may be
significantly different than estimated. Material revisions to reserve estimates
may be made depending on the results of drilling, testing, and rates of production.
You should not assume that the present value of future
net cash flows is the current market value of the Company’s estimated proved reserves.
In accordance with SEC requirements, the Company based the estimated discounted
future net cash flows from proved reserves on market prices and costs on the date
of the estimate. The Company’s rate of recording depreciation,
depletion and amortization expense for proved properties is dependent on the Company’s
estimate of proved reserves. If these reserve estimates decline, the rate at which
the Company records these expenses will increase. The
Company’s full cost ceiling test also depends on the Company’s estimate of proved
reserves. If these reserve estimates decline, the Company may be subjected to
a full cost ceiling write-down. Cash and Cash Equivalents
Cash and cash equivalents include highly liquid
investments with maturities of three months or less when purchased. Revenue
Recognition and Natural Gas Imbalances The Company
follows the sales method of accounting for revenue recognition and natural gas
imbalances, which recognizes over and under lifts of natural gas when sold, to
the extent sufficient natural gas reserves or balancing agreements are in place.
Natural gas sales volumes are not significantly different from the Company’s share
of production. Financing Costs Net
long-term debt financing costs, of $1.6 million and $5.9 million are included
in other assets as of December 31, 2004 and 2005, respectively, and are being
amortized using the effective yield method over the term of the loans (through
September 2007 for the First Lien Credit Facility and through July 2010 for the
Second Lien Credit Facility (the First Lien Facility and the Second Lien Facility
together the “Credit Facilities”). Supplemental Cash
Flow Information The Statement of Cash Flows for
the year ended December 31, 2003 does not include the acquisition of $1.2 million
of seismic data through the issuance of common stock, and the $0.2 million non-cash
cumulative effect recorded in connection with the implementation of Statement
of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement
Obligations.” The Statement of Cash Flows for the year ended December 31, 2004
does not include the net exercise of $0.7 million of warrants and the conversion
of $7.5 million of preferred stock into common stock and the $0.3 million relinquishment
of interests in certain leases to RMG in lieu of principal payments on a note
payable. The Statement of Cash Flows for the year ended December 31, 2005 does
not include interest paid-in-kind of $1.3 million, the net exercise of 80,000
warrants for common stock and the acquisition of $2.0 million of oil and gas properties
in exchange for the Company’s common stock. Financial
Instruments The Company's recorded financial instruments
consist of cash, receivables, payables and long-term debt. The carrying amount
of cash, receivables and payables approximates fair value because of the short-term
nature of these items. The carrying amounts of the Credit Facilities approximate
fair value as these borrowings bear interest at variable interest rates. Stock-Based
Compensation In June of 1997, the Company established
the Incentive Plan of Carrizo Oil & Gas, Inc. (the “Incentive Plan”). In October
1995, the FASB issued SFAS No. 123, “Accounting for Stock-Based Compensation,”
which requires the Company to record stock-based compensation at fair value. In
December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
148, “Accounting for Stock Based Compensation - Transition and Disclosure, an
amendment of SFAS No. 123.” The Company has adopted the disclosure requirements
of SFAS No. 148 and has elected to record employee compensation expense utilizing
the intrinsic value method permitted under Accounting Principles Board (APB) Opinion
No. 25, “Accounting for Stock Issued to Employees. The Company accounts for its
employees’ stock-based compensation plan under APB Opinion No. 25 and its related
interpretations. Accordingly, any deferred compensation expense would be recorded
for stock options based on the excess of the market value of | 
