalling 12 Bcf of gas and 3.7 MmBbls of oil, as of December 31, 1996 were
located in the Permian Basin of west Texas, principally within the Spraberry
Field. At August 31, 1997, the Company operated 101 wells and had approximately
26,400 net acres in this basin.

Cotton Valley Pinnacle Reef Trend. The Cotton Valley Pinnacle Reef Trend is
in the East Texas Salt Basin. Recent exploration has focused on reef anomalies
identified primarily through 3-D seismic data, and current production comes from
a three county area in the southwestern part of the trend. The Company entered
this area in January 1996 and now controls approximately 92,000 gross (39,000
net) acres in three prospect areas (Lake Tyler, Mt. Selman, and Lost Prairie) in
the eastern part of the field. After analyzing 2-D seismic data, the Company
commenced a 77 square mile 3-D survey over the Lost Prairie area. This data is
currently being analyzed, and the Company plans to begin drilling its first
exploratory well in the Lost Prairie area in the fourth quarter of 1997. The
Company plans to spend approximately $2.2 million for capital expenditures in
this trend in 1998.

In December of 1996, the Company announced a joint venture with American
Exploration which covers the Lost Prairie and Lake Tyler prospects. American
Exploration has purchased a 40% working interest in these lands. The Company
retains the remaining 60% working interest and serves as operator of the
properties.

26
<PAGE> 27

Other Areas of Activity. In addition to the areas discussed above, the
Company conducts exploration and development activities in other parts of the
Rocky Mountains and Texas as well as in other areas of the continental United
States, including Kansas, Louisiana, Mississippi, Nebraska, New Mexico, Oklahoma
and West Virginia. At December 31, 1996, the Company's net proved reserves in
these areas consisted of 72.1 Bcf of gas and 2.9 MmBbls of oil.

GAS GATHERING, PROCESSING AND MARKETING

The Company's gathering, processing and marketing of natural gas produced
by the Company and third parties is conducted through Wildhorse, a joint venture
owned 45% by the Company and 55% by KNE. Wildhorse was formed in January 1996 in
conjunction with the acquisition by the Company of KNE's oil and gas subsidiary
and is managed by KNE under the direction of an operating team with equal
representation from KNE and the Company. In connection with this transaction,
the Company dedicated significant amounts of its Rocky Mountain gas production
to Wildhorse and KNE contributed gas marketing contracts and storage assets in
western Colorado. Wildhorse currently owns gathering and processing assets in
Wyoming, western Colorado and eastern Utah. The assets include approximately
1,065 miles of natural gas gathering lines, two processing plants, a carbon
dioxide treatment plant and a dew point control plant. These facilities
currently gather, process and treat more than 100 Mmcf of natural gas per day
from more than 800 wells.

In August 1997, KNE announced that it had entered into a binding agreement
to acquire Interenergy in exchange for shares of its common stock. Interenergy's
assets include approximately 650 miles of natural gas gathering lines and two
natural gas liquids processing facilities, one in Wyoming and one in North
Dakota. Interenergy's gathering capacity is approximately 53 Mmcf per day and
its natural gas liquids processing capacity is 35 Mmcf per day. Pursuant to the
terms of the Wildhorse joint venture, each party is obligated to offer to
Wildhorse any natural gas gathering and processing facilities acquired by it in
the Rocky Mountains area. As a result, if the Interenergy transaction is
consummated the Company believes that Wildhorse will have an opportunity to
acquire certain of the Interenergy assets and will do so if the pricing terms
are determined to be acceptable by the Company. If Wildhorse acquires these
properties, the Company will be required to fund a portion of the acquisition
cost based on its share of ownership of Wildhorse. There can be no assurance,
however, that the transaction will be consummated or that Wildhorse will acquire
any of Interenergy's assets.

27
<PAGE> 28

PRODUCTION VOLUMES, UNIT PRICES AND COSTS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ----------------
1994 1995 1996(1) 1996(1) 1997
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Total production:
Gas (Bcf).................................... 7.1 10.6 16.8 8.2 15.6
Oil (MmBbls)................................. 0.3 0.4 0.5 0.3 0.6
Total (Bcfe)......................... 8.7 12.9 20.0 9.8 19.4
Average daily net production:
Gas (Mmcf)................................... 19.4 29.0 45.8 45.4 85.9
Oil (MBbls).................................. 0.8 1.1 1.5 1.4 3.5
Total (Mmcfe)........................ 24.0 35.4 54.7 54.0 107.1
Average sales prices:
Gas ($/Mcf).................................. 1.62 1.31 1.77 1.45 2.30
Oil ($/Bbl).................................. 15.73 16.80 20.45 18.80 18.98
Average Production Cost ($/Mcfe)(2)............ 0.69 0.53 0.49 0.44 0.61
</TABLE>

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

(1) Includes production volumes, sales prices and costs for properties acquired
in the Presidio and KNPC Acquisitions from the effective date of such
acquisitions.

(2) Includes production costs and taxes on production.

PRODUCTIVE WELLS

The following table sets forth the gross and net productive gas and oil
wells in which the Company owned an interest at June 30, 1997.

<TABLE>
<CAPTION>
PRODUCTIVE WELLS
--------------------------------
GROSS NET
-------------- ------------
GAS OIL GAS OIL
----- --- --- ---
<S> <C> <C> <C> <C>
Colorado................................................. 431 59 134 36
Louisiana................................................ 36 38 13 14
New Mexico............................................... 35 28 7 12
Oklahoma................................................. 128 35 31 10
Texas.................................................... 76 251 36 94
West Virginia............................................ 51 -- 17 --
Wyoming.................................................. 422 153 128 40
Other.................................................... 71 77 22 15
----- --- --- ---
Total.......................................... 1,250 641 388 221
===== === === ===
</TABLE>

28
<PAGE> 29

GAS AND OIL DRILLING ACTIVITY

The following table sets forth the Company's gross and net interests in
exploratory and development wells drilled during the periods indicated.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
----------------------------------------- ENDED
1994 1995 1996 JUNE 30, 1997
------------ ------------ ----------- -------------
TYPE OF WELL GROSS NET GROSS NET GROSS NET GROSS NET
------------ ----- ---- ----- ---- ----- --- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory
Gas................................ 1 .3 -- -- -- -- 1 .4
Oil................................ -- -- -- -- -- -- -- --
Dry................................ 1 .5 3 1.1 5 2.8 -- --
-- ---- -- ---- -- --- -- ---
Total...................... 2 .8 3 1.1 5 2.8 1 .4
== ==== == ==== == === == ===
Development
Gas................................ 19 8.2 34 9.7 14 3.9 7 3.4
Oil................................ 2 1.0 3 1.5 -- -- -- --
Dry................................ 2 1.0 10 3.9 5 1.7 -- --
-- ---- -- ---- -- --- -- ---
Total...................... 23 10.2 47 15.1 19 5.6 7 3.4
== ==== == ==== == === == ===
</TABLE>

In the first eight months of 1997, the Company drilled or participated in,
or was in the process of drilling or completing, 43 wells. In 1997, the Company
plans to drill or participate in the drilling of a total of 100 wells.

GAS AND OIL RESERVES

Estimates of the Company's gas and oil reserves at December 31, 1994, 1995
and 1996 including estimated future net revenues and the present value of future
net cash flows, were made by Williamson Petroleum Consultants, Inc. and by Ryder
Scott Company at December 31, 1996 (both independent petroleum consultants), in
accordance with guidelines established by the Securities and Exchange Commission
(the "Commission"). Estimates of gas and oil reserves and their estimated values
require numerous engineering assumptions as to the productive capacity and
production rates of existing geological formations and require the use of
certain Commission guidelines as to assumptions regarding costs to be incurred
in developing and producing reserves and prices to be realized from the sale of
future production. Accordingly, estimates of reserves and their value are
inherently imprecise and are subject to constant revision and change and should
not be construed as representing the actual quantities of future production or
cash flows to be realized from the Company's gas and oil properties or the fair
market value of such properties.

29
<PAGE> 30

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Net proved reserves:
Gas (Bcf)................................................. 180.3 163.3 359.2
Oil (MmBbls).............................................. 4.5 4.1 12.3
------ ------ ------
Total (Bcfe)...................................... 207.4 187.7 433.0
Gas reserves as a percentage of net proved reserves......... 87% 87% 83%
Proved developed reserves (Bcfe)............................ 131.3 126.4 311.2
Gas price as of December 31 ($/Mcf)......................... 1.53 1.44 3.42
Oil price as of December 31 ($/Bbl)......................... 16.26 18.34 24.03
Present value of estimated future net revenues before income
taxes discounted at 10% ($ in millions)(1)................ 124.9 114.6 608.7
</TABLE>

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

ACREAGE

The following table sets forth the gross and net acres of developed and
undeveloped gas and oil leases held by the Company at June 30, 1997.

<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED TOTAL
----------------- --------------------- ---------------------
LOCATION GROSS NET GROSS NET GROSS NET
-------- ------- ------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Rocky Mountains:
Wind River Basin(1)........ 27,964 14,250 1,038,544 623,697 1,066,508 637,947
Green River Basin.......... 110,046 39,884 380,300 240,046 490,346 279,930
Piceance Basin............. 105,730 52,571 176,375 99,624 282,105 152,195
Paradox Basin.............. 1,684 1,673 127,130 124,406 128,814 126,079
Big Horn Basin............. 160 40 51,100 51,012 51,260 51,052
Powder River Basin......... 21,739 4,721 49,505 17,217 71,244 21,938
Other...................... 56,402 46,934 179,474 38,425 235,876 85,359

Texas:
Val Verde Basin............ 7,200 3,600 30,123 14,732 37,323 18,332
Permian Basin.............. 82,635 25,231 5,452 1,211 88,087 26,442
Cotton Valley Pinnacle Reef
Trend................... -- -- 92,600 39,070 92,600 39,070
Other...................... 18,560 4,947 30,547 4,059 49,107 9,006

Other........................ 114,372 15,456 254,613 141,812 368,985 157,268
------- ------- --------- --------- --------- ---------
Total.............. 546,492 209,307 2,415,763 1,395,311 2,962,255 1,604,618
======= ======= ========= ========= ========= =========
</TABLE>

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

(1) Includes 942,175 gross (536,343 net) acres in Wyoming under option
agreements between the Company and certain Indian tribes that give the
Company the right to acquire leasehold interests upon the payment of
specified consideration.

30
<PAGE> 31

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information with respect to the
executive officers and Directors of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Donald L. Evans...................... 51 Chairman of the Board of Directors and Chief
Executive Officer
William R. Granberry................. 55 President, Chief Operating Officer and Director
Peter R. Scherer..................... 40 Executive Vice President
Thomas E. Klauss..................... 54 Vice President -- Exploration South
Christopher E. Mullen................ 37 Vice President -- Exploration North
Clifford C. Drescher................. 45 Vice President -- Production
Richard B. Porter.................... 42 Vice President -- Land
R. Kim Harris........................ 41 Controller
B. Jack Reed......................... 48 Treasurer
Bruce R. DeBoer...................... 44 Vice President, General Counsel and Secretary
Thomas C. Brown...................... 70 Director
David M. Carmichael(1)............... 58 Director
Henry Groppe(1)...................... 71 Director
Edward W. LeBaron, Jr.(2)............ 67 Director
Clyde E. McKenzie(2)................. 50 Director
James B. Wallace(2).................. 68 Director
Robert H. Whilden, Jr.(1)............ 62 Director
</TABLE>

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

(1) Member of Compensation Committee

(2) Member of Audit Committee

Directors of the Company serve until the next annual meeting of
stockholders and until their successors are elected and qualified. Each officer
is appointed annually by the Company's Board of Directors to serve at the
Board's discretion and until his successor is elected and qualified.

Messrs. Evans, Scherer, Klauss, Drescher, Harris and Reed have each been
employed by the Company in their present positions for more than five years. Mr.
Evans is also a director of TMBR/Sharp Drilling, Inc.

Mr. Granberry has been a director of the Company since 1995 and President
and Chief Operating Officer of the Company since January 1996. He was Chairman
of the Board of Directors and Chief Executive Officer of Mineral Development,
Inc. ("MDI") from August 1994 until December 1995, and President of MDI from
October 1994 to December 1995.

Mr. Mullen has been employed by the Company since September 1994. He served
as Geologist -- Rocky Mountain Division from September 1994 to September 1995
and as Vice President -- Exploration North from September 1995 to the present.
Mr. Mullen was a Petroleum Geologist with Unocal Corporation from 1987 to
September 1994.

Mr. Porter has been employed by the Company since April 1994. He served as
Landman -- Rocky Mountain Division from April 1994 to September 1995 and as Vice
President -- Land from September 1995 to the present. Mr. Porter was Resource
Manager with Paragon Ranch Corporation from 1984 to January 1994.

31
<PAGE> 32

Mr. DeBoer has been employed by the Company since May 1997 as Vice
President, General Counsel and Secretary and from 1988 through 1996 was employed
by Presidio Oil Company in a similar capacity.

Mr. Brown has served as Chairman of the Board of Directors of TMBR/Sharp
Drilling, Inc. for the last five years and is also a director of Weatherford
International Incorporated.

Mr. Carmichael is a director of KN Energy, Inc. and was formerly Chairman
of the Board of Directors, Chief Executive Officer and President of American Oil
and Gas Corporation.

Mr. Groppe has been an oil and gas consultant with Groppe, Long & Littell
since 1955.

Mr. LeBaron is a retired partner in the law firm of Pillsbury, Madison and
Sutro in Sacramento, California, which he has been associated with since April
1989, and has served as Chairman of the Board of Directors of Pacific Casino
Management, Inc. since June 1994.

Mr. McKenzie has been employed by KN Energy, Inc. since 1996 as Vice
President and Chief Financial Officer and prior to joining KN Energy, Inc. was
Vice President and Treasurer of Apache Corporation from 1988 to 1996.

Mr. Wallace has been a partner in Brownlie, Wallace, Armstrong and Bander
Exploration, a partnership engaged in oil and gas exploration and production,
since 1992. Mr. Wallace is a director of Grease Monkey International.

Mr. Whilden has been a partner in the law firm of Vinson & Elkins L.L.P. in
Houston, Texas, since 1970.

There are no family relationships between any of the Directors or executive
officers of the Company.

32
<PAGE> 33

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 2,500,000 shares of
preferred stock, $.10 par value per share, and 40,000,000 shares of Common
Stock, $.10 par value per share. As of August 31, 1997, 24,162,554 shares of
Common Stock were outstanding and 1,000,000 shares of preferred stock were
outstanding. All of the shares of Common Stock of the Company offered hereby
will be, when issued and sold, legally issued, fully paid and non-assessable.

COMMON STOCK

Subject to the prior rights of shares of preferred stock outstanding from
time to time, the shares of Common Stock of the Company: (1) are entitled to
such dividends as may be declared by the Board of Directors out of funds legally
available therefor (subject to limitations set forth in the Credit Facility);
(2) are entitled to one vote per share and have no cumulative voting rights; (3)
have no preemptive or conversion rights; (4) are not subject to, or entitled to
the benefits of, any redemption or sinking fund provisions; and (5) are entitled
upon liquidation to receive the assets of the Company remaining after the
payment of corporate debts and the satisfaction of any liquidation preferences
of preferred stock.

The Company has never paid any cash dividends and does not intend to pay
any cash dividends on the Common Stock in the foreseeable future. Under the
terms of its Credit Facility, the Company is prohibited from paying cash
dividends on the Common Stock without the written consent of its lenders. See
"Dividend Policy."

The Company's Rights Plan provides that a preferred stock purchase right is
associated with each share of Common Stock. See "-- Stockholder Rights Plan."

The Common Stock is quoted on The Nasdaq National Market under the symbol
"TMBR." The Transfer Agent and Registrar for the Common Stock is Boston
EquiServe, Boston, Massachusetts.

PREFERRED STOCK

The Company presently has outstanding 1,000,000 shares of Convertible
Preferred Stock with an aggregate liquidation preference of $25 million.

As the holder of the Convertible Preferred Stock, KNE is entitled to
receive cumulative dividends at the annual rate of $1.75 per share, payable in
cash quarterly. If full cumulative dividends on the Convertible Preferred Stock
have not been paid, the Company may not declare or pay any dividends or make any
other distributions on, or purchase, redeem or retire the Common Stock, or any
other stock of the Company ranking junior to the Convertible Preferred Stock
(other than, in the case of dividends or distributions, dividends or
distributions paid in shares of Common Stock or such other junior ranking
stock).

The Company has the option, at any time beginning on or after March 15,
2001, to redeem all or any part of the outstanding shares of Convertible
Preferred Stock at the redemption price of $25.00 per share, plus an amount
equal to all accrued and unpaid dividends on such shares of Convertible
Preferred Stock to the date of redemption.

Upon the occurrence of a change of control of the Company, KNE, as the
holder of the Convertible Preferred Stock, has the right to cause the
Convertible Preferred Stock to be redeemed by the Company, in whole or in part,
at the redemption price of $25.50 per share, plus all accrued and unpaid
dividends. Generally, for purposes of the Convertible Preferred Stock, a change
of control is any situation in which a majority of the Board of Directors of the
Company changes within a period of twelve months or a new person or group of
persons becomes in control of the Company, within the meaning of the rules of
the Commission.

Each share of the Convertible Preferred Stock is convertible at the option
of the holder thereof at any time and from time to time prior to the redemption
of such share, into fully paid and

33
<PAGE> 34

nonassessable shares of Common Stock of the Company at the initial conversion
rate of 1.666 shares of Common Stock for each share of Convertible Preferred
Stock, subject to customary adjustments.

The Convertible Preferred Stock is exchangeable, in whole or in part, at
the option of the Company on any dividend payment date at any time on or after
March 15, 1999, and prior to March 15, 2001, for shares of Common Stock at the
exchange rate of 1.666 shares of Common Stock for each share of Convertible
Preferred Stock; provided that (i) on or prior to the date of exchange, the
Company shall have declared and paid or set apart for payment to the holders of
Convertible Preferred Stock all accumulated and unpaid dividends to the date of
exchange, and (ii) the current market price of the Common Stock is above $18.375
(the "Threshold Price"). The exchange rate is subject to adjustment in the same
manner and under the same circumstances as the conversion rate is subject to
adjustment, and the Threshold Price is also subject to adjustment in the same
manner and under the same circumstances.

Upon dissolution, liquidation or winding up of the Company, whether
voluntary or involuntary, the holders of the Convertible Preferred Stock are
entitled to receive out of the assets of the Company available for distribution
to stockholders, the amount of $25.00 per share plus an amount equal to all
dividends on such shares (whether or not earned or declared) accrued and unpaid
thereon to the date of final distribution, before any payment or distribution
may be made on the Common Stock or on any class of stock ranking junior to the
Convertible Preferred Stock with respect to distributions upon dissolution,
liquidation or winding up.

If at any time dividends payable on the Convertible Preferred Stock are in
arrears and unpaid for four quarterly dividend periods, the holders of the
outstanding Convertible Preferred Stock will have the right, voting separately
as a class without regard to series, to designate two additional Directors of
the Company (the "Special Directors") at the next annual or special meeting of
stockholders of the Company irrespective of whether such meeting otherwise would
involve the election of directors, and the membership of the Board of Directors
of the Company shall be increased by the number of the Special Directors so
designated. Such right of the holders of the Convertible Preferred Stock to
designate Special Directors continues until all dividends accumulated and
payable on the Convertible Preferred Stock have been paid in full, at which time
such right to designate Special Directors terminates, subject to revesting in
the event of a subsequent dividend payment arrearage.

For so long as KNE owns 80% or more of the voting power of the securities
of the Company issued pursuant to the KNPC Acquisition, KNE has the right to
elect a special class of two Directors to the Board of Directors of the Company,
and for so long as KNE owns securities of the Company issued pursuant to the
KNPC Acquisition possessing less than 80% of the voting power of the securities
of the Company issued pursuant to the KNPC Acquisition, but more than 30% of
such voting power, KNE has the right to elect a special class of one Director to
the Board of Directors of the Company.

The holders of the Convertible Preferred Stock are entitled to vote on all
matters upon which holders of the Common Stock have the right to vote. In such
voting, each share of Convertible Preferred Stock is entitled to a number of
votes per share equivalent to the number of shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock and shall vote together with the
holders of the outstanding shares of the Common Stock as if a part of that
class.

The Board of Directors is empowered, without approval of the stockholders,
to cause additional shares of preferred stock to be issued in one or more series
with the number of shares of each series and the rights, preferences and
limitations of each series to be determined by it. Among the specific matters
that may be determined by the Board of Directors are the rate of dividends,
redemption and conversion prices, terms and amounts payable in the event of
liquidation and voting rights. Issuance of shares of preferred stock could
involve dilution of the equity of the holders of Common Stock and further
restrict the rights of such stockholders to receive dividends. Although the
Company has no present intention to issue any additional shares of preferred
stock, the

34
<PAGE> 35

issuance of such shares in the future could be used to discourage an unsolicited
acquisition proposal.

STOCKHOLDER RIGHTS PLAN

On March 1, 1991, the Board of Directors adopted a Rights Plan designed to
help assure that all stockholders receive fair and equal treatment in the event
of a hostile attempt to take over the Company and to help guard against abusive
takeover tactics. The Board of Directors declared a dividend of one preferred
share purchase right (a "Right") for each outstanding share of Common Stock and
authorized the issuance of Rights for all shares of Common Stock that are
subsequently issued. Each Right entitles the registered holder to purchase, in
lieu of preferred shares, shares of Common Stock or other securities of the
Company (or, under certain circumstances, of the acquiring person) worth twice
the per share exercise price of the Right. The Rights will be exercisable only
if a person or group acquires 20% or more of the Company's Common Stock or
announces a tender offer which would result in ownership by a person or group of
20% or more of the Common Stock. The date on which the above occurs is to be
known as the "Distribution Date." The Rights are not exercisable until the
Distribution Date. The Rights will expire on March 15, 2001, unless extended or
redeemed earlier by the Company. Until the Distribution Date occurs, the
certificates representing shares of Common Stock also evidence the Rights.
Following the Distribution Date, the Rights will be evidenced by separate
certificates.

The Rights may tend to deter potential unsolicited tender offers or other
efforts to obtain control of the Company that are not approved by the Board of
Directors. See Note 6 to Notes to Consolidated Financial Statements of the
Company included elsewhere in this Prospectus.

DELAWARE ANTI-TAKEOVER LAW

Under Section 203 of the Delaware General Corporation Law (the "Delaware
anti-takeover law"), certain "business combinations" between a Delaware
corporation whose stock generally is publicly traded or held of record by more
than 2,000 stockholders and an "interested stockholder" are prohibited for a
three-year period following the date such stockholder became an interested
stockholder, unless (1) the corporation has elected in its certificate of
incorporation not to be governed by the Delaware anti-takeover law (the Company
has not made such an election), (2) the business combination was approved by the
board of directors of the corporation before the other party to the business
combination became an interested stockholder, (3) upon consummation of the
transaction that made it an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
commencement of the transaction (excluding voting stock owned by directors who
are also officers or held in employee benefit plans in which the employees do
not have a confidential right to tender or vote stock held by the plan) or (4)
the business combination was approved by the board of directors of the
corporations and ratified by 66 2/3% of the voting stock which the interested
stockholder did not own. The three-year prohibition also does not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of certain extraordinary transactions involving
the corporation and a person who had not been an interested stockholder with the
approval of a majority of the corporation's directors. The term "business
combination" is defined generally to include mergers or consolidations between a
Delaware corporation and an "interested stockholder," transactions with an
"interested stockholder" involving the assets or stock of the corporation or its
majority-owned subsidiaries and transactions which increase an interested
stockholder's percentage ownership of stock. The term "interested stockholder"
is defined generally as those stockholders who become beneficial owners of 15%
or more of a Delaware corporation's voting stock.

35
<PAGE> 36

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Vinson & Elkins L.L.P., 1001 Fannin, Houston, Texas 77002. Robert H.
Whilden, Jr., a partner in the firm of Vinson & Elkins L.L.P., is a Director of
the Company. See "Management -- Compensation of Directors" in the Company's 1997
Proxy Statement, which has been incorporated herein by reference, for a
description of stock options held by Mr. Whilden. Certain legal matters will be
passed upon for the Underwriters by Andrews & Kurth L.L.P., 4200 Texas Commerce
Tower, Houston, Texas 77002. Andrews & Kurth L.L.P. has provided legal services
for the Company from time to time on matters unrelated to the offering of the
Common Stock.

EXPERTS

The consolidated financial statements of Tom Brown included or incorporated
by reference in this Prospectus or elsewhere in this Registration Statement, to
the extent and for the periods indicated in their report, have been audited by
Arthur Andersen LLP, independent public accountants, and are included herein in
reliance upon the authority of said firm as experts in giving said report.

The consolidated financial statements of Presidio Oil Company incorporated
herein by reference from the Current Report on Form 8-K of Tom Brown filed on
January 7, 1997 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report which is incorporated herein by reference.
Such financial statements have been so incorporated in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.

The estimated reserve evaluations and related calculations of Williamson
Petroleum Consultants, Inc. and Ryder Scott Company incorporated by reference
into this Prospectus have been included herein in reliance upon the authority of
said firms as experts in petroleum engineering.

AVAILABLE INFORMATION

The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549,
and at the following regional offices of the Commission: Seven World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials can be obtained by mail from the Public Reference Section of the
Commission, at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy statements and other
information regarding registrants that file electronically with the Commission.
In addition, reports, proxy statements and other information concerning the
Company can be inspected at the Nasdaq National Market, 1735 K Street, N.W.,
Washington, D.C. 20006, on which exchange the Common Stock is quoted.

This Prospectus constitutes a part of a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Company with the Commission under the Securities Act of
1933, as amended. This Prospectus omits certain of the information contained in
the Registration Statement, and reference is hereby made to the Registration
Statement for further information with respect to the Company and the securities
offered hereby, Any statements contained herein concerning the provisions of any
document filed as an exhibit to the Registration Statement or otherwise filed
with the Commission are not necessarily complete, and in each instance reference
is made to the copy of such document so filed. Each such statement is qualified
in its entirety by such reference.

36
<PAGE> 37

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents, filed with the Commission by the Company pursuant
to the Exchange Act, are incorporated herein by reference and made a part of
this Prospectus:

(i) the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996;

(ii) the Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997 and June 30, 1997;

(iii) the Company's Proxy Statement for the Annual Meeting of
Stockholders held May 21, 1997; and

(iv) the Company's Current Reports on Form 8-K filed on January 7,
1997 and October 10, 1997.

Each document filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of this offering shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing of
such document. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained in this
Prospectus or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or suspended, to constitute a part of this Prospectus.

The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the request of any such person, a copy of any
or all of the foregoing documents incorporated herein by reference, other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference in such documents). Written or telephone requests for such copies
should be directed to Bruce R. DeBoer, Secretary, Tom Brown, Inc., 500 Empire
Plaza Building, Midland, Texas 79701; telephone: (915) 682-9715.

CERTAIN DEFINITIONS

As used in this Prospectus, the following terms have the following specific
meanings: "Mcf" means thousand cubic feet, "Mmcf" means million cubic feet,
"Bcf" means billion cubic feet, "Bbl" means barrel, "MBbl" means thousand
barrels, "MmBbl" means million barrels, "Mcfe" means thousand cubic feet
equivalent, "Mmcfe" means million cubic feet equivalent, "Bcfe" means billion
cubic feet equivalent, "MBbls/d" means thousand barrels per day, "Mmcf/d" means
million cubic feet per day, and "Mmcfe/d" means million cubic feet equivalent
per day. "Gross" in reference to any wells, acreage or reserves refers to any
well, acreage or reserves in which the Company owns a working interest. "Net" in
reference to wells, acreage or reserves refers to the sum of the fractional
working interests owned by the Company in gross wells, acreage or reserves, as
the case may be.

37
<PAGE> 38

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Interim Financial Statements:
Consolidated Balance Sheets, June 30, 1997 (Unaudited) and
December 31, 1996...................................... F-2
Consolidated Statements of Operations, Three and Six
Months ended June 30, 1997 and 1996 (Unaudited)........ F-3
Consolidated Statements of Cash Flows, Six Months ended
June 30, 1997 and 1996 (Unaudited)..................... F-4
Notes to Consolidated Financial Statements, Three and Six
Months ended June 30, 1997 and 1996 (Unaudited)........ F-5
Annual Financial Statements:
Report of Independent Public Accountants.................. F-8
Consolidated Balance Sheets, December 31, 1996 and 1995... F-9
Consolidated Statements of Operations, Years ended
December 31, 1996, 1995 and 1994....................... F-10
Consolidated Statements of Changes in Stockholders'
Equity, Years ended December 31, 1996, 1995 and 1994... F-11
Consolidated Statements of Cash Flows, Years ended
December 31, 1996, 1995 and 1994....................... F-12
Notes to Consolidated Financial Statements................ F-13
</TABLE>

F-1
<PAGE> 39

TOM BROWN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 10,658 $ 20,504
Accounts receivable....................................... 24,366 33,080
Inventories............................................... 1,487 1,374
Other..................................................... 682 889
-------- --------
Total current assets.............................. 37,193 55,847
-------- --------
Property and equipment, at cost:
Oil and gas properties, based on the successful efforts
accounting method...................................... 440,910 436,879
Other equipment........................................... 38,035 35,216
-------- --------
478,945 472,095
Less: Accumulated depreciation and depletion.............. 141,633 124,834
-------- --------
Net property and equipment........................ 337,312 347,261
-------- --------
Deferred income taxes, net.................................. 69 2,865
-------- --------
Other assets, net........................................... 464 401
-------- --------
$375,038 $406,374
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 18,328 $ 25,033
Accrued expenses.......................................... 6,635 10,562
-------- --------
Total current liabilities......................... 24,963 35,595
-------- --------
Commitments and contingencies
Bank debt................................................... 90,000 119,000
-------- --------
Other non-current liabilities............................... 5,890 5,643
-------- --------
Stockholders' equity:
Common stock, at $.10 par value Authorized 40,000,000
shares; Outstanding 24,135,714 and 23,898,431 shares,
respectively........................................... 2,414 2,390
Convertible preferred stock, at $.10 par value. Authorized
2,500,000 shares; 1,000,000 shares outstanding......... 100 100
Additional paid-in capital................................ 309,389 307,631
Accumulated deficit....................................... (57,718) (63,985)
-------- --------
Total stockholders' equity........................ 254,185 246,136
-------- --------
$375,038 $406,374
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-2
<PAGE> 40

TOM BROWN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Gas and oil sales............................ $19,281 $ 8,324 $47,827 $16,757
Marketing, gathering and processing.......... 7,186 5,635 14,504 10,289
Interest income and other.................... 421 112 907 230
------- ------- ------- -------
Total revenues....................... 26,888 14,071 63,238 27,276
------- ------- ------- -------
Costs and expenses:
Gas and oil production....................... 3,969 1,648 8,196 3,087
Taxes on gas and oil production.............. 1,599 477 3,689 1,174
Cost of gas sold............................. 5,688 3,835 11,884 7,486
Exploration costs............................ 1,527 515 2,648 926
Impairments of leasehold costs............... 180 2 360 67
General and administrative................... 2,664 1,403 5,061 2,757
Depreciation, depletion and amortization..... 8,655 3,980 17,351 7,697
Interest expense............................. 1,705 10 3,667 17
------- ------- ------- -------
Total costs and expenses............. 25,987 11,870 52,856 23,211
------- ------- ------- -------
Income before income taxes..................... 901 2,201 10,382 4,065
Income tax expense............................. (212) (752) (3,240) (1,386)
------- ------- ------- -------
Net income..................................... 689 1,449 7,142 2,679
------- ------- ------- -------
Preferred stock dividend....................... (437) (437) (875) (797)
------- ------- ------- -------
Net income available to common shareholders.... $ 252 $ 1,012 $ 6,267 $ 1,882
======= ======= ======= =======
Weighted average number of common shares
outstanding.................................. 25,169 21,121 25,110 21,117
======= ======= ======= =======
Net income per common share.................... $ .01 $ .05 $ .25 $ .09
======= ======= ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 41

TOM BROWN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 6,267 $ 1,882
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization............... 17,351 7,697
Gain on sales of assets................................ (10) (11)
Option plan compensation............................... -- 20
Exploration costs...................................... 2,648 926
Impairments of leasehold costs......................... 360 67
Deferred income taxes.................................. 2,796 1,208
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable........... 8,714 (4,535)
Increase in inventories.............................. (113) (194)
Decrease (increase) in other current assets.......... 207 (46)
(Decrease) increase in accounts payable.............. (9,113) 4,801
Decrease (increase) in other non-current accounts.... 184 (551)
-------- -------
Net cash provided by operating activities................... 29,291 11,264
-------- -------
Cash flows from investing activities:
Proceeds from sales of assets............................. 12,613 109
Capital and exploration expenditures...................... (23,013) (9,658)
Changes in accounts payable and accrued expenses for oil
and gas expenditures................................... (972) --
-------- -------
Net cash used in investing activities....................... (11,372) (9,549)
-------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options................... 1,235 140
Repayments of long-term debt.............................. (29,000) --
-------- -------
Net cash provided by financing activities................... (27,765) 140
-------- -------
Net increase (decrease) in cash and cash equivalents........ (9,846) 1,855
-------- -------
Cash and cash equivalents at beginning of period............ 20,504 4,982
-------- -------
Cash and cash equivalents at end of period.................. $ 10,658 $ 6,837
======== =======
Cash paid during the period for:
Interest.................................................. $ 2,941 $ --
Taxes..................................................... 397 85
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 42

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

During interim periods, Tom Brown, Inc. follows the accounting policies set
forth in its Annual Report to Stockholders and its Report on Form 10-K filed
with the Securities and Exchange Commission. Users of financial information
produced for interim periods are encouraged to refer to the footnotes contained
in the Annual Report to Stockholders when reviewing interim financial results.

In the opinion of management, the accompanying interim financial statements
contain all material adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation.

(2) ACQUISITION

Acquisition of Presidio Oil Company

On December 23, 1996, the Company completed the acquisition of Presidio Oil
Company and its subsidiaries (collectively, "Presidio"), following the issuance
by the U.S. Bankruptcy Court, District of Delaware, on December 10, 1996, of an
Order confirming Presidio's reorganization under Chapter 11 of the U.S.
Bankruptcy Code. The purchase price was approximately $206.6 million consisting
of approximately $105 million in cash, 2.71 million shares of the Company's
Common Stock valued at $17.125 per share and the assumption of certain
liabilities. Such amount does not include 2.64 million shares of the Company's
Common Stock which were not issued due to the Company's ownership of $56.15
million principal amount of Presidio's Senior Gas Indexed Notes. The Presidio
acquisition has been accounted for using the purchase method. The cash portion
of the Presidio acquisition was funded by borrowings under the Company's loan
agreement with its bank lender. The assets acquired consisted primarily of
proved oil and gas properties and undeveloped acreage located in Wyoming, North
Dakota, Oklahoma and Louisiana. The Wyoming properties are concentrated in the
Green River and Powder River Basins of Wyoming.

Pro Forma Information

The following table presents the unaudited revenues, net income and net
income per share of the Company for the six months ended June 30, 1997 and 1996
assuming that the Presidio acquisition occurred on January 1, 1996.

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1997 1996
------------ -----------
(HISTORICAL) (PRO FORMA)
(IN THOUSANDS, EXCEPT FOR
PER SHARE AMOUNTS)
<S> <C> <C>
Revenues.................................................... $63,238 $44,955
======= =======
Net income.................................................. 7,142 3,956
======= =======
Net income available to common shareholders................. 6,267 3,159
======= =======
Net income per common share................................. $ .25 $ .13
======= =======
</TABLE>

(3) BANK DEBT

In September 1995, the Company entered into a bank credit agreement. The
credit agreement provided for a $65 million revolving credit facility (the
"credit facility") maturing in September 1998.

F-5
<PAGE> 43

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Borrowings under the credit facility are unsecured and bear interest, at the
election of the Company, at a rate equal to (i) the greater of the agent bank's
prime rate or the federal funds effective rate plus 1/2 of 1% or (ii) the agent
bank's Eurodollar rate plus a margin ranging from .75% to 1.00%. Interest on
amounts outstanding under the credit facility is due on the last day of each
month in the case of loans bearing interest at the prime rate or federal funds
rate and, in the case of loans bearing interest at the Eurodollar rate, interest
payments are due on the last day of each applicable interest period of one, two,
three or six months, as selected by the Company at the time of borrowing.

In connection with the Presidio acquisition, on December 23, 1996, the
Company and its lenders entered into a credit agreement providing for a $125
million revolving credit facility, maturing December 1999. Pursuant to this
agreement, the Company repaid the existing indebtedness under the prior facility
with borrowings under the new credit agreement. The terms and conditions of the
new credit facility are substantially the same as the credit facility. At June
30, 1997 the outstanding balance was $90 million at an interest rate of
approximately 6.7%.

Financial covenants of the credit facility require the Company to maintain
a minimum consolidated tangible net worth of not less than $226 million as of
June 30, 1997. The Company is also required to maintain a ratio of (i) earnings
before interest expense, state and federal taxes and depreciation, depletion and
amortization to (ii) consolidated fixed charges, as defined in the credit
agreement, of not less than 2.5:1. Additionally, the Company is required to
maintain a ratio of consolidated debt to consolidated total capitalization of
less than 0.45:1 and a current ratio of not less than 1.1:1. The Company was in
compliance with all financial covenants at June 30, 1997.

(4) INCOME TAXES

The Company has not paid Federal income taxes since March 31, 1982, due to
its net operating loss carryforward, but is required to pay alternative minimum
tax ("AMT"). This tax can be partially offset by an AMT net operating loss
carryforward.

Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets (liabilities) are as follows:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards........................... $ 15,715 $ 18,689
Gas and oil acquisition, exploration and development costs
deducted for tax purposes in excess of book.............. (14,414) (14,520)
Investment tax credit carryforwards........................ 2,463 2,463
Option plan compensation................................... 1,559 1,559
Other...................................................... 2,591 2,309
-------- --------
Net deferred tax asset................................... 7,914 10,500
Valuation allowance........................................ (7,845) (7,635)
-------- --------
Recognized net deferred tax asset........................ $ 69 $ 2,865
======== ========
</TABLE>

F-6
<PAGE> 44

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

allowance for these carryforwards, including any limitations concerning their
use, and the levels of taxable income necessary for utilization. In this regard,
full valuation allowances were provided for investment tax credit carryforwards.
Based on its recent operating results and its expected levels of future
earnings, the Company believes it will, more likely than not, generate
sufficient taxable income to realize the benefit attributable to the net
operating loss carryforwards for which valuation allowances were not provided.
The deferred tax assets and related valuation allowance will be adjusted as
future events so warrant.

At June 30, 1997, the Company had investment tax credit carryforwards of
approximately $2.5 million and net operating loss carryforwards of approximately
$44.9 million. The Company currently has no liability for deferred Federal
income taxes because of these net operating loss and investment tax credit
carryforwards. Realization of the benefits of these carryforwards is dependent
upon the Company's ability to generate taxable earnings in future periods. In
addition, the availability of these carryforwards is subject to various
limitations. The remainder of the carryforwards will expire between 1997 and
2004. Additionally, the Company has approximately $4.5 million of statutory
depletion carryforwards and $0.9 million of AMT credit carryforwards that may be
carried forward until utilized.

F-7
<PAGE> 45

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors
of Tom Brown, Inc.:

We have audited the accompanying consolidated balance sheets of Tom Brown,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. 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 statements. 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.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tom Brown,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
February 28, 1997

F-8
<PAGE> 46

TOM BROWN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 20,504 $ 4,982
Accounts receivable....................................... 33,080 7,470
Inventories............................................... 1,374 246
Other..................................................... 889 190
-------- --------
Total current assets.............................. 55,847 12,888
-------- --------
PROPERTY AND EQUIPMENT, AT COST:
Gas and oil properties, successful efforts method of
accounting............................................. 436,879 186,624
Other..................................................... 35,216 12,056
-------- --------
Total............................................. 472,095 198,680
Less: Accumulated depreciation, depletion and
amortization........................................... 124,834 112,695
-------- --------
Net property and equipment........................ 347,261 85,985
-------- --------
OTHER ASSETS:
Investment in securities.................................. -- 51,093
Deferred income taxes, net................................ 2,865 13,170
Other assets.............................................. 401 1,038
-------- --------
Total other assets................................ 3,266 65,301
-------- --------
$406,374 $164,174
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable.......................................... $ 25,033 $ 5,979
Accrued expenses.......................................... 10,562 1,536
-------- --------
Total current liabilities......................... 35,595 7,515
-------- --------
BANK DEBT................................................... 119,000 --
-------- --------
OTHER NON-CURRENT LIABILITIES............................... 5,643 --
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.10 par value. Authorized
2,500,000 shares; Outstanding 1,000,000 shares with a
liquidation preference of $25,000,000.................. 100 --
Common Stock, $.10 par value. Authorized 40,000,000
shares; Outstanding 23,898,431 shares and 20,180,902
shares, respectively................................... 2,390 2,018
Additional paid-in capital................................ 307,631 224,889
Accumulated deficit....................................... (63,985) (70,248)
-------- --------
Total stockholders' equity........................ 246,136 156,659
-------- --------
$406,374 $164,174
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-9
<PAGE> 47

TOM BROWN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
REVENUES:
Gas and oil sales......................................... $40,789 $20,385 $15,792
Marketing, gathering and processing....................... 25,122 15,572 11,876
Gain on sales of gas and oil properties................... 267 4,402 13
Interest income and other................................. 542 694 1,390
------- ------- -------
Total revenues.................................... 66,720 41,053 29,071
------- ------- -------
COSTS AND EXPENSES:
Gas and oil production.................................... 6,576 4,834 4,130
Taxes on gas and oil production........................... 3,258 2,043 1,869
Cost of gas sold.......................................... 20,496 13,146 10,022
Exploration costs......................................... 3,471 3,644 1,184
Impairments of leasehold costs............................ 331 582 910
General and administrative................................ 5,786 4,184 3,546
Depreciation, depletion and amortization.................. 15,140 9,994 7,288
Writedown of properties................................... -- 8,368 --
Interest expense.......................................... 389 1,369 20
------- ------- -------
Total costs and expenses.......................... 55,447 48,164 28,969
------- ------- -------
Income (loss) before income taxes................. 11,273 (7,111) 102
INCOME TAX BENEFIT (PROVISION):
Recognition of deferred tax asset......................... -- 13,170 --
Income tax expense........................................ (3,338) (274) (262)
------- ------- -------
Net income (loss)........................................... 7,935 5,785 (160)
Preferred stock dividends................................... (1,672) -- --
------- ------- -------
Net income (loss) attributable to common stock.............. $ 6,263 $ 5,785 $ (160)
======= ======= =======
Weighted average number of common shares outstanding........ 22,223 16,852 15,464
======= ======= =======
Net income (loss) per common share.......................... $ .28 $ .34 $ (.01)
======= ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-10
<PAGE> 48

TOM BROWN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PREFERRED COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT EQUITY
--------- ------ ---------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1993........ $ -- $1,544 $176,705 $(75,873) $102,376
Stock options exercised................ -- 7 304 -- 311
Property acquisition................... -- 1 134 -- 135
Option plan compensation............... -- -- 207 -- 207
Net loss............................... -- -- -- (160) (160)
---- ------ -------- -------- --------
BALANCE AS OF DECEMBER 31, 1994........ -- 1,552 177,350 (76,033) 102,869
Stock options exercised................ -- 6 255 -- 261
Common stock issuance.................. -- 460 47,472 -- 47,932
Stock issuance costs................... -- -- (285) -- (285)
Option plan compensation............... -- -- 97 -- 97
Net income............................. -- -- -- 5,785 5,785
---- ------ -------- -------- --------
BALANCE AS OF DECEMBER 31, 1995........ -- 2,018 224,889 (70,248) 156,659
Stock issuance for KNPC Acquisition.... 100 92 36,058 -- 36,250
Stock options exercised................ -- 9 510 -- 519
Common stock issuance for Presidio
Acquisition.......................... -- 271 46,157 -- 46,428
Stock issuance costs................... -- -- (5) -- (5)
Option plan compensation............... -- -- 22 -- 22
Net income............................. -- -- -- 6,263 6,263
---- ------ -------- -------- --------
BALANCE AS OF DECEMBER 31, 1996........ $100 $2,390 $307,631 $(63,985) $246,136
==== ====== ======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-11
<PAGE> 49

TOM BROWN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ 6,263 $ 5,785 $ (160)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization............. 15,140 9,994 7,288
Gain on sales of assets.............................. (267) (4,402) (53)
Writedown of properties.............................. -- 8,368 --
Use (Recognition) of deferred tax asset.............. 2,701 (13,170) --
Option plan compensation............................. 22 97 207
Exploration costs.................................... 3,471 3,644 1,184
Impairments of leasehold costs....................... 331 582 910
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable......... (15,408) 990 (1,682)
Decrease (increase) in inventories................. 75 886 (410)
Decrease (increase) in other current assets........ 220 (12) 4
Increase (decrease) in accounts payable and
accrued expenses................................ 9,919 (3,050) 306
Decrease (increase) in other assets................ 2,406 (922) 2
-------- -------- -------
Net cash provided by operating activities................. 24,873 8,790 7,596
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets........................... 593 9,044 295
Investment in securities................................ -- (51,093) --
KNPC and Presidio Acquisitions.......................... (95,529) -- --
Capital and exploration expenditures.................... (33,929) (28,814) (17,558)
-------- -------- -------
Net cash used in investing activities..................... (128,865) (70,863) (17,263)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................. -- 47,932 --
Borrowings of long-term bank debt....................... 119,000 51,000 --
Repayments of long-term bank debt....................... -- (51,000) --
Proceeds from exercise of stock options................. 519 261 311
Stock issuance costs.................................... (5) (285) --
-------- -------- -------
Net cash provided by financing activities................. 119,514 47,908 311
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 15,522 (14,165) (9,356)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............ 4,982 19,147 28,503
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................. $ 20,504 $ 4,982 $19,147
======== ======== =======
Cash paid during the year for:
Interest................................................ $ 136 $ 1,369 $ 20
Income taxes............................................ 190 77 141
</TABLE>

See accompanying notes to consolidated financial statements

F-12
<PAGE> 50

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

(1) NATURE OF OPERATIONS

Tom Brown, Inc and its wholly-owned subsidiaries ("the Company") is an
independent energy company engaged in the domestic exploration for, and the
acquisition, development, marketing, production and sale of, natural gas and
crude oil. The Company's industry segments are (i) the exploration for, and the
acquisition, development and production of, natural gas and crude oil, and (ii)
the marketing, gathering and processing of natural gas, primarily through
Wildhorse Energy Partners, L.L.C. ("Wildhorse"). All of the Company's operations
are conducted in the United States. The Company's operations are presently
focused in the Wind River and Green River Basins of Wyoming, the Piceance Basin
of Colorado, the Val Verde Basin of west Texas and the Permian Basin of west
Texas and southeastern New Mexico. The Company also, to a lesser extent,
conducts exploration and development activities in other areas of the
continental United States.

Substantially all of the Company's production is sold under
market-sensitive contracts. The Company's revenue, profitability and future rate
of growth are substantially dependent upon the price of, and demand for, oil,
natural gas and natural gas liquids. Prices for natural gas and oil are subject
to wide fluctuation in response to relatively minor changes in their supply and
demand as well as market uncertainty and a variety of additional factors that
are beyond the control of the Company. These factors include the level of
consumer product demand, weather conditions, domestic and foreign governmental
regulations, the price and availability of alternative fuels, political
conditions in foreign countries, the foreign supply of natural gas and oil and
the price of foreign imports and overall economic conditions. The Company is
affected more by fluctuations in natural gas prices than oil prices because a
majority of its production (84 percent in 1996 on a volumetric equivalent basis)
was natural gas.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements include the accounts of
the Company. The Company's proportionate share of assets, liabilities, revenues
and expenses associated with certain interests in gas and oil partnerships and
the Company's 45% ownership in Wildhorse are consolidated within the
accompanying financial statements. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications have been made to
amounts reported on previous years to conform to the 1996 presentation.

Inventories

Inventories consist of pipe and other production equipment. Inventories are
stated at the lower of cost (principally first-in, first-out) or estimated net
realizable value.

Property and Equipment

The Company accounts for its natural gas and crude oil exploration and
development activities under the successful efforts method of accounting. Under
such method, costs of productive exploratory wells, development dry holes and
productive wells and undeveloped leases are capitalized. Gas and oil lease
acquisition costs are also capitalized. Exploration costs, including geological
and geophysical expenses and delay rentals for gas and oil leases, are charged
to expense as incurred. Exploratory drilling costs are initially capitalized,
but charged to expense if and when the well is determined not to have found
reserves in commercial quantities.

F-13
<PAGE> 51

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Maintenance and repairs are charged to expense; renewals and betterments
are capitalized to the appropriate property and equipment accounts. Upon
retirement or disposition of assets, the costs and related accumulated
depreciation are removed from the accounts with the resulting gains or losses,
if any, reflected in results of operations.

Unproved properties with significant acquisition costs are assessed
quarterly on a property-by-property basis and any impairment in value is charged
to expense. Unproved properties whose acquisition costs are not individually
significant are aggregated, and the portion of such costs estimated to be
nonproductive, based on historical experience, is amortized over the average
holding period. If the unproved properties are determined to be productive, the
related costs are transferred to proved gas and oil properties.

During 1995, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived Assets . . ."
("SFAS 121"). SFAS 121 generally requires a separate assessment for potential
impairment of each of the Company's producing property cost centers, in contrast
to the Company's prior policy of evaluating the producing property accounts for
impairment in total. As a result, the Company recorded an $8.4 million non-cash
charge during 1995 which reduced the carrying value of certain of the Company's
non-core properties to their estimated fair values.

The provision for depreciation, depletion and amortization of oil and gas
properties is calculated on a field-by-field basis using the unit-of-production
method. Included in such calculations are estimated future dismantlement,
restoration and abandonment costs, net of estimated salvage values.

Other property and equipment is recorded at cost and depreciated using the
straight-line method based on estimated useful lives.

Natural Gas Revenues

The Company utilizes the accrual method of accounting for natural gas
revenues whereby revenues are recognized as the Company's entitlement share of
gas is produced based on its working interests in the properties. The Company
records a receivable (payable) to the extent it receives less (more) than its
proportionate share of gas revenues. At December 31, 1996, the Company had net
gas balancing liabilities of approximately $3,427,000 associated with
approximately 2.1 billion cubic feet ("Bcf") of gas.

Income Taxes

The Company provides for income taxes using the asset and liability method
under which deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on deferred taxes
of a change in tax laws or tax rates is recognized in income in the period such
changes are enacted.

Stock-Based Compensation

The Company accounts for employee stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees". Accordingly, adoption of
SFAS No. 123, "Accounting for Stock-Based Compensation" had no effect on the
Company's results of operations but pro forma disclosure is

F-14
<PAGE> 52

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

made of the effect on Net Income had the accounting recommended by SFAS No. 123
been implemented (See Note 7) in 1996.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements. Such estimates and assumptions also affect the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Significant estimates with regard to these financial
statements include the estimate of proved oil and gas reserve volumes and the
related present value of estimated future net revenues to be received therefrom
(see Note 13), as well as the valuation allowance for deferred taxes (see Note
5).

Net Income (Loss) Per Common Share

Net income per common share for the years 1996 and 1995 was calculated
based on the weighted average number of common shares and common equivalent
shares outstanding. For fiscal years prior to 1995, common stock equivalents
were antidilutive for purposes of calculating the net loss per common share.

Consolidated Statements of Cash Flows

The Company considers investments purchased with an original maturity of
three months or less to be cash equivalents. During the year ended December 31,
1996 the Company (i) issued 1.0 million shares of Preferred Stock and .9 million
shares of Common Stock in connection with the KNPC Acquisition (see Note 3), and
(ii) issued 2.71 million shares of the Company's Common Stock and converted its
$51 million investment in Presidio GINs, purchased in June 1995, into equity
ownership, both in connection with the Presidio Acquisition (see Note 3).
Insofar as such transactions are non-cash, they are not reflected in the
Consolidated Statements of Cash Flows.

(3) ACQUISITIONS AND DIVESTITURES

Acquisition of KN Production Company

Pursuant to a letter of intent entered into in December 1995, the Company
and KN Energy, Inc. ("KNE") closed certain transactions on January 31, 1996
which resulted in (i) the Company's acquisition of all of the issued and
outstanding stock of KN Production Company ("KNPC"), a wholly owned subsidiary
of KNE, and (ii) Wildhorse being formed by the Company and KNE for the purpose
of providing gas gathering, processing, marketing, field and storage services,
(collectively the "KNPC Acquisition"). The price paid to KNE in connection with
the KNPC Acquisition was determined to be $36.25 million, of which $25 million
was paid in the form of 1,000,000 shares of the Company's $1.75 Convertible
Preferred Stock, Series A (the "Preferred Stock") and the remaining $11,250,000
was paid in the form of 918,367 shares of the Company's Common Stock, based on a
price per share of $12.25. The KNPC Acquisition has been recorded under the
purchase method of accounting.

As a result of the KNPC Acquisition, the Company acquired interests in 624
gross producing wells in Colorado and Wyoming, of which the Company became
operator of 308. The properties acquired by the Company include approximately
243,000 net undeveloped acres in Colorado, Wyoming, Kansas and Nebraska and
approximately 64,000 net developed acres located in Colorado and Wyoming.

F-15
<PAGE> 53

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

An integral part of the KNPC Acquisition was the formation of Wildhorse,
which is owned fifty-five percent (55%) by KNE and forty-five percent (45%) by
the Company. The business and affairs of Wildhorse are managed by KNE under the
direction of an operating team consisting of two representatives appointed by
the Company and two representatives appointed by KNE. The Company dedicated a
significant amount of its Rocky Mountain gas reserves to Wildhorse and KNE
contributed gas marketing contracts. The Company also acquired a natural gas
storage facility in western Colorado which was simultaneously contributed to
Wildhorse.

The principal purpose of Wildhorse is to provide for the furnishing of
services related to natural gas, natural gas liquids and other natural gas
products, including gathering, processing and storage services, marketing
services and field services.

Acquisition of Presidio Oil Company

On December 23, 1996, the Company completed the acquisition of Presidio Oil
Company and its subsidiaries (collectively, "Presidio"), following the issuance
by the U.S. Bankruptcy Court, District of Delaware, on December 10, 1996, of an
Order confirming Presidio's reorganization under Chapter 11 of the U.S.
Bankruptcy Code. The purchase price was approximately $206.6 million consisting
of approximately $105 million in cash and 2.71 million shares of the Company's
Common Stock valued at $17.125 per share, including the assumption of certain
liabilities. Such amount does not include 2.64 million shares of the Company's
Common Stock which were not issued due to the Company's ownership of $56.15
million principal amount of Presidio's Senior Gas Indexed Notes (the "GINs").
The GINs were purchased in June 1995 for approximately $51 million as a
strategic part of the Company's efforts to acquire Presidio Oil Company. The
Presidio Acquisition has been accounted for using the purchase method. The cash
portion of the Presidio Acquisition was funded by borrowings under the Company's
loan agreement with its bank lender. The assets acquired consist primarily of
proved oil and gas properties and undeveloped acreage located in Wyoming, North
Dakota, Oklahoma and Louisiana. The Wyoming properties are concentrated in the
Green River and Powder River Basins of Wyoming.

Pro Forma Information

The following table presents the unaudited pro forma revenues, net income
and net income per share of the Company for the years ended December 31, 1996
and 1995 assuming that the KNPC Acquisition and the Presidio Acquisition both
occurred on January 1, 1995.

<TABLE>
<CAPTION>
YEAR ENDED
-------------------------
1996 1995
----------- ----------
(IN THOUSANDS, EXCEPT FOR
PER SHARE AMOUNTS)
<S> <C> <C>
Revenues.................................................... $106,009 $84,821
======== =======
Net income.................................................. 8,184 5,026
======== =======
Net income available to common shareholders................. 6,512 3,276
======== =======
Net income per common share................................. .26 .13
======== =======
</TABLE>

Sale of Arkoma Assets

In September 1995, the Company sold its properties in the Arkoma Basin in
western Arkansas for $9.0 million. As a result of this sale, the Company
realized an after-tax book gain of $3.0 million.

F-16
<PAGE> 54

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Proceeds from the sale of these properties were used to repay a portion of the
Company's outstanding indebtedness under its Credit Facility.

(4) BANK DEBT

In September 1995, the Company entered into a bank credit agreement. The
credit agreement provided for a $65 million revolving credit facility (the
"Credit Facility") maturing in September 1998. Borrowings under the Credit
Facility are unsecured and bear interest, at the election of the Company, at a
rate equal to (i) the greater of the agent bank's prime rate or the federal
funds effective rate plus 1/2 of 1% or (ii) the agent bank's Eurodollar rate
plus a margin ranging from .75% to 1.00%. Interest on amounts outstanding under
the Credit Facility is due on the last day of each month in the case of loans
bearing interest at the prime rate or federal funds rate and, in the case of
loans bearing interest at the Eurodollar rate, interest payments are due on the
last day of each applicable interest period of one, two, three or six months, as
selected by the Company at the time of borrowing.

On November 13, 1995, the Company repaid the $51 million outstanding under
the Credit Facility primarily with funds generated from the Company's public
stock offering (see Note 6). At December 31, 1995, there was no outstanding
balance under the Credit Facility.

In connection with the Presidio Acquisition, on December 23, 1996, the
Company and its lenders entered into a Credit Agreement providing for a $125
million revolving credit facility, maturing December 1999. Pursuant to this
agreement, the Company repaid the existing indebtedness under the prior facility
with borrowings under the new Credit Agreement. The terms and conditions of the
new Credit Facility are substantially the same as the Credit Facility. At
December 31, 1996, the outstanding balance was $119 million at an interest rate
of 8.25%.

Financial covenants of the Credit Facility require the Company to maintain
a minimum consolidated tangible net worth of not less than $223 million as of
December 31, 1996. The Company is also required to maintain a ratio of (i)
earnings before interest expense, state and federal taxes and depreciation,
depletion and amortization to (ii) consolidated fixed charges, as defined in the
credit agreement, of not less than 2.5:1. Additionally, the Company is required
to maintain a ratio of consolidated debt to consolidated total capitalization of
less than 0.45:1 and a current ratio of not less than 1.1:1. The Company was in
compliance with all financial covenants at December 31, 1996.

(5) INCOME TAXES

The Company has not paid Federal income taxes due to its net operating loss
carryforward, but is required to pay alternative minimum tax ("AMT"). This tax
can be partially offset by an AMT net operating loss carryforward.

F-17
<PAGE> 55

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A U.S. Federal statutory rate applied to the Company's income (loss) before
income taxes of 35% in 1996 and 34% in 1995 and 1994 was used in the following
reconciliation of the Company's effective income tax expense:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax provision (benefit) at statutory
rate................................................. $3,946 $(2,418) $ 35
Utilization of net operating loss carryforward......... -- -- (105)
Adjustment to valuation allowance...................... (596) 2,357 --
Other.................................................. (583) 33 70
------ ------- -----
2,767 (28) --
AMT provision.......................................... 290 105 24
State income and franchise taxes....................... 281 197 238
------ ------- -----
Income tax expense..................................... $3,338 $ 274 $ 262
====== ======= =====
</TABLE>

The significant components which give rise to the Company's deferred tax
assets (liabilities) are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards............................ $ 18,689 $ 23,070
Gas and oil acquisition, exploration and development costs
deducted for tax purposes in excess of book............... (14,520) (8,074)
Investment tax credit carryforwards......................... 2,463 4,813
Option plan compensation.................................... 1,559 1,507
Other....................................................... 2,309 2,435
-------- --------
Net deferred tax asset.................................... 10,500 23,751
Valuation allowance......................................... (7,635) (10,581)
-------- --------
Recognized net deferred tax asset......................... $ 2,865 $ 13,170
======== ========
</TABLE>

A valuation allowance of approximately $7.6 million and $10.6 million at
December 31, 1996 and 1995, respectively, has been provided against the
Company's net deferred tax assets based on management's estimate of the
recoverability of future tax benefits. The valuation allowance relates primarily
to the ability to use net operating loss and investment tax credit
carryforwards. The Company evaluated all appropriate factors to determine the
proper valuation allowance for these carryforwards, including any limitations
concerning their use, the year the carryforwards expire and the levels of
taxable income necessary for utilization. In this regard, full valuation
allowances were provided for investment tax credit carryforwards. Based on its
recent operating results and its expected levels of future earnings, the Company
believes it will, more likely than not, generate sufficient taxable income to
realize the benefit attributable to the net operating loss carryforwards for
which valuation allowances were not provided.

At December 31, 1996, the Company had investment tax credit carryforwards
of approximately $2.5 million and net operating loss carryforwards of
approximately $53.4 million. The Company currently has no liability for deferred
Federal income taxes because of these net operating loss and investment tax
credit carryforwards. Realization of the benefits of these carryforwards is
dependent upon the Company's ability to generate taxable earnings in future
periods. In addition, the availability

F-18
<PAGE> 56

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of these carryforwards is subject to various limitations. The remainder of the
carryforwards will expire between 1997 and 2004. Additionally, the Company has
approximately $3.9 million of statutory depletion carryforwards and $0.4 million
of AMT credit carryforwards that may be carried forward until utilized.

(6) STOCKHOLDERS' EQUITY

Common Stock

The Company's Common Stock is $.10 par value per share. There are
40,000,000 authorized shares of Common Stock of which 23,898,431 shares and
20,180,902 shares were outstanding as of December 31, 1996 and 1995,
respectively.

In November 1995, the Company sold 4,600,000 of Common Stock in a public
offering. The net proceeds of such offering totaled approximately $47.7 million
and were used to repay indebtedness outstanding under the Credit Facility.

The Company issued 918,367 shares of Common Stock in January 1996 in
connection with the KNPC Acquisition and 2.71 million shares of Common Stock in
December 1996 in connection with the Presidio Acquisition (See Note 3).

Rights Plan

The Rights will be exercisable only if a person or group acquires 20% or
more of the Company's Common Stock or announces a tender offer which would
result in ownership by a person or group of 20% or more of the Common Stock. The
date on which the above occurs is to be known as the ("Distribution Date"). The
Rights will expire on March 15, 2001, unless extended or redeemed earlier by the
Company.

At the time the Rights dividend was declared, the Board of Directors
further authorized the issuance of one Right with respect to each share of the
Company's Common Stock that shall become outstanding between March 15, 1991 and
the earlier of the Distribution Date or the expiration or redemption of the
Rights. Until the Distribution Date occurs, the certificates representing shares
of the Company's Common Stock also evidence the Rights. Following the
Distribution Date, the Rights will be evidenced by separate certificates.

The provisions described above may tend to deter any potential unsolicited
tender offers or other efforts to obtain control of the Company that are not
approved by the Board of Directors and thereby deprive the stockholders of
opportunities to sell shares of the Company's Common Stock at prices higher than
the prevailing market price. On the other hand, these provisions will tend to
assure continuity of management and corporate policies and to induce any person
seeking control of the Company or a business combination with the Company to
negotiate on terms acceptable to the then elected Board of Directors.

F-19
<PAGE> 57

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Preferred Stock

In January 1996, in connection with the KNPC acquisition, (see Note 3) the
Company issued 1,000,000 shares of its $1.75 Convertible Preferred Stock, Series
A (the "Preferred Stock"). There are 2,500,000 shares of Preferred Stock
authorized.

As the holder of the Preferred Stock, KNE is entitled to receive cumulative
dividends at the annual rate of $1.75 per share, payable in cash quarterly on
the fifteenth day of March, June, September and December in each year. If full
cumulative dividends on the Preferred Stock have not been declared and paid or
set apart for payment, the Company may not declare or pay or set apart for
payment any dividends or make any other distributions on, or make any payment on
account of the purchase, redemption or retirement of, the Company's Common
Stock, or any other stock of the Company ranking junior to the Preferred Stock
as to payment of dividends or distribution of assets on liquidation, dissolution
or winding up of the Company (other than, in the case of dividends or
distributions, dividends or distributions paid in shares of Common Stock or such
other junior ranking stock).

The Company has the option, at any time beginning on or after March 15,
2001, to redeem all or any part of the outstanding shares of Preferred Stock at
the redemption price of $25.00 per share, plus an amount equal to all accrued
and unpaid dividends on such shares of Preferred Stock to the date of
redemption.

Upon the occurrence of a change of control of the Company, KNE, as the
holder of the Preferred Stock, has the right to cause the Preferred Stock to be
redeemed by the Company, in whole or in part, at the redemption price of $25.50
per share, plus all accrued and unpaid dividends. Generally, for purposes of the
Preferred Stock, a "change of control" is any situation in which a majority of
the Board of Directors of the Company changes within a period of twelve months
or a new person or group of persons becomes in "control" of the Company, within
the meaning of rules of the Securities and Exchange Commission.

Each share of the Preferred Stock is convertible at the option of the
holder thereof, at any time and from time to time prior to the redemption of
such share, into fully paid and nonassessable shares of Common Stock of the
Company at the initial conversion rate of 1.6660 shares of Common Stock for each
share of Preferred Stock, subject to customary adjustments.

The Preferred Stock is exchangeable, in whole or in part, at the option of
the Company on any dividend payment date at any time on or after March 15, 1999,
and prior to March 15, 2001, for shares of Common Stock at the exchange rate of
1.666 shares of Common Stock for each share of Preferred Stock; provided that
(i) on or prior to the date of exchange, the Company shall have declared and
paid or set apart for payment to the holders of Preferred Stock all accumulated
and unpaid dividends to the date of exchange, and (ii) the current market price
of the Common Stock is above $18.375 (the "Threshold Price"). The exchange rate
is subject to adjustment in the same manner and under the same circumstances as
the conversion rate is subject to adjustment, and the Threshold Price is also
subject to adjustment in the same manner and under the same circumstances.

Upon the dissolution, liquidation or winding up of the Company, whether
voluntary or involuntary, the holders of the Preferred Stock are entitled to
receive out of the assets of the Company available for distribution to
stockholders, the amount of $25.00 per share plus an amount equal to all
dividends on such shares (whether or not earned or declared) accrued and unpaid
thereon to the date of final distribution, before any payment or distribution
may be made on the Common Stock or on any class of stock ranking junior to the
Preferred Stock with respect to distributions upon dissolution, liquidation or
winding up.

F-20
<PAGE> 58

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

If at any time dividends payable on the Preferred Stock are in arrears and
unpaid in an amount equal to or exceeding the amount of dividends payable
thereon for four quarterly dividend periods, the total number of Directors on
the Company's Board of Directors will be limited to a maximum of nine and the
holders of the outstanding Preferred Stock will have the exclusive right, voting
separately as a class without regard to series, to designate a special class of
two Directors of the Company (the "Special Directors") at the next annual or
special meeting of stockholders of the Company irrespective of whether such
meeting otherwise would involve the election of directors, and the membership of
the Board of Directors of the Company shall be increased by the number of the
Special Directors so designated. Such right of the holders of Preferred Stock to
designate Special Directors continues until all dividends accumulated and
payable on the Preferred Stock have been paid in full, at which time such right
to designate Special Directors terminates, subject to re-vesting in the event of
a subsequent dividend payment arrearage.

In exercising the right to designate Special Directors or when otherwise
granted voting rights by operation of law, each share of Preferred Stock shall
be entitled to one vote, except as described below.

The holders of the Preferred Stock are entitled to vote on all matters upon
which holders of the Company's Common Stock have the right to vote. In such
voting, each share of Preferred Stock is entitled to a number of votes per share
equivalent to the number of shares of Common Stock issuable upon conversion of
the Preferred Stock and shall vote together with the holders of the outstanding
shares of the Company's Common Stock as if a part of that class.

(7) BENEFIT PLANS

1986 Grant

The Company granted nonqualified stock options to certain key officers and
employees for various terms and at prices not less than the market value of the
shares at the date of the grant. The exercise prices of the options granted,
which originally were set at prices ranging from $5.682 per share to $7.50 per
share, were reduced effective September 4, 1991 to $4.00 per share, the market
value at that date. The options expire ten years from the date of grant.

1989 Plan

On September 28, 1990, shareholders approved the Company's 1989 Stock
Option Plan (the "1989 Plan"). The aggregate number of shares of Common Stock
that may be issued under the 1989 Plan is 1,400,000 shares. The exercise price
of the options granted to employees and employee directors prior to 1991, which
was originally set at $5.25 per share, was reduced effective September 4, 1991
to $4.00 per share, the market value at that date. The options expire ten years
from the date of grant.

F-21
<PAGE> 59

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1993 Plan

In May 1990 and March 1992, the Board of Directors adopted the 1990 Phantom
Stock Option Plan and the 1992 Phantom Stock Option Plan for Non-employee
Directors (the "Phantom Plans").

In February 1993, the Board of Directors adopted the Company's 1993 Stock
Option Plan (the "1993 Plan"). The 1993 Plan provides for issuance of options to
certain employees and directors to purchase shares of Common Stock. In May 1996,
the Board of Directors increased the aggregate number of shares of Common Stock
that may be issued under the 1993 Plan is 800,000 shares. The exercise price,
vesting and duration of the options may vary and will be determined at the time
of issuance. Also, in connection with the 1993 Plan, employees and directors who
were granted units pursuant to the Phantom Plans surrendered those units for a
like number of options under the 1993 Plan at the surrendered units' exercise
prices.

A summary of the status of the plans described above, as of the dates
indicated, and the changes during the years then ended, is presented in the
table and narrative below:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
WTD. WTD. WTD.
SHARES AVG. SHARES AVG. SHARES AVG.
UNDER EXER. UNDER EXER. UNDER EXER.
OPTION PRICE OPTION PRICE OPTION PRICE
------ ------ ------ ------ ------ ------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year........ 1,525 $ 8.72 1,120 $ 6.51 1,099 $ 6.17
Granted............................... 673 15.70 470 12.96 88 11.75
Exercised............................. (88) 5.89 (60) 4.41 (67) 4.65
Forfeited............................. 0 (5) 3.86 0
----- ----- -----
Outstanding, end of year.............. 2,110 11.06 1,525 8.72 1,120 6.51
===== ===== =====
Exercisable, end of year.............. 1,457 8.99 1,309 8.28 893 5.71
===== ===== =====
Available for grant, end of year...... 31 429 495
===== ===== =====
</TABLE>

The weighted average fair value of options granted during the years ended
December 31, 1996 and 1995 was $9.19 and $6.71, respectively. The fair value of
each option is estimated as of the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1996 and 1995, respectively: (i) risk-free interest rates of 6.35 and
7.59 percent; (ii) expected lives of seven years, (iii) expected volatility of
45.4 and 46.9 percent, and (iv) no dividend yields.

The following table summarizes information about stock options outstanding
at December 31, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
NO. OF SHS. WTD. AVG. NO. OF SHS.
RANGE OF UNDER REMAINING WTD. AVG. UNDER WTD. AVG.
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES OPTIONS LIFE PRICE OPTIONS PRICE
-------- ----------- ----------- --------- ----------- ---------
(SHARES IN THOUSANDS)
<C> <C> <C> <C> <C> <C>
$ 3.810- 7.620 699 4.51 $ 4.26 694 $ 4.23
11.125-13.320 493 8.74 12.16 418 12.09
14.687-18.875 918 9.20 15.66 345 14.82
----- -----
2,110 7.54 11.06 1,457 8.99
===== =====
</TABLE>

F-22
<PAGE> 60

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company accounts for its stock-based compensation using the intrinsic
value method prescribed by APB Opinion No. 25 and related interpretations, under
which no compensation cost has been recognized for the stock option plans.
Alternatively, if compensation costs for these plans had been determined in
accordance with SFAS No. 123 ("SFAS 123"), the Company's net income and net
income per share would approximate the following pro forma amounts:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1996 1995
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net Income
As Reported............................................... $6,263 $5,785
Pro Forma................................................. 4,729 5,105
Net Income per Common Share:
As Reported............................................... $ 0.28 $ 0.34
Pro Forma................................................. 0.21 0.30
</TABLE>

The pro forma amounts shown above may not be representative of future
results because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995.

Profit Sharing, ESOP and KSOP Plans

Effective April 1, 1985, the Company adopted a profit sharing plan (the
"Profit Sharing Plan") for the benefit of all employees. Under the Profit
Sharing Plan, the Company may contribute to a trust either stock or cash in such
amounts as it may, from time to time, deem advisable. The Company contributed
$30,000 for 1995 to the Profit Sharing Plan. The Company did not make a
contribution to the Profit Sharing Plan for year 1994.

Effective April 1, 1986, the Company adopted an employee stock ownership
plan (the "ESOP") for the benefit of all employees. Under the ESOP, the Company
may contribute cash or the Company's Common Stock to a trust in such amounts as
the Company deems advisable. The Company contributed $30,000 and $60,000 to the
trust for 1995 and 1994, respectively, for the purchase by the trust of 2,110
and 4,750 shares of Common Stock.

Effective April 1, 1990, the Profit Sharing Plan was amended to provide for
voluntary employee contributions under Section 401(k) of the Internal Revenue
Code of 1986, as amended. The Profit Sharing Plan was further amended to provide
employees with the ability to give direct investment instructions to the Profit
Sharing Trustee for amounts held for their benefit.

Effective January 1, 1996 the Company adopted the KSOP ("KSOP")which is a
merger of the ESOP and the Profit Sharing Plan which contains 401(k) profit
sharing plan and employer stock ownership plan provisions for the benefit of
those persons who qualify as participants. The Company contributed $100,000 to
the KSOP for 1996.

(8) FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value
of financial instruments. The carrying values of trade receivables and trade
payables included in the accompanying Consolidated Balance Sheets approximated
market value at December 31, 1996 and 1995.

F-23
<PAGE> 61

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Cash and Cash Equivalents

The carrying amounts approximated fair value due to the short maturity of
these instruments.

Investments

At December 31, 1995, there was no quoted price for the Presidio GINs.
Consequently, the Company was unable to estimate the fair value of the GINs;
therefore, they remained valued at the Company's purchase price.

Bank Debt

The carrying value approximates fair value because the interest rate is
variable and is reflective of current market conditions.

(9) RELATED PARTIES AND SIGNIFICANT CUSTOMERS

Certain of the Company's officers and directors participate (either
individually or indirectly through various entities) with the Company and other
unrelated investors in the drilling, development and operation of gas and oil
properties. Related party transactions are non-interest bearing and are settled
in the normal course of business with terms which, in management's opinion, are
similar to those with other joint owners.

The Company has engaged from time to time two law firms, one of whose
partner serves as a director and one of whose partner serves as an officer. The
amounts paid to each of these firms for the years ended December 31, 1996, 1995
and 1994 were $56,000 and $268,000; $103,000 and $159,000; and $37,000 and
$70,000, respectively. The Company also paid $74,000, $35,000, and $35,000
during the years ended December 31, 1996, 1995 and 1994, respectively, to a
consulting firm which has a partner who serves as a director of the Company.

The Company participates in exploration activity with a partnership, one of
whose partner is a director of the Company. During the years ended December 31,
1996, 1995, and 1994 the Company billed $239,000, $153,000 and $6,000,
respectively to such partnership for their share of certain leasehold costs.

In addition, certain officers and directors of the Company are directors of
a former subsidiary. The Company and the former subsidiary make available to
each other certain personnel, office services and records with each party being
reimbursed for costs and expenses incurred in connection therewith. During the
years ended December 31, 1996, 1995 and 1994, the Company charged the former
subsidiary approximately $75,000, $70,000 and $64,000, respectively, for such
services. The former subsidiary performs drilling services on certain wells
operated by the Company and charged approximately $42,000, $934,000 and
$1,322,000 for such services during the years ended December 31, 1996, 1995 and
1994, respectively. In management's opinion, the above described transactions
and services were provided on the same terms as could be obtained from
non-related sources.

Gas and oil sales to three purchasers, Coastal Oil and Gas, Conoco, Inc.
and KN Gas Marketing, Inc., accounted for 15%, 14% and 13%, respectively, of gas
and oil sales and marketing, gathering and processing revenues for the year
ended December 31, 1996 and 14%, 25% and 12%, respectively, for the year ended
December 31, 1995. For the year ended December 31, 1994, Montana-Dakota
Utilities Co. and KN Gas Marketing, Inc. accounted for 13% and 12%,
respectively, of gas and oil sales and marketing, gathering and processing
revenues. Because there are

F-24
<PAGE> 62

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

numerous other parties available to purchase the Company's production, the
Company believes the loss of these purchasers would not materially affect its
ability to sell natural gas or crude oil.

Concentration of Credit Risk

The Company's revenues are derived principally from uncollateralized sales
to customers in the gas and oil industry. The concentration of credit risk in a
single industry affects the Company's overall exposure to credit risk because
customers may be similarly affected by changes in economic and other conditions.
The Company has not experienced significant credit losses on such receivables.

(10) SEGMENT INFORMATION

The Company operates in two reportable segments: (i) gas and oil
exploration and development and (ii) marketing, gathering and processing. The
segment results are presented in the following schedule:

<TABLE>
<CAPTION>
GAS & OIL MARKETING,
EXPLORATION GATHERING
& & INTERCOMPANY
DEVELOPMENT PROCESSING SALES & OTHER TOTAL
----------- ---------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Assets................................... $393,697 $14,923 $(2,246) $406,374
Revenues................................. 41,598 29,476 (4,354) 66,720
Income before taxes...................... 7,417 3,856 -- 11,273
Capital expenditures..................... 256,054 24,550 -- 280,604
Depreciation and amortization............ 13,762 1,378 -- 15,140

Year ended December 31, 1995
Assets................................... $157,928 $ 6,246 $ -- $164,174
Revenues................................. 25,385 19,696 (4,028) 41,053
Income (loss) before taxes............... (9,060) 1,949 -- (7,111)
Capital expenditures..................... 24,809 1,203 -- 26,012
Depreciation and amortization............ 9,785 209 -- 9,994

Year ended December 31, 1994
Assets................................... $106,144 $ 8,948 $ -- $115,092
Revenues................................. 15,792 16,554 (3,275) 29,071
Income (loss) before taxes............... (1,414) 1,516 -- 102
Capital expenditures..................... 22,359 651 -- 23,010
Depreciation and amortization............ 7,119 169 -- 7,288
</TABLE>

(11) COMMITMENTS AND CONTINGENCIES

The Company's operations are subject to numerous Federal and state
government regulations which may give rise to claims against the Company. In
addition, the Company is a defendant in various lawsuits generally incidental to
its business. The Company does not believe that the ultimate resolution of such
litigation will have a material adverse effect on the Company's financial
position or results of operations.

F-25
<PAGE> 63

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Lease Commitments

At December 31, 1996, the Company had long-term leases covering certain of
its facilities and equipment. The minimum rental commitments under
non-cancelable operating leases with lease terms in excess of one year are
approximately $562,000, $132,000 and $75,000 for 1997, 1998 and 1999,
respectively. Total rental expense incurred for the years ended December 31,
1996, 1995 and 1994 was approximately $394,000, $262,000 and $245,000,
respectively, all of which represented minimum rentals under non-cancelable
operating leases.

Firm Transportation Commitments

As of December 31, 1996, Wildhorse had entered into several contracts for
firm transportation on interstate pipelines. Based upon current rates and using
the Company's forty-five percent (45%) ownership in Wildhorse, the Company's
obligation for such firm transportation for the next five years and thereafter
is as follows:

<TABLE>
<CAPTION>
COMMITMENT
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ --------------
(IN THOUSANDS)
<S> <C>
1997........................................... $ 2,812
1998........................................... 4,866
1999........................................... 4,851
2000........................................... 4,778
2001........................................... 4,531
Thereafter..................................... 7,490
-------
$29,328
=======
</TABLE>

Environmental Matters

A wholly-owned subsidiary of the Company is a party to an environmental
cleanup proceeding. The subsidiary's share of the estimated cleanup costs were
accrued in the consolidated financial statements at December 31, 1994. Based on
the amount of remediation costs estimated for this site and the Company's de
minimis contribution, if any, the Company believes that the outcome of this
proceeding will not have a material adverse effect on its financial position or
results of operations.

F-26
<PAGE> 64

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(12) QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Revenues............................... $13,205 $14,071 $14,773 $24,671 $66,720
Gross profit(1)........................ 7,300 7,999 6,407 13,875 $35,581
Net income............................. 870 1,012 122 4,259 $ 6,263
Net income per common share(3)......... .04 .05 .01 .19 $ .28
Year ended December 31, 1995
Revenues............................... $ 9,428 $ 9,162 $12,082 $10,381 $41,053
Gross profit(1)........................ 3,814 4,101 3,765 4,254 $15,934
Net income (loss)(2)................... 4,530 273 1,500 (518) $ 5,785
Net income (loss) per common
share(3)............................ .28 .02 .09 (.03) $ .34
</TABLE>

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

(1) Gross Profit is computed as the excess of gas and oil revenues over
operating expenses. Operating expenses are those associated directly with
gas and oil revenues and include lease operations, gas and oil related taxes
and other expenses.

(2) Net income for the quarter ended March 31, 1995 includes the recognition of
deferred tax assets of $13,967,000 offset by an $8,368,000 charge against
earnings related to the early adoption of SFAS No. 121, "Accounting for the
Impairment of Long-lived Assets". see Note 2.

(3) The sum of the individual quarterly net income (loss) per share may not
agree with year-to-date net income (loss) per share as each period's
computation is based on the weighted average number of common shares
outstanding during the period.

(13) SUPPLEMENTAL INFORMATION RELATED TO GAS AND OIL ACTIVITIES (UNAUDITED)

The following tables set forth certain historical costs and operating
information related to the Company's gas and oil producing activities:

F-27
<PAGE> 65

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Capitalized Costs and Costs Incurred

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Capitalized costs
Proved gas and oil properties................ $ 392,192 $ 184,424 $ 212,218
Unproved gas and oil properties.............. 44,687 2,200 2,233
--------- --------- ---------
Total gas and oil properties......... 436,879 186,624 214,451
Less: Accumulated depreciation, depletion and
amortization.............................. (118,635) (105,442) (132,512)
--------- --------- ---------
Net capitalized costs................ $ 318,244 $ 81,182 $ 81,939
========= ========= =========
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Costs incurred
Proved property acquisition costs............ $194,869 $ 44 $ 256
Unproved property acquisition costs.......... 42,877 657 1,498
Exploration costs............................ 3,471 3,144 3,177
Development costs............................ 13,177 21,747 17,797
-------- ------- -------
Total................................ $254,394 $25,592 $22,728
======== ======= =======
</TABLE>

Gas and Oil Reserve Information (Unaudited)

The following summarizes the policies used by the Company in preparing the
accompanying gas and oil reserve disclosures, Standardized Measure of Discounted
Future Net Cash Flows Relating to Proved Gas and Oil Reserves and reconciliation
of such standardized measure between years.

Estimates of proved and proved developed reserves at December 31, 1996,
1995 and 1994 were principally prepared by independent petroleum consultants.
Proved reserves are estimated quantities of natural gas and crude oil which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are proved reserves that can be
recovered through existing wells with existing equipment and operating methods.
All of the Company's gas and oil reserves are located in the United States.

The standardized measure of discounted future net cash flows from
production of proved reserves was developed as follows:

1. Estimates are made of quantities of proved reserves and the future
periods during which they are expected to be produced based on year end economic
conditions.

2. The estimated future cash flows from proved reserves were determined
based on year end prices, except in those instances where fixed and determinable
price escalations are included in existing contracts.

3. The future cash flows are reduced by estimated production costs and
costs to develop and produce the proved reserves, all based on year end economic
conditions and by the estimated effect of future income taxes based on the
then-enacted tax law, the Company's tax basis in its proved

F-28
<PAGE> 66

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

gas and oil properties and the effect of net operating loss, investment tax
credit and other carryforwards.

The standardized measure of discounted future net cash flows does not
purport to present, nor should it be interpreted to present, the fair value of
the Company's gas and oil reserves. An estimate of fair value would also take
into account, among other things, the recovery of reserves not presently
classified as proved, anticipated future changes in prices and costs and a
discount factor more representative of the time value of money and the risks
inherent in reserve estimates.

Quantities of Gas and Oil Reserves (Unaudited)

The following table presents estimates of the Company's net proved and
proved developed natural gas and oil reserves (including natural gas liquids).

<TABLE>
<CAPTION>
RESERVE QUANTITIES
------------------
GAS OIL
(MMCF) (MBBLS)
------- -------
<S> <C> <C>
Proved reserves:
Estimated reserves at December 31, 1993................... 130,995 3,300
Revisions of previous estimates........................ (4,582) (288)
Purchase of minerals in place.......................... 659 19
Extensions and discoveries............................. 60,593 1,775
Sales of minerals in place............................. (128) (8)
Production............................................. (7,231) (276)
------- -------
Estimated reserves at December 31, 1994................... 180,306 4,522
Revisions of previous estimates........................ (11,071) (476)
Purchase of minerals in place.......................... -- --
Extensions and discoveries............................. 12,065 455
Sales of minerals in place............................. (7,412) (46)
Production............................................. (10,585) (387)
------- -------
Estimated reserves at December 31, 1995................... 163,303 4,068
Revisions of previous estimates........................ 10,249 (471)
Purchase of minerals in place.......................... 174,185 6,278
Extensions and discoveries............................. 28,192 2,976
Production............................................. (16,762) (545)
------- -------
Estimated reserves at December 31, 1996................... 359,167 12,306
======= =======
Proved developed reserves:
December 31, 1993...................................... 86,153 2,357
December 31, 1994...................................... 114,061 2,877
December 31, 1995...................................... 109,267 2,862
December 31, 1996...................................... 257,241 8,994
</TABLE>

F-29
<PAGE> 67

TOM BROWN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Gas and Oil Reserves
(Unaudited)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1995 1994
---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash flows.............................. $1,523,845 $308,965 $348,652
Future production costs........................ (380,453) (86,735) (90,228)
Future development costs....................... (62,124) (13,344) (17,596)
---------- -------- --------
Future net cash flows before tax............... 1,081,268 208,886 240,828
Future income taxes............................ (265,260) (31,016) (38,950)
---------- -------- --------
Future net cash flows after tax................ 816,008 177,870 201,878
Annual discount at 10%......................... (349,795) (74,523) (90,048)
---------- -------- --------
Standardized measure at discounted future net
cash flows................................... $ 466,213 $103,347 $111,830
========== ======== ========
Discounted future net cash flows before income
taxes........................................ $ 608,746 $114,586 $124,942
========== ======== ========
</TABLE>

Natural gas prices increased significantly during the fourth quarter of
1996 and subsequent to December 31, 1996 have declined significantly.
Accordingly, the discounted future net cash flows shown above would be
substantially lower if the standardized measure were calculated using prices in
effect at the end of the first quarter of 1997.

Changes in Standardized Measure of Discounted Future Net Cash Flows
(Unaudited)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Gas and oil sales, net of production costs..... $ (30,955) $(13,509) $ (9,793)
Net changes in anticipated prices and
production cost.............................. 129,492 (10,077) (29,733)
Extensions and discoveries, less related
costs........................................ 81,675 10,803 51,231
Changes in estimated future development
costs........................................ (1,985) 2,254 1,237
Previously estimated development costs
incurred..................................... 428 4,152 667
Net change in income taxes..................... (131,293) 1,872 (3,706)
Purchase of minerals in place.................. 288,643 -- 485
Sales of minerals in place..................... (37) (6,133) (157)
Accretion of discount.......................... 11,458 12,494 10,575
Revision of quantity estimates................. 16,993 (8,337) (3,515)
Changes in production rates and other.......... (1,553) (2,002) (1,808)
--------- -------- --------
Change in Standardized Measure............... $ 362,866 $ (8,483) $ 15,483
========= ======== ========
</TABLE>

F-30
<PAGE> 68

UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the Underwriters named
below, and each of such Underwriters, for whom Goldman, Sachs & Co., Howard,
Weil, Labouisse, Friedrichs Incorporated, Petrie Parkman & Co., Inc. and Salomon
Brothers Inc are acting as representatives (the "Representatives"), has
severally agreed to purchase from the Company, the respective number of shares
of Common Stock set forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
----------- ---------
<S> <C>
Goldman, Sachs & Co. ....................................... 876,000
Howard, Weil, Labouisse, Friedrichs Incorporated............ 876,000
Petrie Parkman & Co., Inc. ................................. 876,000
Salomon Brothers Inc........................................ 876,000
Credit Suisse First Boston.................................. 144,000
First Albany Corporation.................................... 72,000
Hanifen, Imhoff Inc. ....................................... 72,000
Interstate/Johnson Lane Corporation......................... 72,000
Jefferies & Company, Inc. .................................. 72,000
McDonald & Company Securities, Inc. ........................ 72,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 144,000
PaineWebber Incorporated.................................... 144,000
Raymond James & Associates, Inc. ........................... 72,000
Sanders Morris Mundy Inc. .................................. 72,000
Schroder & Co. Inc. ........................................ 144,000
Scott & Stringfellow, Inc. ................................. 72,000
Stifel, Nicolaus & Company, Incorporated.................... 72,000
Tucker Anthony Incorporated................................. 72,000
---------
Total............................................. 4,800,000
=========
</TABLE>

Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.

The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at such
price less a concession of $0.80 per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $0.10 per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the Representatives.

In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include overallotment
and stabilizing transactions, "passive" market making and purchases to cover
syndicate short positions created in connection with the offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock and syndicate
short positions involve the sale by the Underwriters of a greater number of
shares of Common Stock than they are required to purchase from the Company in
the offering. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to syndicate members or other broker-dealers in respect of
the shares of Common Stock sold in the offering for their account may be
reclaimed by the syndicate if such shares of Common Stock are repurchased by the
syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of

U-1
<PAGE> 69

the Common Stock, which may be higher than the price that might otherwise
prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.

As permitted by Rule 103 under the Exchange Act, certain Underwriters (and
selling group members, if any) that are market makers ("passive market makers")
in the Common Stock may make bids for or purchases of the Common Stock in the
Nasdaq National Market until such time, if any, when a stabilizing bid for such
securities has been made. Rule 103 generally provides that (1) a passive market
maker's net daily purchases of the Common Stock may not exceed 30% of its
average daily trading volume in such securities for the two full consecutive
calendar months (or any 60 consecutive days ending within the 10 days)
immediately preceding the filing date of the registration statement of which
this Prospectus forms a part, (2) a passive market maker may not effect
transactions or display bids for the Common Stock at a price that exceeds the
highest independent bid for the Common Stock by persons who are not passive
market makers and (3) bids made by passive market makers must be identified as
such.

The Company has granted to the Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of 700,000
additional shares of Common Stock solely to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 4,800,000 shares of Common
Stock offered.

The Company and its executive officers and Directors have agreed not to
offer to sell, sell, grant any option to purchase or otherwise dispose of any
shares of any capital stock of the Company (or securities convertible into, or
exchangeable for capital stock of the Company), directly or indirectly, for a
period of 90 days after the date of this Prospectus, without the prior written
consent of Goldman, Sachs & Co., except for grants of stock options by the
Company to its officers, directors and employees and issuance of stock upon
exercise of options held by such persons, and except for shares of capital stock
issued by the Company in connection with the acquisition of assets or capital
stock of any company engaged in the oil and gas business.

Certain of the Underwriters have previously performed various investment
banking services for the Company from time to time.

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

U-2
<PAGE> 70

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

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 9
The Company............................. 11
Use of Proceeds......................... 12
Capitalization.......................... 13
Price Range of Common Stock............. 14
Dividend Policy......................... 14
Selected Consolidated Financial Data.... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 17
Business and Properties................. 23
Management.............................. 31
Description of Capital Stock............ 33
Legal Matters........................... 36
Experts................................. 36
Available Information................... 36
Incorporation of Certain Documents by
Reference............................. 37
Certain Definitions..................... 37
Index to Financial Statements........... F-1
Underwriting............................ U-1
</TABLE>

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

4,800,000 SHARES

TOM BROWN, INC.

COMMON STOCK
(PAR VALUE $.10 PER SHARE)
------------------

[TOM BROWN, INC. LOGO]
------------------

GOLDMAN, SACHS & CO.

HOWARD, WEIL, LABOUISSE, FRIEDRICHS
INCORPORATED

PETRIE PARKMAN & CO.

SALOMON BROTHERS INC

REPRESENTATIVES OF THE UNDERWRITERS

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