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 in the Barnett Shale area in North Texas and along the onshore Gulf Coast area in Texas and Louisiana, primarily in the Miocene, Wilcox, Frio and Vicksburg trends. Our other interests include properties in the U.K.North Sea and acreage in shale plays in the Fayetteville in Arkansas, Barnett/Woodford in West Texas/New Mexico, Floyd/Neal in Mississippi, the western New Albany in Kentucky/Illinois and the Marcellus in Pennsylvania/New York. We also have coalbed methane investments in the Rocky Mountains, largely through our minority interest in Pinnacle Gas Resources, Inc.

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, 2003 through December 31, 2007 on an annualized basis was 23.6%. From our inception through December 31, 2007, we participated in the drilling of 604 wells (268.5 net) with an apparent success rate of approximately 70.8% in our onshore Gulf Coast area and an apparent success rate of 100% in the Barnett Shale area in North Texas (also called “Barnett Shale area” or “Ft. Worth Barnett Shale area”). Exploratory wells accounted for 79% of the total wells we drilled. Our total proved reserves as of December 31, 2007 were an estimated 347.6 Bcfe with a pre-tax PV-10 value of $840.0 million. During 2007, we added a record 155.1 Bcfe to proved reserves and produced a record 17.5 Bcfe. We finance the majority of our drilling activity through internal cash flow generated primarily from oil and natural gasproduction sales revenue, proceeds from the issuance of equity securities and borrowings under our credit facilities.

As a main component of our business strategy, we have acquired licenses for over 12,385 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. Our 3-D seismic holdings in our onshore Gulf Coast area have remained relatively unchanged in recent years with approximately 8,396 square miles. Since 2003, we have also grown our 3-D seismic holdings in the Barnett Shale area to over 491 square miles.

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, Ocean Energy, ARCO, Conoco, Burlington Resources, Unocal, Pennzoil and Tenneco. Analyzing and reprocessing our 3-D seismic database, our highly qualified technical staff is continually adding to and refiningour 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, 2007, we had 198,930 net acres in Texas and Louisiana under lease or lease option (all references to acres under lease in this Form 10-K also include lease option acres unless otherwise indicated), including 85,429 net acres in our Barnett Shale area, 50,312 net acres in our onshore Gulf Coast area, predominantly all covered by 3-D seismic data, and 58,297 net acres in our West Texas Woodford/Barnett Shale area. We have identified: (1) over 817 potential exploratory and development horizontal drilling locations on our leased acreage in the Ft. Worth Barnett Shale area and (2) 136 potential exploratory drilling locations in our onshore Gulf Coast area, comprisedof 69 leased exploratory drillsites, 26 of which are field extension wells based on initial drilling activities, and 67 seismicallydefined prospects on which we are pursuing acreage. The vast majority of our 3-D seismic data covers productive geological trends in our onshore Gulf Coast area, where we have made 269 completions as a result of our utilization and evaluation of thisdata.

In our onshore Gulf Coast area, 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.