9. SHAREHOLDERS' EQUITY

     In December 1999, in connection with the sale of the Subordinated Notes (see Note 6) the Company consummated the sale of 3,636,364 shares of its Common Stock at a price of $2.20 per share and Warrants to purchase up to 2,760,189 shares of the Company's Common Stock valued at $0.25 per Warrant to an investor group led by CB Capital Investors, L.P. (now kown as J.P. Morgan Partners, LLC) which included certain members of the Board of Directors. The Warrants have an exercise price of $2.20 per share and expire December 2007.

     In connection with its initial public offering, the Company recorded deferred compensation related to the March 1997 stock option agreement as additional paid-in capital and an offsetting contra-equity account. This compensation accrual is based on the difference between the option price and the fair value of Carrizo's Common Stock when the options were granted (using an estimate of the initial public offering Common Stock price as an estimate of fair value). The deferred compensation was amortized in the period in which the options vest, which resulted in $139,910 being recorded in the year ended December 31, 1999.

     The following table summarizes information for the options outstanding at December 31, 2001:

     In June of 1997, the Company established the Incentive Plan of Carrizo Oil & Gas, Inc. (the 'Incentive Plan"). The Company accounts for this plan under APB Opinion No. 25 "Accounting For Stock Issued to Employees" ("APB No. 25"), under which no compensation cost has been recognized on options which have exercise prices at least equal to the market price of the stock on the date of the grant. Had compensation cost been determined consistent with SFAS No. 123 "Accounting for Stock Based Compensation" for all options, the Company's net income (loss) and earnings per share would have been as follows:

     The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 1999, 2000 and 2001: risk free interest rate of 6.81 percent, 6.66 percent and 4.93 percent, respectively, expected dividend yield of 0 percent, expected life of 10 years and expected volatility of 70.0 percent, 70.8 percent and 80.7 percent, respectively.