Report on Status of Operations by the COO

General

Zion’s mission is to explore for oil and gas in Israel. Zion’s principal assets are petroleum rights issued by the Ministry of National Infrastructures of the State of Israel, specifically two onshore exploration licenses covering approximately 162,000 acres located between Tel-Aviv and Haifa and a preliminary exploration permit covering approximately 165,000 acres located to the east of Zion’s Asher-Menashe license area. We have named the project to explore the license areas the “Joseph Project.”

We hold 100% of the working interest in our licenses, which means we are responsible for 100% of the costs of exploration and, if established, production. Our net revenue interest is 81.5%, which means we would receive 81.5% of the gross proceeds from the sale of oil and gas produced from lands subject to the licenses (and any leases granted following a declaration of a discovery thereon), if there is any commercial production. The 18.5% we don’t receive is due to a 12.5% royalty reserved by the State of Israel and a 6.0% royalty to charitable foundations that we established. Other than its 12.5% royalty, the government has no right of participation in any portion of our project. No royalty would be payable to any landowner with respect to production from our license areas as the State of Israel owns all the mineral rights. In addition, we intend to establish an employee incentive pool of up to 1.5%. This means that our effective net revenue interest after payout will be no less than 80%, subject to our maintaining a 100% working interest in our licenses.

Background

In 1983, during a visit to Israel, John M. Brown (our founder and chairman) became inspired by Scripture (1 Kings 8:41-43) and dedicated to finding oil and gas in Israel, and he started the process that led to the Joseph Project. During the next seventeen years he made numerous trips to Israel, hired oil and gas consultants in Israel and Texas, met with Israeli government officials, made direct investments with local exploration companies, and assisted Israeli exploration companies in raising money for oil and gas exploration in Israel. This activity led Mr. Brown to form Zion Oil & Gas, Inc. in April 2000 in order to receive the award of a small 28,800 acre onshore petroleum license (the “Ma’anit License”) from the Israeli government. Upon its formation, Mr. Brown and a group of 25 persons who had assisted him in the initial stages of the Joseph Project contributed to Zion all of the technical, economic, legal and financial data they had accumulated over the years relating to oil and gas exploration in Israel.

Following the award of our first petroleum right in May 2000, the Israeli government has given us access to most of its data with respect to previous exploration in the areas of the several petroleum rights we received over the years, including the Joseph and Asher Permits and the Ma’anit, Ma’anit-Joseph and Asher-Menashe Licenses. The data received from the government has included geologic reports, seismic records and profiles, drilling reports, well files, gravity surveys, geochemical surveys and regional maps. We also gathered information concerning prior and ongoing geological, geophysical and drilling activity relevant to our activities from a variety of publicly accessible sources. Since receiving our first license in 2000, we ourselves conducted extensive geological and geophysical activities, including the acquisition of 33 kilometers of new seismic data, the reprocessing of about 330 kilometers of seismic data and the interpretation of over 500 kilometers of seismic data, at a cost of about $600,000.

Joseph Project Summary

Licenses

Zion currently holds two Petroleum Exploration Licenses – the Asher-Menashe License along the Israeli coastal plain and on the Mt. Carmel range, between Caesarea and Haifa and the Joseph License located along the Israel coastal plain between Netanya on the south to the southern border of the Asher-Menashe License.

The 79,000 acre Asher-Menashe License began on June 10th, 2007 and is for a three-year term, extendable to a maximum of seven years. Zion currently holds a 100% Working Interest and an 87.5% Net Revenue Interest in the License. By the terms of the license, Zion must commence the drilling of a well by January 1, 2010. During October 2009, the Company commenced the drilling of the Elijah #3 well within the Asher-Menashe License. During early February 2010, drilling on this well was temporarily suspended and the rig moved back to the Ma’anit-Rehoboth #2 well for completion/testing operations.

The 83,000 acre Joseph License covers much of the land that Zion previously held under the Ma’anit-Joseph License, which was relinquished on June 22, 2007 with the expiration of its seven-year term. The Joseph License began on October 11th, 2007 and has an initial term of three years, extendable to a maximum of seven years. Zion’s Working and Net Revenue Interests in the Joseph License are the same as its interests in the Asher-Menashe License. Under the Joseph License, Zion must commence drilling a well by July 2009. In May 2009, Zion commenced drilling on the Ma’anit-Rehoboth #2 well. As of September 2009, Zion drilled the Ma’anit-Rehoboth #2 well to a final depth of 17,913 feet (5,460 meters). In December 2009, Zion brought in a small workover rig to conduct swabbing operations on the Ma’anit-Rehoboth #2 well but the workover rig was released shortly after. In February 2010, AMEs 2000 horsepower rig moved back to the Ma’anit-Rehoboth #2 well to complete the testing of the zones of interest that were identified while drilling the well.

In the event of a discovery, Zion will be entitled to convert the relevant portions of its licenses to 30-year production leases, extendable to 50 years.

Permit

In August 2009, Zion was awarded a preliminary petroleum exploration permit with priority rights on approximately 165,000 acres onshore Israel. The permit area is adjacent to and to the east of Zion’s Asher-Menashe license area and is in the area that was formerly within Issachar’s and Zebulun’s ancient biblical tribal areas. Consequently, Zion has named the area the ‘Issachar-Zebulun Permit Area’.

The Issachar-Zebulun Permit extends Zion’s petroleum rights from the Mediterranean at Caesarea across the Carmel Mountains to Megiddo and through to the Jordan River immediately south of the Sea of Galilee. It increases Zion’s total petroleum exploration rights area to approximately 327,000 acres.

Geology

Currently, Zion is developing four leads and one prospect in its license areas. Three of the leads are located in the Asher-Menashe License area and one lead and the prospect are in the Joseph License area. The map shows the outline of our Asher-Menashe and Joseph Licenses and the general location of the prospect and leads we have developed. In January 2008, the company acquired over 50 kilometers of new seismic for the expressed purpose of upgrading the Nahal Me’arot and Ramot Menashe leads into firm prospects.

From studies conducted by Zion, the five areas under investigation, shown on the map, appear to have a total potentially productive acreage in excess of 20,000 acres.

The prospective geological horizons in the areas are in the Middle to Lower Triassic and the Upper Permian section of the Paleozoic, during which geological periods all of the prospective areas were situated in what is believed to have been a high energy depositional environment.

Based on its analysis, Zion believes that there are prospective hydrocarbon bearing intervals at depths between 12,500 feet and 18,000 feet and that, if successful, the primary hydrocarbons will be natural gas and condensate, with the possibility of oil.

Drilling

Ma’anit #1

In 2005, Zion drilled the Ma’anit #1 well on the Ma’anit structure in the Joseph License area. Drilling breaks and shows of hydrocarbons were recorded from 12,000 to the total depth of 15,500 feet. Due to mechanical problems that prevented the company from isolating highly conductive water bearing zones from the tighter hydrocarbon bearing formations, the shows were never successfully tested and the well was abandoned in June 2007.

The Ma’anit structure encompasses 7,400 acres and, compared to any other well in Northern Israel, the top of Triassic is over 1,600 feet higher, i.e. closer to the surface.

Ma’anit-Rehoboth #2

In May 2009, Zion commenced drilling of the Ma’anit-Rehoboth #2 well. In September 2009, our drilling reached a depth of 5,460 meters (17,913 feet), we ceased drilling and sought to test the seven zones that warrant completion testing, as well as carry out further analysis on the geology, using the drilling and logging data obtained.

In December 2009, Zion brought in a small workover rig to conduct swabbing operations on the Ma’anit-Rehoboth #2 well and retrieved a small quantity of crude oil that we believe came from the open hole section below the last casing point at 15,830 feet (4,825 meters). However, as we did not have zonal isolation in the open hole section of the well, the workover rig was released and we began evaluating the next steps needed in order to test the zones of interest individually.

In February 2010, due to a stuck drill string at the Elijah #3 well, a decision was made to relocate the AME 2,000 horsepower rig back to the Ma’anit-Rehoboth #2 well to continue testing the zones of interest. While we are not planning to do any further drilling at this time at the Ma’anit-Rehoboth #2 well, the added horsepower that this rig provides gives us greater operational flexibility to perform certain completions/testing work that may not be possible with other, smaller workover rigs.

In March 2010, we completed some of the initial down-hole preparatory work that was needed before we can production test the first geologic interval. This preparatory work included milling out the plug used to isolate the open-hole section of the well and validating that the cement bond quality between the casing and rock formation is adequate for testing.

The next phase includes perforating the zone of interest and testing the well for hydrocarbon flow. To ‘perforate’, we use shaped explosive charges that are run into the well on a perforating ‘gun’ – a long hollow cylinder. The charges are spaced out equally along this cylinder, across the zone of interest, and detonated from the surface. The energy from the exploding charges penetrates (or perforates) the casing and into the rock formation.

This action creates a passageway for any hydrocarbons in the rock to find their way to the wellbore. The pressure drop from the higher pressure rock to the lower pressure wellbore allows any hydrocarbons present to flow from the rock to the well. We plan to use sophisticated equipment from Schlumberger Oilfield Services to measure pressures and flow rates, both inside and outside the well, all critical data needed to assess a well’s long term production capabilities.

Elijah # 3

In October 2009, Zion moved the AME 2,000 horsepower rig to a new site to commence drilling the Elijah #3 well. The rig is owned by Aladdin Middle East Ltd., an independent oil and gas exploration and production company with offices in Wichita, Kansas and operational headquarters in Ankara, Turkey.

By February 2010, the Elijah #3 well was drilled to a depth of approximately 10,938 feet (3,334 meters) when the drill string became stuck within the Asher Volcanics section of the hole. After recovering a significant portion of the stuck drill pipe, progress in recovering the remainder of the pipe slowed and the decision was made to temporarily suspend drilling operations pending further analysis of the situation and to relocate the AME 2,000 horsepower rig back to the Ma’anit-Rehoboth #2 well to continue testing the zones of interest.

We are currently assessing various options that should enable us to proceed with the ‘next steps’ for the Elijah #3.

The Issachar-Zebulun Permit Area

In January 2010, Zion and the Geophysical Institute of Israel (GII) have signed an Agreement for GII, on behalf of Zion, to acquire approximately 30 kilometers of seismic data in Zion’s Issachar-Zebulun Permit area.

In February 2010, a pre-site assessment field trip was conducted last month by Zion’s geological team and members of GII. The purpose of the site visit was to assess the general area where seismic data is to be collected and identify potential natural barriers (e.g. waterways) or other impediments (man-made structures) that could impact the seismic acquisition process.

With the pre-site assessment completed, detailed planning can now commence for the actual field work. The timing for the field work has been pushed back by a number of weeks, as the seismic crew for GII is currently out of Israel and not scheduled to return until mid-summer 2010.
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Due to the depth and slow bit penetration rates, dry hole drilling costs per well are estimated to be between $7 million and $9.5 million. Completed well costs are estimated to be between $9 million and $11 million.

Markets

The natural gas market is developing in Israel following the various offshore discoveries, the construction of several natural gas-fired generating stations by the national electric company, the planned construction of several gas-fired IPPs and inside-the-fence plants by a number of large industrial users and most recently the offshore Tamar natural gas discovery by Noble Energy in January of 2009. The Israeli government is encouraging the power and industrial sectors to convert to natural gas and, jointly with the private sector, has completed most of the offshore underwater natural gas pipeline infrastructure intended to connect the newly discovered offshore gas fields to the markets in Israel; construction of the first phases of the onshore pipeline system has also been completed. It is believed that the electrical generating sector, together with the industrial, commercial, and future residential sectors when developed, should be able to absorb any gas discovery within a reasonable period.

In the Ma’anit area, a market for approximately 2,500 mcfpd currently exists within 1,000 feet of the Ma’anit #2 wellsite. In conversation, representatives of the Israel Natural Gas Authority stated that a high-pressure transportation line from offshore line’s existing landfall at Hadera to Ma’anit is expected to be completed by the end of 2009. The cross-country, high-pressure gas transportation line currently in construction is expected to pass within 3,000 feet of the well sometime between 2011 and 2013. Entry into either of those pipelines would open the entire country to gas marketing from Zion’s license areas.

Because Israel imports all of its crude oil needs and the markets for crude oil in Israel are the two oil refineries, no special marketing strategy need be adopted with regard to any oil that Zion may discover. Zion believes that it will have a ready local market for its oil at market prices, and will have the option of exporting to the international market.