In March of 2000, the FASB issued Interpretation No. 44 "Accounting for Certain Transactions involving Stock Compensation - an interpretation of APB No. 25" ("the Interpretation") which was effective July 1, 2000 and clarifies the application of APB No. 25 for certain issues associated with the issuance or subsequent modifications of stock compensation. For certain modifications, including stock option repricings made subsequent to December 15, 1998, the Interpretation requires that variable plan accounting be applied to those modified awards prospectively from July 1, 2000. This requires that the change in the intrinsic value of the modified awards be recognized as compensation expense. On February 17, 2000, Carrizo repriced certain employee and director stock options covering 348,500 shares of stock with a weighted average exercise price of $9.13 to a new exercise price of $2.25 through the cancellation of existing options and issuance of new options at current market prices. Subsequent to the adoption of the Interpretation, the Company is required to record the effects of any changes in its stock price over the remaining vesting period through February 2010 on the corresponding intrinsic value of the repriced options in its results of operations as compensation expense until the repriced options either are exercised or expire. Stock option compensation expense (benefit) relating to the
repriced options for the years ended December 31, 2000 and 2001 amounted to $651,741 and $(557,566), respectively.

10. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

     On January 1, 1999 the Company adopted the American Institute of Certified Public Accountants Statement of Position ("SOP") 98-5, which provides guidance on the accounting for start up costs. SOP 98-5 requires that start up costs be expensed as incurred. The cumulative effect of this change in accounting principle to write off unamortized organization costs totaled $77,731 in 1999.

11. RELATED-PARTY TRANSACTIONS

     In September 1998 and March 1999 certain members of the Board of Directors guaranteed a portion of the Company's outstanding indebtedness, provided a bridge loan of $2 million which was repaid in December 1999, and purchased a portion of the Subordinated Notes payable.

     During the year ended December 31, 1999, the Company incurred drilling costs in the amount of $130,742 with R&B Falcon Corporation. Messrs. Loyd, Webster, Hamilton and Chavkin were members of the Board of Directors of both the Company and R&B Falcon Corporation ("R&B"). In addition, Mr. Loyd was Chairman of the Board, President and Chief Executive Officer of R&B and Mr. Webster was the Vice Chairman of R&B. It is management's opinion that these transactions were performed at prevailing market rates. There were no transactions with R&B during the year ended December 31, 2000.

     During the year ended December 31, 2001, the Company incurred drilling costs in the amount of $6.3 million with Grey Wolf Drilling. Mr. Webster is the Chairman of the Board of Carrizo and a member of the Board of Directors of Grey Wolf Drilling. It is management's opinion that these transactions with Grey Wolf were performed at prevailing market rates.

     During the year ended 2001, the Company participated in the drilling of two wells that were operated by a subsidiary of Brigham Exploration Company. Mr. Webster is a member of the Board of Directors of Brigham Exploration Company ("Brigham"). The terms of the operating agreement between Carrizo and Brigham are consistent with standard industry practices.

     See Notes 6 and 13 for a discussion of the December 1999 and February 2002 financings with parties that included members of the Company's Board of Directors.

12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITY

     In November 2001, the Company had no-cost collars with an affiliate of Enron Corp., designated as hedges, covering 2,553,000 MMBtu of gas production from December 2001 through December 2002. The value of these derivatives at that time was $759,000. Because of Enron's financial condition, the Company concluded that the derivatives contracts were no longer effective and thus did not qualify for hedge accounting treatment. As required by SFAS No. 133, the value of these derivative instruments as of November 2001 ($759,000) was recorded in accumulated other comprehensive income and will be reclassified into earnings over the original term of the derivative instruments. An allowance for the related asset totaling $759,000, net of tax of $409,000, was charged to other expense. At December 31, 2001, $706,000, net of tax of $380,000, remained in accumulated other comprehensive income related to the deferred gains on these derivatives.

     Total oil purchased and sold under hedging arrangements during 1999, 2000 and 2001 were 45,200 Bbls, 87,900 Bbls and 18,000 Bbls, respectively. Total natural gas purchased and sold under hedging arrangements in 1999, 2000 and 2001 were 2,050,000 MMBtu, 1,590,000 MMBtu and 3,087,000 MMBtu, respectively. The net gains and (losses) realized by the Company under such hedging arrangements were $(412,000) and $(1,537,700) and $2,015,000 for 1999, 2000 and 2001, respectively, and are included in oil and gas revenues.