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.

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 had an initial three-year term that ran from June 10, 2007 through June 9, 2010, and has now been extended for an additional one-year period ending on June 9, 2011. At the option of the Israeli Petroleum Commissioner, the Asher- Menashe License may be extended for additional one-year periods up to 2014. Zion currently holds a 100% Working Interest and an 87.5% Net Revenue Interest in the License.

Under the terms of the Asher-Menashe License, as extended, Zion is required (i) to sign an agreement with an appropriate geological services provider to acquire at least 30 kilometers of 2D seismic by August 1, 2010, (ii) to commence the seismic survey by October 1, 2010, (iii) to process and integrate the results of the new seismic survey with existing seismic lines and file a report with the Israeli Petroleum Commissioner by February 1, 2011, (iv) to identify a new drilling prospect in the Asher-Menashe License area by April 1, 2011 and (v) to sign a drilling contract to drill to the Permian geological layer by May 1, 2011.

On May 20, 2010, the Company entered into an agreement with the Geophysical Institute of Israel (“GII”) to acquire approximately 32 kilometers of field seismic in the Asher-Menashe License area, thereby satisfying the first condition under the Company’s Asher-Menashe License. On June 20, 2010, GII commenced field acquisition of seismic data in the Company’s Asher-Menashe License area, thereby satisfying the second condition under the Company’s Asher-Menashe License.

The 83,000 acre Joseph License had an initial three-year term that ran from October 10, 2007 through October 10, 2010, and has now been extended for an additional one-year period ending October 10, 2011. At the option of the Israeli Petroleum Commissioner, the Joseph License may be extended for additional one-year periods up to 2014. Zion’s Working and Net Revenue Interests in the Joseph License are the same as its interests in the Asher-Menashe License.

Under the terms of the Joseph License, as extended, Zion is required (i) to submit to the Israeli Petroleum Commissioner a report as to the production testing of Zion’s Ma’anit-Rehoboth #2 well by October 1, 2010 and (ii) to start drilling, by January 1, 2011, a well to the Permian geological layer.

The Company is in the process of preparing for submission to the Israeli Petroleum Commissioner the production reports relating to the Ma’anit-Rehoboth #2 well and has previously disclosed its plans to drill the Ma’anit-Joseph #3 well to test the Permian geological formation, both of which are located within the Joseph License area. The Company anticipates commencing drilling operations in August 2010 for the Ma’anit-Joseph #3 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.

See the “Drilling” section below for details regarding drilling and exploration operations under our license and permit areas.

Geology

In June 2010, Zion concluded an acquisition and re-acquisition of seismic data on its Asher-Menashe License and its Issachar/Zebulun Permit and it is anticipated that, by October 2010, the collected data will be processed and interpreted for use in Zion’s geologic model of the area. Zion plans to begin drilling the Ma’anit-Joseph #3 well in August 2010 and is seismically evaluating its license and permit areas.

Testing of Zion’s Ma’anit-Rehoboth #2 well (MR-2) has shown that the Ma’anit structure produced small amounts of three types of hydrocarbon material and gas from Triassic carbonates. After swabbing operations, the MR-2 well produced Late Cretaceous black oil. During drilling the MR-2 well, small amounts of light oil were observed. In addition, the Ma’anit-Rehoboth #1 well recovered bitumen (Glance Pitch). All hydrocarbon samples from the MR-1 well were recovered from Triassic carbonates. The Late Cretaceous oil recovered in the MR-2 well came as a surprise because, up until now, oils recovered from northern Israel wells were Triassic (or older) in age and in Triassic reservoirs. At present, the origin and relationships of the Glance Pitch, heavy black oil, and light oil are being evaluated to determine their origin and relationships to the Triassic reservoirs.

The Elijah-3 is temporarily suspended at a depth of 3,300 m due to drilling problems within the Asher Volcanics. Because the quality of the current seismic data is not sufficient to determine the thickness of the volcanics, Zion is re-acquiring three seismic lines near the well. These new data lines may help us evaluate the thickness of the Asher Volcanics in the Elijah-3.

Preparation for the drilling of the Ma’anit-Joseph #3 well (MJ-3) is underway. The necessary permits are being obtained, the site is being prepared and it is planned that Zion will begin drilling the MJ-3 in August 2010.

Seismic interpretation of the Issachar/Zebulun Permit is underway. Interpretation of existing re-processed seismic data will be integrated with the acquisition of a new 30 km seismic line in the Jordan Valley, located on the easternmost part of the permit area. The Jordan Valley is productive in the Dead Sea area and our exploration of the Jordan Valley may extend this production north.

In addition, Zion is re-evaluating its seismic data in the western Joseph and Asher-Menashe license areas. This has resulted from the discovery of Late Cretaceous heavy black oil in the MR-2. This discovery opens a new play in Northern Israel. Because Late Cretaceous oil source rocks are at or near the surface, they are immature in Israel (with the exception of the Jordan Valley, Dead Sea area). The most likely path for the oil observed in the MR-2 was migration from deeper offshore carbonates. The present seismic data suggests that faults in the Caesarea area are large and regional enough to have provided migration paths for this oil. Seismic interpretation of this area may provide hydrocarbon traps.

Seismic interpretation of the data acquired in 2009 has downgraded the Ramot Menashe Lead and enhanced the Nahal Me’arot Prospect (Elijah-3).

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.

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 several zones that warranted completion testing. We also carried out further analysis on the geology, using the drilling and logging data obtained during drilling.

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 steps needed to test the zones of interest individually.

In February 2010, we began completion/testing of the Ma’anit-Rehoboth #2 well and by April 2010, we isolated and individually tested three separate intervals. The first test interval was a 20 meter zone selected by our geologists as one of several that were deemed to be potentially hydrocarbon bearing.

This first test consisted of three separate flow periods and two separate shut-in periods. Reservoir pressure ‘draw down’ and fluid/gas flow rates were monitored during the flow periods and reservoir pressure ‘build up’ was measured during the shut-in periods. The flow periods were used to determine the well’s instantaneous flow rates whereas the pressure data was used, in part, to assess long-term productivity and reservoir size. Operationally, the first test was executed very well although the results were disappointing in that no clear evidence of hydrocarbons were detected.

Following this first test, we conducted two additional tests, one in the open hole section of the well and one in the shallower, cased hole section of the well. The open hole test was conducted first and was performed in the deepest geologic zone of interest. Following the conclusion of this test, we moved uphole and performed a third test on a separate interval, this time in a cased hole section of the well. In each case, the test procedure consisted of two separate flow and shut-in periods in which the geologic interval was evaluated for productivity and reservoir pressure.

Results for the second and third test intervals were also disappointing and indicate that commercial quantities of hydrocarbons are not present in the Ma’anit-Rehoboth #2 well.

In light of this apparent outcome from what were considered to be the zones of greatest potential, we decided to forego further production testing and began plans to temporarily suspend this well. It is our expectation that this well may have further utility as a potential offset well to the next well drilled which will target a completely different geologic formation in Permian aged rocks. Preparations for this next well, the Ma’anit Joseph #3 well, are well underway, with drilling expected to commence in August 2010.

Elijah # 3

In October 2009, Zion commenced drilling the Elijah #3 well. 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.

On June 30, 2010, GII successfully concluded field acquisition of approximately 25 km of new 2-dimensional seismic data within the Elijah #3 project area. This data will help us to resolve certain questions regarding the geology of the area surrounding this well.

As with the seismic data collected in the Issachar-Zebulun permit area, this data will also need to be processed and subsequently interpreted. In this case, however, we are not looking for new prospects but instead looking for greater clarity in the geology that underlies our Elijah-3 well.

Processing of the Elijah #3 seismic data is now underway and is being done by both GII and a geophysical consultant in the United States.

The Issachar-Zebulun Permit Area

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

On June 16, 2010, field acquisition of new 2-dimensional seismic in the Jordan River Valley section of our Issachar-Zebulun permit area was successfully concluded. Approximately 30 km of new seismic data was collected on Zion’s behalf by the Geophysical Institute of Israel (GII).

This data continues to be processed by a geophysical consultant in the United States, and now also GII, into usable graphic imagery that can then be interpreted by our geologists in their investigation for future drilling prospects. The processing and interpretation of this data is expected to be finalized by October 2010.

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 close proximity to our proposed new well, the Ma’anit Joseph #3 well site. 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.