General

We explore for oil and gas in Israel. At this time, our 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 as further described in The Joseph Project Summary below. 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 87.5%, which means we would receive 87.5% 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 12.5% we don't receive is a royalty reserved by the State of Israel. 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 the event commercial production is established, we will be setting aside a royalty (or equivalent net profits interest) after payout of 6% for charitable foundations we intend to establish. 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 and dedicated to finding oil and gas in Israel, and he started the process that led to the Joseph Project. During the next fourteen years he made several trips each year 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. We also reentered and deepened the Ma'anit #1 well to a depth of 15,482 feet at a cost of about $8,900,000. A summary of the status of The Joseph Project follows:

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 July 2009.

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 will have to commence drilling a well by July 2009.

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.

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 the 4th quarter of 2007. In December and January, 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

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.

Zion's current plans are to re-enter the well and then 'sidetrack' and drill directionally to a distance approximately 2,500 feet northeast of the present location by the time the well reaches its projected true vertical depth of 18,040 feet in the Permian section of the Paleozoic Age. The purpose of the well is both to appraise the apparent findings of the Ma'anit #1 in the Triassic and to test the deeper Permian horizons. The bottom hole location for the second well on the Ma'anit structure has been chosen in an attempt to maximize the chance of being in localized fracturing in the Permian section. This will be important for successful completion of the well at such an extreme depth.

Based on the results of the Ma'anit #1 well, the primary product of the planned second well, the Ma'anit-Rehoboth #2, if successful, is expected to be natural gas plus condensate. However, oil was seen on the pits while drilling the Ma'anit #1 well and some oil zones are possible.

Preparations for drilling the Ma'anit-Rehoboth #2 well are continuing. However, the timing of the commencement of drilling the well is uncertain. This is because there is currently no drilling rig in Israel capable of drilling to either the Triassic or the Permian. Zion intends to import an appropriate drilling rig into Israel. In order to justify the importation costs, Zion, together with other on-shore operators, is considering a multi-well drilling program in which Zion may commit to the drilling of both the Ma'anit-Rehoboth well and possibly the first well on the Asher-Menashe License. This program would require Zion to raise additional financing and/or sell a portion of Zion's rights in all or part of the Joseph Project. Please note there can be no certainty that Zion will be successful in raising the required additional funds.

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 offshore discovery of the Mari-B field in 2000, the construction of several natural gas-fired generating stations by the national electric company and the planned construction of several gas-fired IPPs and inside-the-fence plants by a number of large industrial users. 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. As the system is being developed we are seeing an upward trend in the gas price now in the range of $3,500 to $4,500 per billion BTU. Tenders are currently being issued by the Israeli government for the establishment of LDCs (Local Distribution Companies) in several regions of the country and the Israeli government has announced its strategic need to find additional suppliers of natural gas for the anticipated significant expansion of the market.

In the Ma'anit area, a market for approximately 2,500 mcfpd currently exists within 1,000 feet of the Ma'anit #1 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.