PART I

ITEM 1. AND ITEM 2. BUSINESS AND PROPERTIES

GENERAL

Carrizo Oil & Gas, Inc. ("Carrizo," the "Company" or "We") is an independent energy company engaged in the exploration, development and production of natural gas and oil. Our current operations are focused in proven, producing natural gas and oil geologic trends along the onshore Gulf Coast in Texas and Louisiana, primarily in the Miocene, Wilcox, Frio and Vicksburg trends. Our other interests include properties in East Texas, a coalbed methane investment in the Rocky Mountains and, recently, the Barnett Shale trend in North Texas. Additionally, in 2003 we obtained licenses to explore in the U.K. North Sea.

We have traditionally grown our production through our 3-D seismic-driven exploratory drilling program. Our compound production growth rate for the period December 31, 1999 through December 31, 2003 on an annualized basis was 15%. From our inception through December 31, 2003, we participated in the drilling of 295 wells (89.9 net) with a success rate of approximately 68% in our onshore Gulf Coast core area. Exploratory wells accounted for 97% of the total wells we drilled. Our total proved reserves as of December 31, 2003 were an estimated 70.4 Bcfe with a PV-10 Value of $116.0 million. During 2003, we added 15.1 Bcfe to proved reserves and produced a record 7.5 Bcfe. We have historically financed the majority of our drilling activity through internal cash flow generated primarily from oil and natural gas production sales revenue.

As a main component of our business strategy, we have acquired licenses for over 8,700 square miles of 3-D seismic data for processing and evaluation. Historically, we either (1) sought to acquire seismic permits from landowners that included options to lease the acreage prior to conducting proprietary surveys or (2) participated in 3-D group shoots in which we typically sought to obtain leases or farm-ins rather than lease options. Since 2001, we have been able to increase the size of our 3-D seismic holdings in our onshore Gulf Coast core area by approximately 75% to over 6,650 square miles, in large part by taking advantage of very favorable pricing available for nonproprietary data from libraries of seismic companies.

One of our primary strengths is the experience of our management and technical staff in the development, processing and analysis of this 3-D seismic data to generate and drill natural gas and oil prospects. Our technical and operating employees have an average of over 20 years of industry experience, in many cases with major and large independent oil and gas companies, including Shell Oil, ARCO, Conoco, Vastar Resources, Pennzoil and Tenneco. Analyzing and reprocessing our 3-D seismic database, our highly qualified technical staff is continually adding to and refining our substantial inventory of drilling locations.

We believe that our utilization of large-scale 3-D seismic surveys and related technology allows us to create and maintain a multiyear inventory of high-quality exploration prospects. As of December 31, 2003, we had 98,557 gross acres in Texas and Louisiana under lease or lease option, almost all of which is covered by 3-D seismic data. On this leased acreage, we have identified over 120 potential exploratory drilling locations, including over 45 additional extension opportunities, depending on the success of our initial drilling activities on those locations. The vast majority of our 3-D seismic data covers productive geological trends in our onshore Gulf Coast core area, where we have made 192 completions as a result of our utilization and evaluation of this data.

Most of our drilling targets prior to 2000 were shallow (from 4,000 to 7,000 feet), normally pressured reservoirs that generally involved moderate cost (typically $0.3 million to $0.4 million per completed well) and risk. Since then, the depth of many of the wells that we have drilled, as well as our current drilling prospects, are deeper, over-pressured targets with greater economic potential but generally higher cost (typically $1.0 million to $4.0 million per completed well) and risk. We seek to sell a portion of these deeper prospects to reduce our exploration risk and financial exposure while retaining significant upside potential. More recently, we have begun to retain larger percentages of, and increased our exposure to, higher cost, higher potential wells. We expect to use a portion of the proceeds from our recently completed offering to increase our percentage of and exposure to these wells.

We operate the majority of our projects through the exploratory phase. As of December 31, 2003, we operated 94 producing oil and gas wells, which accounted for 55% of the onshore Gulf Coast producing wells in which we had an interest.

During 2001, through our wholly-owned subsidiary, CCBM, Inc. ("CCBM"), we acquired 50% of the working interests held by Rocky Mountain Gas, Inc. ("RMG") in approximately 107,000 net mineral acres prospective for coalbed methane located in the Powder River Basin in Wyoming and Montana. Subsequently, we participated in the acquisition and/or drilling of 77 gross wells (21 net) before jointly contributing with RMG a majority of our coalbed methane property interests and operations into a newly, formed company, Pinnacle Gas Resources, Inc. ("Pinnacle"). In exchange for the assets contributed, CCBM and RMG each received a 37.5% common stock ownership in Pinnacle and options to purchase additional common stock, or on a fully diluted basis, CCBM and RMG

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