Summary of ZION OIL & GAS INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR UNAUDITED INTERIM FINANCIAL STATEMENTS AND THE RELATED NOTES TO THOSE STATEMENTS INCLUDED IN THIS FORM 10-Q. SOME OF OUR DISCUSSION IS FORWARD-LOOKING AND INVOLVES RISKS AND UNCERTAINTIES. FOR INFORMATION REGARDING RISK FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, REFER TO THE DISCUSSION OF RISK FACTORS IN DESCRIPTION OF BUSINESS SECTION OF OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2008 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

Forward-Looking Statements

Certain statements made in this discussion are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may materially differ from actual results.

Forward-looking statements can be identified by terminology such as "may", "should", "expects", "intends", "anticipates", "believes", "estimates", "predicts", or "continue" or the negative of these terms or other comparable terminology and include, without limitation, statements regarding:

· exploration, development, and drilling plans;

· future general and administrative expenses;

· future exploration;

· future geophysical and geological data;

· generation of additional properties, reserves;

· new prospects and drilling locations;

· future capital expenditures;

· sufficiency of working capital;

· plans regarding and ability to raise additional capital;

· drilling plans;

· timing or results of any wells;

· interpretation and results of seismic surveys or seismic data;

· permit, license and lease rights;

· participation of operating partners;

· legislative and regulatory initiatives, their potential results and effects; and

· any other statements regarding future operations, financial results, opportunities, growth, business plans, and strategies.

Because forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. We undertake no duty to update any forward-looking statements after the date of this report to conform such statements to actual results.

Overview

Zion Oil is an initial stage oil and gas exploration company with a history of almost nine years of oil and gas exploration in Israel. We have no revenues or operating income and we are classified as an "exploration stage" company. We currently hold two exploration licenses covering approximately 162,100 acres onshore in the State of Israel between Netanya in the south and Haifa in the north and one exploration permit covering approximately 165,000 acres adjacent to and to the east of Zion's Asher-Menashe license area and in the area that was formerly within Issachar's and Zebulun's ancient biblical tribal areas. The areas have been subject to a series of exploration permits and licenses that have been granted to and held by us pursuant to the Petroleum Law. The Issachar-Zebulun Permit increases our total petroleum exploration rights area to approximately 327,100 acres.

As of September 2009, utilizing a 2,000 horsepower rig and rig crews imported from Turkey, directional drilling equipment and crew from Baker Hughes INTEQ, Italy, the Company had drilled the Ma'anit-Rehoboth #2 well to approximately 17,913 feet and had conducted logging operations, using logging equipment from Baker Hughes-Baker Atlas, which logs are now being evaluated both internally and externally for recoverable hydrocarbons. The Company plans to resume operations on the Ma'anit-Rehoboth #2 well during late 2009 in order to test up to seven potentially productive zones.

Between October 24, 2008 and December 31, 2008, we raised from the Follow On Public Offering gross proceeds of $4,164,000, of which $120,000 was for debt conversion. In January 2009, we raised an additional $2,499,000, of which $120,000 was for debt conversion and approximately $6,000 was in settlement of fees due to two service providers. Gross proceeds from the offering were $6,663,000, with the Company receiving net cash proceeds of $5,402,000 after deducting for commissions (5%) and expenses (3%) to the underwriter in the amount of $514,000 and the deduction of $520,000 in deferred offering costs (related to legal, accounting, transfer agent and escrow fees and printing and marketing costs). We issued, in respect of the amounts raised, 666,343 Units (641,768 for cash and 24,575 for debt conversions). We utilized the amounts raised in the Follow On Public Offering to drill the Ma'anit-Rehoboth #2 well.

Under a rights offering to shareholders which expired on June 24, 2009, we distributed to each holder of record as of close of business on May 4, 2009, at no charge, .375 of a subscription right for each share held as of such date (three subscription rights for each eight shares). Each whole subscription right entitled the stockholder to purchase one share of common stock at the purchase price of $5.00 per share, for up to an aggregate of 4.2 million shares. Shareholders who exercised their rights in full were also entitled to purchase additional shares pursuant to an over-subscription right to the extent holders did not fully subscribe for their basic subscription rights. The Rights Offering, originally scheduled to expire on June 10, was extended to June 24, 2009. The Rights Offering was fully subscribed for $21,000,000 gross proceeds before deducting $146,000 of offering expenses, and resulted in the Company distributing all 4.2 million shares of its common stock available under the offering.

Our current work program calls for the drilling of an additional well to a minimum depth of approximately 4,500 meters (14,800 feet) on the Asher-Menashe License (the Elijah #3) by January 2010. We commenced drilling operations on the Elijah #3 well in October 2009.

However, in order to drill additional wells, we anticipate needing to raise additional funds. Accordingly, on July 29, 2009, we filed a registration statement with the SEC with respect to a second proposed rights offering to common stockholders of up to 2 million shares of our common stock. On September 15, 2009, we amended the registration statement to increase the number of shares of common stock that can be purchased in this second rights offering from 2.0 million shares to 3.6 million shares. The registration statement was declared effective on October 9, 2009. Under the terms of the rights offering, stockholders of record on the record date of October 19, 2009 of shares of our common stock have received, by way of a dividend, .23 of a subscription right for each share held as of such date (twenty-three subscription rights for each one hundred shares). Each whole subscription right entitles the holder to purchase one share of our common stock for $5.00. If fully subscribed, the Company would receive gross proceeds of approximately $18 million, before deducting approximately $165,000 in offering expenses. Proceeds from this offering, if any, would be used to further our drilling plans. No assurance can be provided that we will be able to raise any funds from this rights offering.

During the nine years between our formation and September 30, 2009, we have received net proceeds from the issuance of our equity securities of $51,603,000 (before the deduction of $3,650,000 in costs associated with the issuance of shares) and have invested in unproved oil and gas properties $25,777,000 in order to satisfy our work commitments under the terms of our permits and licenses received from the State of Israel, of which $9,494,000 was written off during 2007. Through May 31, 2009, our officers and key employees had deferred a substantial portion of their salaries and other compensation due through that time. During the nine months ended September 30, 2009, $1,712,000 was paid in cash with $130,000 being deferred until January 2010 and an additional $15,000 of previously deferred salary being paid in October 2009 upon the departure of one of the deferring officers. From time to time, most of them have exchanged portions of the deferred compensation for our equity securities, which (with four exceptions relating to employee stock options) were priced at the same price as concurrent sales of our equity securities. (Deferred compensation has been paid to our officers upon their retirement or resignation).

Going Concern Basis

Our unaudited interim financial statements for the period ended September 30, 2009 have been prepared on a going concern basis, which contemplates realization of assets and liquidation of liabilities in the ordinary course of business. Since we are in the development stage, we have limited capital resources, no revenue, and a loss from operations. Our ability to continue as a going concern is dependent upon our ability to obtain additional financing or equity capital and, ultimately, to achieving profitable operations. The uncertainty of these conditions raises substantial doubt about our ability to continue as a going concern. The unaudited financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Critical Accounting Policies

Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the reporting period.

We have identified the accounting principles which we believe are most critical to the reported financial status by considering accounting policies that involve the most complex of subjective decisions or assessment.

We follow the full-cost method of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including directly related overhead costs, are capitalized.

The Company's oil and gas operations represent an investment in an unproved property that include the drilling to a different bottom-hole location on the same property on which the Ma'anit #1 well was drilled. These costs are excluded from the amortized cost pool until proved reserves are found or until it is determined that the costs are impaired. All costs excluded are reviewed at least quarterly to determine if impairment has occurred. The amount of any impairment is charged to expense as a reserve base has not yet been established. An impairment requiring a charge to expense may be indicated through evaluation of drilling results, relinquishing drilling rights or other information.

We record an investment impairment charge when we believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments or poor or inconclusive evaluation and/or testing results could result in losses or an inability to recover the carrying value of the investment that may not be reflected in an investment's current carrying value, thereby possibly requiring an impairment charge in the future.

In June 2007, following the analysis of the results of the testing of our Ma'anit #1 well workover, evaluation of the mechanical condition of the well and the desire to optimize drilling operations on our planned Ma'anit-Rehoboth #2 well, we decided to cease operations on the Ma'anit #1 well and, as required by the Petroleum Law, formally relinquish the Ma'anit-Joseph License. As planned, the Company used the Ma'anit #1 wellbore, down to approximately 3,200 meters, as the upper part of the wellbore for the Ma'anit-Rehoboth #2 well. The Ma'anit-Rehoboth # 2 well was directionally drilled from that point to the middle and the lower Triassic, which zones have been tested and are being evaluated for the presence of recoverable hydrocarbons. The Company is currently continuing drilling down to the Permian section of the upper Paleozoic formation.

Immediately after the relinquishment of the Ma'anit-Joseph License, we filed an application with Israel's Petroleum Commissioner for a petroleum exploration license, the Joseph License, covering approximately 85,000 acres of the original Ma'anit-Joseph License including the Ma'anit structure on which the Ma'anit #1 well was drilled. This license was subsequently granted. As a result of the unsuccessful Ma'anit #1 well and formal relinquishment of the Ma'anit-Joseph License, we recorded an impairment of $9,494,000 to its unproved oil and gas properties.

Although our properties are in Israel and our principal operations are also there, we report all our transactions in United States dollars. Certain of the dollar amounts in the financial statements may represent the dollar equivalent of other currencies, including the New Israeli Shekel ("NIS"), and may not be exchangeable for dollars.

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we were to determine that it would be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase net income in the period such determination was made.

We do not participate in, nor have we created, any off-balance sheet special purpose entities or other off-balance sheet financing. In addition, we do not enter into any derivative financial instruments.

We record a liability for asset retirement obligation at fair value in the period in which it is incurred and a corresponding increase in the carrying amount of the related long lived assets.

Liquidity and Capital Resources

Our working capital (current assets minus current liabilities) was $10,711,000 at September 30, 2009 and $462,000 at December 31, 2008. The increase in working capital is attributable to the proceeds from the Rights Offering (discussed below) held in June 2009.

$23,419,000 was provided by financing activities during the nine month period ended September 30, 2009, which was from the sale of equity securities in connection with our Rights Offering and our Follow On Public Offering, net of equity sales costs. No cash was provided by financing activities for the nine month period ended September 30, 2008. Net cash used in investing activities was $10,919,000 for the nine months ended September 30, 2009 and $1,014,000 for the nine month period ended September 30, 2008, which was used for drilling and exploration costs on the licenses and permits and purchasing equipment for our wells.

On September 30, 2009, we had cash and cash equivalents in the amount of $11,022,000, compared to $1,726,000 at December 31, 2008. On November 12, 2009, we had cash and cash equivalents in the amount of $8,644,000. The increase in cash resources at September 30, 2009 is attributable to the proceeds of the closing of the rights offering which expired in June 2009.

As previously mentioned, between May 4, 2009 and June 24, 2009, we raised $21 million from a rights offering, issuing 4,200,000 shares of common stock. Net proceeds, after the deduction of $146,000 in offering expenses, were $20,854,000.

Also noted previously, between October 24, 2008 and December 31, 2008, we raised from the Follow On Public Offering $4,164,000, of which $120,000 was for debt conversion. In January 2009, we raised an additional $2,499,000 of which $120,000 was for debt conversion and approximately $6,000 was in settlement of fees due to two service providers. Gross proceeds of $6,663,000 were raised in the Follow On Public Offering, from which net cash proceeds of $5,383,000 were received by the Company after deducting for commissions (5%) and expenses (3%) to the underwriter in the amount of $514,000 and the deduction of $520,000 in deferred offering costs (related to legal, accounting, transfer agent and escrow fees and printing and marketing costs).

As of May 31, 2009, our officers and employees (collectively, the "deferring officers and employees") had voluntarily committed to defer payment of approximately $1,587,000 (adjusting for payments made during the first and second quarters of 2009) of unpaid compensation to July 1, 2009, subject to partial earlier payment in certain circumstances. The deferring officers and employees were paid these balances in June and July 2009, with the exception of $130,000 which is being deferred until January 2010 at the deferring person's request. Some of these deferring officers and employees are continuing to defer a portion of their compensation, generally at the recently reduced rate of 20% of their base salary, though that rate can be greater or less depending on the specific officer or employee involved.

We believe that our currently available cash resources will enable us to meet our operating requirements and drilling plans through July 2010. To continue our drilling plans beyond that date, we will need to raise additional funds, either from the current (second) rights offering or from other sources. No assurance can be provided, however, that we will be successful in raising any funds through the current rights offering. In the event we do not succeed in raising the necessary amounts from the rights offering, we will have to attract additional investments in our company or additional parties to join our drilling operations in order to carry out our drilling operations. There can be no guarantees that we will be successful in any of these efforts.

Results of Operations

COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008

Revenue. We have no revenue generating operations as we are still an exploration stage company.

General and administrative expenses. General and administrative expenses were $865,000 and $3,207,000 for the three and nine month periods ended September 30, 2009 compared to $865,000 and $3,130,000 for the three and nine month periods ended September 30, 2008. Legal and Professional fees were $156,000 and $623,000 for the three and nine month periods ended September 30, 2009 compared to $179,000 and $779,000 for the three and nine month periods ended September 30, 2008. The costs have been decreasing due to the Company performing more preliminary review and drafting in-house, therefore containing the external cost. Salary expenses were $368,000 and $1,768,000 for the three and nine month periods ended September 30, 2009 compared to $312,000 and $1,255,000 for the three and nine month periods ended September 30, 2008. The higher salary expenses are related to the addition of personnel during 2009 and expense recognition for option grants. Other general and administrative expenses were $341,000 and $816,000 for the three and nine month periods ended September 30, 2009 compared to $374,000 and $1,096,000 for the three and nine month periods ended September 30, 2008. The decrease is related to a targeted cost reduction effort by our staff.

Interest income, net. Interest income was $48,000 and $66,000 for the three and nine month periods ended September 30, 2009 as compared to $12,000 and $69,000 for the three and nine months ended September 30, 2008. The increase in interest income was due to higher cash balances. Interest expense for these periods was negligible.

Net Loss. Net loss was $817,000 and $3,065,000 for the three and nine month periods ended September 30, 2009 compared to $853,000 and $3,061,000 for the three and nine month periods ended September 30, 2008.