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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL OVERVIEW

The Company began operations in September 1993 and initially focused on the acquisition of producing properties. As a result of the increasing availability of economic onshore 3-D seismic surveys, the Company began to obtain 3-D seismic data and options to lease substantial acreage in 1995 and began to drill its 3-D based prospects in 1996. The Company drilled 39, 25 and 20 gross wells in the Gulf Coast region in 2000, 2001 and 2002 respectively. The Company has budgeted to drill 27 gross wells (10.7 net) in 2003 in the Gulf Coast region; however, the actual number of wells drilled will vary depending upon various factors, including the availability and cost of drilling rigs, land and industry partner issues, Company cash flow, success of drilling programs, weather delays and other factors. If the Company drills the number of wells it has budgeted for 2003, depreciation, depletion and amortization are expected to increase and oil and gas operating expenses are expected to increase over levels incurred in 2002. The Company has typically retained the majority of its interests in shallow, normally pressured prospects and sold a portion of its interests in deeper, over-pressured prospects.

The Company has primarily grown through the internal development of properties within its exploration project areas, although the Company acquired properties with existing production in the Camp Hill Project in late 1993, the Encinitas Project in early 1995 and the La Rosa Project in 1996. The Company made these acquisitions through the use of limited partnerships with Carrizo or Carrizo Production, Inc. as the general partner. In addition, in November 1998 the Company acquired assets in Wharton County, Texas in the Jones Branch project area for approximately $3.0 million.

During the second quarter of 2001, the Company formed CCBM, Inc. ("CCBM") as a wholly-owned subsidiary. CCBM was formed to acquire interests in certain oil and gas leases in Wyoming and Montana in areas prospective for coalbed methane and develop such interests. The Company also acquired a 1,940 gross acre coalbed methane property in Wyoming, the "Bobcat Project", for $0.7 million in cash and common stock in July 2002. CCBM plans to spend up to $5.0 million for drilling costs on these leases through December 2003, 50% of which would be spent pursuant to an obligation to fund $2.5 million of drilling costs on behalf of RMG, from whom the interests in the leases were acquired. Through December 31, 2002, CCBM has satisfied $1.5 million of its drilling obligations on behalf of RMG. CCBM has drilled or acquired 75 gross wells (28 net) and incurred total drilling costs of $3.0 million through December 31, 2002. These wells typically take up to 18 months to evaluate and determine whether or not they are successful. CCBM has budgeted to drill up to 50 gross (18 net) wells in 2003. The coalbed methane wells include 17 wells acquired as a result of the Bobcat acquisition.

The Company uses the full-cost method of accounting for its oil and gas properties. Under this method, all acquisition, exploration and development costs, including any general and administrative costs that are directly attributable to the Company's acquisition, exploration and development activities, are capitalized in a "full-cost pool" as incurred. The Company records depletion of its full-cost pool using the unit-of-production method. To the extent that such capitalized costs in the full-cost pool (net of depreciation, depletion and amortization and related deferred taxes) exceed the present value (using a 10 discount rate) of estimated future net after-tax cash flows from proved oil and gas reserves, such excess costs are charged to operations. Based on oil and gas prices in effect on December 31, 2001, the unamortized cost of oil and gas properties exceeded the cost center ceiling. As permitted by full cost accounting rules, improvements in pricing subsequent to December 31, 2001 removed the necessity to record a write-down. Using prices in effect on December 31, 2001 the write-down would have been approximately $0.7 million. Because of the volatility of oil and gas prices, no assurance can be given that the Company will not experience a write-down in future periods. Once incurred, a write-down of oil and gas properties is not reversible at a later date.

RESULTS OF OPERATIONS

Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001

Oil and natural gas revenues for 2002 increased 2% to $26.8 million from $26.2 million in 2001. Production volumes for natural gas in 2002 increased 8% to 4,801 MMcf from 4,432 MMcf in 2001. Realized average natural gas prices decreased 31% to $3.50 per Mcf in 2002 from $5.04 per Mcf in 2001. Production volumes for oil in 2002 increased 151% to 401 MBbls from 160 MBbls in 2001. The increase in oil production was due primarily to the commencement of production at the Delta Farms #1, Riverdale #2, Staubach #1 and Burkhart #1R wells offset by the natural decline in production of other older wells. The increase in natural gas production was due primarily to the commencement of production at the Delta Farms #1, Riverdale #2, Staubach #1, Burkhart #1R and Pauline Huebner A-382 #1 wells offset by the natural decline in production at other wells, primarily from the initial Matagorda County Project wells. Oil and natural gas revenues include the impact of hedging activities as discussed below under "Volatility of Oil and Gas Prices".

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