Where do thoughts arise? I have been reading books on Buddhism, Zen, meditation. All mention observing one's thoughts and let it pass. My question is where does thought arise from and do thoughts create karma by just thinking about them?

Thanks
Thoughts are created by the mind's natural activity. It's what the mind does. It's like a muscle or hair follicle. What matters is our attachment to that thought. Karma is simply energy and attachment and by attaching ourselves to the thoughts of a temporary vehicle (our body and mind), we are destined for suffering. 

If you're a fellow geek, you may get a lot out of the research from Dr. Fred Travis. He studies the brain and has done a lot of research on meditation and brain activity. He basically shows that meditation helps us rise past lower states of consciousnesses by disconnecting that "word = object" mentality. See Youtube, Brain Plasticity and Transcendental Meditation with Dr Fred Travis.

Letting go of karma is thus attaining a higher form of humanity.