In the first quarter of 2004, the Company completed the public offering of 6,485,000 shares of common stock at $7.00 per share generating net proceeds of approximately $23.4 million. The offering included 3,655,500 newly issued shares offered by the Company and 2,829,500 shares offered by certain selling shareholders. The Company did not receive any proceeds from the shares sold by the selling shareholders. The Company used part of the net proceeds from this offering to accelerate its drilling program and to retain larger interests in portions of its drilling prospects that the Company otherwise would sell down or for which the Company would seek joint partners and for general corporate purposes. Initially, the Company used a portion of the net proceeds to repay the $7 million outstanding principal amount under its revolving credit facility and to complete an $8.2 million Barnett Shale acquisition on February 27, 2004.

In June 1997, the Company established the Incentive Plan of Carrizo Oil & Gas, Inc. (the “Incentive Plan”), which authorizes the granting of stock options and stock awards to directors, employees and independent contractors. The Company may grant awards of up to 2,800,000 shares under the Incentive Plan and has granted options covering 2,051,667 shares through December 31, 2006, net of forfeitures. Through that date, 1,000,434 options had been exercised. During 2006, a total of 277,436 restricted stock awards (net of forfeitures) were granted which are subject to pro rata vesting over a one to three-year period. These awards had a grant date fair value totaling $8.4 million that were recorded as deferred compensation and which are being amortized as compensation expense over the respective vesting periods of the awards. The Company incurred $2.9 million, $2.5 million and $1.1 million related to stock-based compensation during the years ended December 31, 2006, 2005 and 2004, respectively.

The Company issued 1,729,175, 2,089,973, and 7,570,109 shares of common stock during the years ended December 31, 2006, 2005 and 2004, respectively. The shares issued during the year ended December 31, 2006 consisted of 1,350,000 shares issued in the 2006 private placement, 2,000 shares issued in connection with the acquisition of certain oil and gas properties, 277,436 shares issued as restricted stock awards granted under the incentive plan and 101,800 shares issued through the exercise of options granted under the Incentive Plan. In addition, during 2006 the Company repurchased 2,061 shares related to tax withholding obligations associated with the vesting of restricted stock. The shares issued during the year ended December 31, 2005 consisted of 1,200,000 shares issued in the 2005 private placement, 127,068 shares issued in connection with the acquisition of certain oil and gas properties, 304,669 shares issued through the exercise of warrants, 87,585 shares issued as restricted stock awards granted under the Incentive Plan and 370,651 shares issued through the exercise of 381,098 options granted under the Incentive Plan. Of these options exercised in 2005, 34,169 were exercised on a costless basis resulting in 23,722 shares being issued. The shares issued during the year ended December 31, 2004 consisted of 3,655,500 shares issued through the 2004 public offering, 2,159,627 shares issued through the exercise of warrants, 1,318,124 shares issued through the conversion of Series B Preferred Stock and 436,858 shares issued through the exercise of options granted under the Company’s Incentive Plan.

10.      RELATED-PARTY TRANSACTIONS

Due to the limited capital available in the first half of 2006 to fund all of the Company’s ongoing lease acquisition efforts in the Barnett Shale and other shale plays, the Company elected to enter into several lease option agreements with a number of third parties and with Steven A. Webster, the Company’s chairman (collectively, the “counterparties”). The terms and conditions of the leasing arrangement (agreement terms are described below) with Mr. Webster are consistent with the leasing arrangements the Company has entered into with the other third parties. These leasing arrangements provide the Company the option to purchase leases from the counterparties, over an option period, generally 90 days, for the counterparties’ original cost of the leases plus an option fee. Strategically, these leasing arrangements have allowed the Company to temporarily control important acreage positions during periods that the Company has lacked sufficient capital to directly acquire such oil and gas leases.

Since May 2006, the Company has acquired certain oil and gas leases through the aforementioned lease option arrangement with Mr. Webster. The acquisitions were made pursuant to a land option agreement between Mr. Webster and the Company dated January 25, 2006. The terms and conditions of this leasing arrangement with Mr. Webster are consistent with leasing arrangements the Company has entered into with the other third parties. Under the option agreement, Mr. Webster agreed to acquire oil and gas leases in areas where the Company is actively leasing or that it deems prospective. On or before the 90th day from the date that Mr. Webster acquires any lease in these areas, the Company has the option to acquire these leases from Mr. Webster for 110% of Mr. Webster’s purchase price or, on the 90th day, pay a non-refundable 10% option extension fee to add a second 90-day option period. On or before the end of this second 90-day option period, the Company has the option to pay Mr. Webster 110% of his original purchase price to acquire the lease. If, at the end of the second option period, the Company has not exercised its purchase option, Mr. Webster will retain ownership of the oil and gas leases. In addition to the cash payments described above, the Company will assign a one-half of one percent of 8/8ths overriding royalty interest (proportionally reduced to the actual net interest in any given lease acquired) on any lease it acquires from Mr. Webster in the first 90-day option period and a one percent of 8/8ths overriding royalty interest (also proportionally reduced) on any lease acquired from Mr. Webster in the second 90-day option period. As of December 31, 2006, Mr. Webster has acquired oil and gas leases for approximately $4.2 million, the Company paid approximately $4.4 million for leases from Mr. Webster and the Company has made option extension payments of approximately $48,000 to Mr. Webster. There are currently no outstanding lease options under our arrangement with Mr. Webster. The Company may continue to use these arrangements as a strategic alternative.

The Company’s Chairman of the Board, Mr. Steve Webster serves as member on the Board of Directors for Grey Wolf Drilling, Basic Energy Services, Inc., Brigham Exploration, Quantum Geophysical, Inc. and Goodrich Petroleum. The