<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 20-F

[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934

                                       OR


[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

                   For the fiscal year ended December 31, 2001
                                       OR

[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

             For the transition period from __________ to __________

                         Commission file number 0-29538

                            PARADIGM GEOPHYSICAL LTD.

    (Exact name of Registrant as specified in its charter and translation of
                        Registrant's name into English)


                                     ISRAEL

                 (Jurisdiction of incorporation or organization)

   GAV-YAM CENTER NO. 3, 9 SHENKAR ST., P.O. BOX 2061, HERZLIA B 46120 ISRAEL
                     (Address of principal executive office)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

                                      NONE

                                (Title of Class)

Securities registered or to be registered pursuant to Section 12(g) of the Act.

ORDINARY SHARES, NOMINAL VALUE NIS 0.5 PER SHARE
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act

NONE

(Title of Class)

Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:

As of December 31, 2001, the Registrant had outstanding 14,891,902 Ordinary
Shares, nominal value NIS 0.5 per share.

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2)has been subject to such filing
requirements for the past 90 days.

                  [X]  Yes           [ ]   No

Indicate by check mark which financial statement item the Registrant has elected
to follow:


                  [ ]Item 17      [X]   Item 18
<PAGE>
PART I

         Unless the context otherwise requires, all references in this annual
report to "Paradigm," "we," "our" and "us" refer to Paradigm Geophysical Ltd.
and its consolidated subsidiaries. References to "dollars" or $ are to United
States dollars.

                               RECENT DEVELOPMENTS

         On May 22, 2002, we announced a definitive merger agreement pursuant to
which we would be acquired by Paradigm Geotechnology B.V.(formerly Talamantes
B.V.) in a merger transaction. Paradigm Geotechnology B.V., or Paradigm BV, was
formed to invest in energy related technology and service firms and, as of the
merger, will be indirectly owned by a non-U.S. limited partnership being
organized by affiliates of Fox Paine & Company, LLC, a San Francisco-based
private equity firm. Under the terms of the merger agreement, each of our
outstanding ordinary shares, nominal value NIS 0.5 per share, other than those
shares then held by us, our subsidiaries, Paradigm BV and Paradigm BV's
subsidiaries, will be converted automatically into the right to receive $5.15 in
cash, without interest. In addition, each unexercised option (other than
warrants) to purchase our shares then outstanding, all of which have vested as a
result of the merger, will be canceled in exchange for a cash payment equal to
the excess, if any, of $5.15 over the exercise price of such option, multiplied
by the number of shares subject to such option, less any applicable withholding
taxes. If the proposed transaction is consummated, we will cease to be a
publicly traded company.

         On June 13, 2002, the holders of 98.2% of our shares present (in person
or by proxy) at a Special Meeting of Shareholders voted in favor of the merger
agreement, the merger and the other transactions contemplated thereby.

         The proposed merger remains subject to the satisfaction or waiver of a
number of conditions, including:


         -   the absence of any legal order prohibiting or restraining the
             merger;

         -   receipt of certain governmental consents, and the expiration
             of the 70-day statutory waiting period under the Israeli
             Companies Law, which will expire on or about August 1, 2002;

         -   absence of the occurrence of any event since May 21, 2002 that
             would reasonably be likely to have a Material Adverse Effect
             (as defined in the merger agreement) on Paradigm;


         -   the performance of each party's obligations under the merger
             agreement and the accuracy of each party's representations and
             warranties contained in the merger agreement; and


         -   other closing conditions specified in the merger agreement.

         A description of the material terms of the merger and the other
transactions contemplated by the merger agreement, as well as a complete copy of
the merger agreement, is contained in our proxy statement dated May 31, 2002,
which has been filed with the Securities and Exchange Commission as Exhibit 99.1
to our Form 6-K dated May 31, 2002.

ITEM 1.        IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2.        OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.        KEY INFORMATION

A.  SELECTED FINANCIAL DATA

         We have derived the selected consolidated income statement data and the
consolidated balance sheet data presented below as of and for the years ended
December 31, 1997, 1998, 1999, 2000 and 2001 from our audited consolidated
financial statements. Our historical consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States and are presented in dollars.
<PAGE>

         The information presented below is qualified by our audited
consolidated financial statements and notes set forth in Item 18 of this annual
report. You should read the selected financial data in conjunction with our
consolidated financial statements and notes thereto and Item 5. "Operating and
Financial Review and Prospects."

CONSOLIDATED INCOME STATEMENT DATA


<TABLE>
<CAPTION>
                                                              1997         1998           1999          2000          2001
                                                              ----         ----           ----          ----          ----
                                                                          (IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                                                         <C>           <C>           <C>           <C>            <C>
REVENUES:

   Products                                                 $ 19,979      $ 38,074      $ 43,023      $ 46,390       $ 50,765
   Services                                                    4,886         7,288        11,483        16,908         22,001
                                                            --------      --------      --------      --------       --------
 TOTAL REVENUES                                             $ 24,865      $ 45,362      $ 54,506      $ 63,298       $ 72,766
                                                            --------      --------      --------      --------       --------
 YEAR -TO- YEAR % CHANGE                                       114.3%         82.4%         20.2%         16.1%          14.9%

OPERATING EXPENSES:

   Cost of products                                            5,070         8,559        12,418        10,816         10,592
   Cost of services                                            1,849         3,107         5,804         6,352          9,793
   Research and development                                    4,728         7,660         9,306        11,215         12,847
   Selling and marketing, general and administrative           9,744        15,822        20,638        23,518         26,850
   Depreciation                                                2,012         2,298         3,865         4,746          5,589
   Amortization of intangible assets                           1,185         2,347         3,064         3,360          3,214
   Non recurring charges                                      10,676            --         2,705            --             --
   Restructuring charges                                          --            --            --            --            540
                                                            --------      --------      --------      --------       --------
      TOTAL OPERATING EXPENSES                              $ 35,264      $ 39,793      $ 57,800      $ 60,007       $ 69,425
                                                            --------      --------      --------      --------       --------

  OPERATING INCOME (LOSS)                                    (10,399)        5,569        (3,294)        3,291          3,341
   Financial expenses, net                                      (446)         (661)         (484)         (552)          (642)
                                                            --------      --------      --------      --------       --------
  INCOME (LOSS) BEFORE TAXES ON INCOME                       (10,845)        4,908        (3,778)        2,739          2,699
   Taxes on income                                                --           356            --           380            569
                                                            --------      --------      --------      --------       --------
  NET INCOME(LOSS)                                          $(10,845)     $  4,552      $ (3,778)     $  2,359       $  2,130
                                                            --------      --------      --------      --------       --------


    BASIC NET EARNINGS (LOSS)  PER SHARE                    $  (4.66)     $   0.66      $  (0.31)     $   0.17       $   0.14
    NUMBER OF SHARES USED IN COMPUTATION OF BASIC
    EARNINGS(LOSS) PER SHARE                                   2,328         6,850        12,205        13,504         14,817

    DILUTED NET EARNINGS(LOSS) PER SHARE                    $  (4.66)     $   0.49      $  (0.31)     $   0.17       $   0.14
    NUMBER OF SHARES USED IN COMPUTATION OF  DILUTED
    EARNINGS(LOSS) PER SHARE                                   2,328         9,306        12,205        13,789         15,124
</TABLE>

<PAGE>

SELECTED CONSOLIDATED  BALANCE SHEET DATA

<TABLE>
<CAPTION>

                                                                                   AS OF DECEMBER 31
                                                                                  ------------------
                                                                1997           1998          1999          2000          2001
                                                               ------         ------        ------         ------      ------
                                                                                     (IN THOUSANDS)
<S>                                                            <C>            <C>           <C>            <C>         <C>
  CASH AND CASH  EQUIVALENTS                                   $8,229         $3,463        $5,457         $8,647      $9,814
  SHORT-TERM BANK DEPOSIT                                          $0             $0            $0             $0      $1,941
  WORKING CAPITAL(DEFICIENCY)                                  ($692)         $9,154       $15,346        $10,860     $17,237
  TOTAL ASSETS                                                $47,883        $46,135       $66,165        $79,761     $99,186
  CURRENT DEBT                                                 $1,288         $2,228        $5,073         $8,186      $7,038
  NOTE PAYABLE                                                 $9,500             $0            $0             $0      $6,318
  BRIDGE LOAN  PAYABLE                                        $12,000             $0            $0             $0          $0
  LONG TERM DEBTS(EXCLUDING CURRENT MATURITIES)                  $483            $39        $4,665         $1,483      $5,099
  CONVERTIBLE LOAN                                                 $0             $0            $0             $0      $8,000
  TOTAL  SHAREHOLDERS'  EQUITY                                 $2,640        $26,697       $35,468        $46,469     $49,075

CASH FLOW  DATA

  CASH  PROVIDED BY (USED IN) OPERATING ACTIVITIES             $1,633       ($1,773)      ($1,089)        $12,628      $2,854
  CASH  PROVIDED BY (USED IN) INVESTING ACTIVITIES          ($11,594)       ($4,516)     ($15,401)       ($9,442)   ($10,991)
  CASH  PROVIDED BY (USED IN) FINANCING ACTIVITIES            $11,077         $1,674       $19,068         ($126)      $9,597


</TABLE>

<PAGE>


B.       CAPITALIZATION AND INDEBTEDNESS

         Not applicable

C.       REASONS FOR THE OFFER AND USE OF PROCEEDS

         Not applicable

D.       RISK FACTORS

         We believe that the occurrence of any or some combination of the
following factors could have a material adverse effect on our business,
financial condition and results of operations.

GLOBAL ECONOMIC AND MARKET CONDITIONS, PARTICULARLY THOSE THAT IMPACT THE OIL
SERVICES INDUSTRY, MAY REDUCE DEMAND FOR OUR PRODUCTS AND SERVICES AND ADVERSELY
AFFECT OUR BUSINESS

         Developments in the oil services industry, such as the impact of
general global economic conditions, volatility of the oil price, instability in
demand for oil and oil products and continuing industry consolidation, has
materially affected our customers and could continue to materially affect our
existing or potential customers. The impact of these conditions on the oil
services industry has reduced demand for our products and services, and the
revenue growth rates that we have achieved in recent years. As a result, we may
be unable to effectively market and sell our products and services.

         The September 11, 2001 terrorist attacks on the United States and the
declared objective to fight global terrorism have had, and we expect will
continue for some time to have, a negative effect on the global economy. These
events and any similar acts of violence or war may negatively affect the oil
services industry, our revenue and our profitability and could also result in a
disruption of our business or the businesses of our customers.

IF THE PROPOSED MERGER IS NOT CONSUMMATED, OUR RESULTS OF OPERATIONS AND
FINANCIAL CONDITION WILL BE MATERIALLY ADVERSELY AFFECTED.

         We have incurred substantial legal, accounting and other costs in
connection with the proposed merger. Additionally, our senior management has
expended significant time and attention on the merger which has diverted their
time and attention away from our day-to-day operations. If the proposed merger
is not consummated, our results of operations and financial condition for the
six-month and nine-month periods ending June 30, 2002, and September 30, 2002,
respectively, and for the fiscal year ending December 31, 2002, will be
materially adversely affected. Additionally, in the event the proposed merger is
not consummated for certain reasons, we will be obligated to pay to Paradigm
B.V. a termination fee of $3.0 million plus up to $1.5 million of the documented
out-of-pocket expenses incurred by Paradigm B.V. and its affiliates in
connection with the merger agreement and the transactions contemplated thereby.
Such payment, if required, would materially adversely affect our results of
operations and financial condition.

IF ACTUAL EXPENDITURES BY OUR CUSTOMERS VARY FROM THEIR ANTICIPATED
EXPENDITURES, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAY BE
MATERIALLY ADVERSELY AFFECTED.

         Our business and operations are substantially dependent upon the
condition of the global oil and gas industry. The oil and gas industry is highly
cyclical and has been subject to significant economic fluctuations at various
times as a result of numerous factors affecting the supply of and demand for oil
and natural gas, including the level of capital expenditures of the oil and gas
industry, the level of drilling activity, the level of production activity,
market prices of oil and gas, worldwide economic conditions,

<PAGE>
interest rates and the cost of capital, environmental regulations, tax policies,
the political stability and political risk exposure in some of the oil producing
countries, political requirements of national governments, coordination by the
Organization of Petroleum Exporting Countries or, OPEC, market behavior of oil
producers who are not members of OPEC, cost of producing oil and natural gas,
and technological advances.

         The budgets of our customers, who are principally oil and gas
exploration and production companies and companies that provide data processing
services to these companies, vary with the state of each customer's financial
condition, the opportunities identified by it for the use of its resources, and
its expectations of future short- and medium-term financial performance. While
surveys are published that are indicative of expected budget expenditures of oil
and gas exploration and production companies over the course of the budget year,
there is a significant variance in actual expenditures by individual companies,
sub-segments of the oil and gas industry and the industry as a whole.

         In addition, fluctuations in the international price of oil, and
regional gas prices, may also affect the budgeted capital expenditures of our
customers. Consequently, there may be significant variations by our customers in
adjusting their level of expenditure to correspond to the short- and medium-term
outlook of the impact of international oil prices and/or regional gas prices on
their performance.

         If actual expenditures by our customers vary from their anticipated
expenditures, whether as a result of fluctuations in the international price of
oil, or otherwise, our business, results of operations and financial condition
may be materially adversely affected.

IF WE ARE UNABLE TO COMPETE EFFECTIVELY IN THE MARKETPLACE, WE MAY SUFFER A
DECREASE IN MARKET SHARE, REVENUES AND PROFITABILITY.

         Competition in our industry is intense and we expect competition to
increase. Some of our competitors are divisions or subsidiaries of companies
that have greater financial and other resources, greater name and brand
recognition, and more extensive and diversified operations than we do. We also
face competition from a number of smaller companies that provide products that
serve niche portions of our markets and from smaller service bureaus providing
seismic data processing and reservoir analysis services. Finally, many oil
exploration companies have their own in-house capabilities for seismic data
processing and analysis. Some of these in-house service groups are customers for
both our software solutions and our data processing services, as a supplement
for their internal capacity.

         Current and potential competitors have established, and may establish
in the future, cooperative relationships among themselves or with third parties
to increase their ability to address the needs of prospective customers.
Accordingly, new competitors or alliances among competitors may emerge and
acquire market share. As a result, our competitors may be able to adapt to new
or emerging technologies and changes in customer requirements, and our larger
competitors may be able to devote greater resources to the promotion and sale of
their products. We cannot guarantee that we will be able to compete effectively
against current or future competitors or that competitive pressures will not
harm our financial results.

OUR SUCCESS DEPENDS ON OUR ABILITY TO CONTINUALLY ENHANCE AND MARKET
TECHNOLOGICALLY SOPHISTICATED PRODUCTS AND SERVICES.

         We believe that our future success will largely depend upon our ability
to continue to enhance our existing products and services and to successfully
develop, market and introduce new products and services to meet the requirements
of our customers. We are currently devoting significant resources to refining
and expanding the range of products and services offered by us to our customers.

         We cannot assure you that we will be successful in developing and
marketing new solutions that respond adequately to technological change. Our
present or future products and services may not satisfy

<PAGE>
the evolving needs of the oil and gas industry. In addition, if we are unable to
anticipate or respond adequately to the demands of our customers, due to
resource, technological or other constraints, our business and results of
operations could be materially adversely affected.

WE MAY SEEK TO EXPAND OUR BUSINESS THROUGH ACQUISITIONS THAT COULD RESULT IN
DIVERSION OF RESOURCES AND ADDITIONAL EXPENSES, WHICH COULD DISRUPT OUR BUSINESS
AND HARM OUR FINANCIAL CONDITION.

         We have pursued, and may continue to pursue, acquisitions of business,
products, technologies and service providers, or the establishment of joint
venture arrangements, that could expand our business. For example, in April
2001, we acquired the GeoScene(R) product line from Oilfield Systems Limited. In
addition, in May 2001, we acquired Sysdrill(R) Limited, a provider of software
solutions for drilling engineering and well operations.

         The negotiation of potential acquisitions or joint ventures and the
integration of an acquired or jointly developed business, technology, product or
services offering could cause diversion of management's attention from the
day-to-day operation of our business. Future acquisitions could result in:

      -   potentially dilutive issuances of equity securities;

      -   the incurrence of debt and contingent liabilities;

      -   amortization of acquired technologies and other intangibles;

      -   research and development write-offs;

      -   restructuring costs; and

      -   other acquisition-related expenses.



         We may also acquire other companies where we believe that we can
acquire new products or services or otherwise enhance our market position or
strategic strengths. However, there can be no assurance that suitable
acquisition candidates can be found, that potential acquisitions can be
consummated on terms favorable to us or that the acquisitions made will
significantly enhance our products or strengthen our competitive position.

         Acquired businesses or joint ventures may not be successfully
integrated with our operations or with our technology. In addition, we may not
receive the intended benefits of the acquisition or joint venture. Potential
acquisitions or joint ventures may not materialize. Due diligence expenses and
expenses involved in negotiations would have a negative impact on our operating
results. Potential acquisitions or joint ventures that ultimately are not
consummated could have a long term negative impact as we may be unable to obtain
products, technologies or services that are necessary to achieve our strategic
growth objectives.

IF WE FAIL TO ATTRACT AND RETAIN SKILLED EMPLOYEES, WE WILL NOT BE ABLE TO
IMPLEMENT OUR BUSINESS STRATEGY OR OPERATE OUR BUSINESS EFFECTIVELY.

         Our business requires highly qualified personnel for research and
development, sales and marketing, software programming, technical customer
support, seismic data processing and analysis services, and reservoir studies.
Our success depends in large part on our ability to attract, train, motivate and
retain highly skilled scientists and technology professionals, including
geologists, geophysicists, petrophysicists, drilling and reservoir engineers,
mathematicians and software programmers. Qualified personnel in these areas are
in demand and are likely to remain a limited resource for the foreseeable
future.

         Our ability to expand our business is dependent upon our success in
recruiting such personnel and our ability to manage and coordinate our worldwide
development program, customer support and services delivery. We may be unable to
continue to attract and retain the skilled employees we require and any
inability to do so could adversely impact our ability to manage and complete our
existing projects and to compete for new customer contracts. In addition, the
resources required to attract and retain such personnel

<PAGE>
may adversely affect our operating margins. The failure to attract and retain
qualified personnel may have a material adverse effect on our business, results
of operations and financial condition.

         Our success also depends, to a certain extent, upon the continued
active participation of a relatively small group of senior management personnel
who have been with us, or with the companies we have acquired, for many years.
The loss of the services of some or all of these employees could have a material
adverse effect on our business.

DUE TO THE FIXED NATURE OF CERTAIN OF OUR COSTS, ANY SIGNIFICANT DECLINE IN OUR
REVENUES COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL CONDITION.

     Our revenues and operating results may vary from quarter to quarter,
     including as a result of the following:

       -  the size, timing and efficient execution of significant
          service projects;

       -  the size and timing of orders for software products;

       -  increased competition;

       -  timing of software product releases;

       -  delays in execution and acceptance of significant service
          projects by customers;

       -  changes in expenses;

       -  changes in our strategy;

       -  personnel changes;

       -  foreign currency exchange rates;

       -  factors impacting oil and gas industry expenditure decisions;

       -  risks of regional military conflict, threats and acts of
          domestic and international terror, and civil unrest;

       -  changes in clients' budgeted and/or spending decisions; and

       -  country, region specific and general economic and political risk
          factors.


         Due to the relatively fixed nature of certain of our costs, a decline
of revenue in any period would result in lower profitability for that period.

BECAUSE SUBSTANTIALLY ALL OF OUR REVENUES ARE GENERATED INTERNATIONALLY, OUR
RESULTS OF OPERATIONS COULD SUFFER IF WE ARE UNABLE TO MANAGE INTERNATIONAL
OPERATIONS EFFECTIVELY.

         During 2001, approximately 55% of our revenues were generated from
customers in North America, Europe, the Middle East and Africa with the balance
derived from customers in the former Soviet Union, the Asia-Pacific region,
China and Latin America. Our strategy is to continue to broaden our existing
customer base in the different regions in which we operate and to expand into
new international markets as the opportunities arise. The expansion of our
operations and entry into new markets, primarily in emerging economies, will
require significant management attention and financial resources, and will
entail an increased relative exposure to political and commercial risk (as
discussed below). We currently maintain development facilities in Israel, the
United States, Australia, Russia, France, the United Kingdom and Canada, and we
have sales and operations offices and service centers in North America, Europe,
the former Soviet Union, the Middle East, Africa, Latin America, China and the
Asia-Pacific region.

         In addition, conducting our business increasingly with, and expanding
our operating locations into emerging markets subjects us to certain risks
including:


       -  legal and cultural differences in the conduct of business;

       -  infringement of intellectual property rights and copyrights;

       -  longer payment cycles than is customary in developed economies;

       -  increased risk of collection;

       -  burdens that may be imposed by tariffs and other trade barriers;
<PAGE>

       -  staffing and managing international foreign operations;

       -  burden of compliance with laws and regulations of a wide variety of
          countries ;

       -  immigration regulations that limit our ability to deploy our
          employees;

       -  economic collapse or instability;

       -  political instability; and


       -  potentially adverse tax consequences.

         One or more of these factors could have a material adverse effect on
our international operations.

FLUCTUATIONS IN EXCHANGE RATES MAY ADVERSELY AFFECT OUR BUSINESS.

         Although most of our revenues are denominated in dollars, a significant
portion of our operating costs are incurred outside the United States. As a
result, fluctuations in exchange rates between the currencies in which these
costs are incurred and the U.S. dollar may have a material adverse effect on our
results of operations and financial condition. The cost of our operations in the
different countries in which we operate, as expressed in U.S. dollars, could be
adversely affected by the extent to which any increase in the operating costs in
the local currency of those countries is not offset (or is offset with a time
delay) by a devaluation of the currencies in those countries in relation to the
U.S. dollar. As a result of this differential, from time to time we experience
increases in the costs of our operations in the countries in which we operate,
as expressed in U.S. dollars, which have had and could have in the future a
material adverse effect on our results of operations and financial condition.

         The cost of our operations in Israel, as expressed in dollars, could be
adversely affected by the extent to which any increase in the rate of inflation
in Israel is not offset (or is offset with a time delay) by a devaluation of the
Israeli currency in relation to the dollar.

         Where we believe it appropriate we limit these exposures by entering
into specific hedging transactions. However, hedging transactions may not enable
us to avoid exchange-related losses, and our business may be harmed by exchange
rate fluctuations.

         The imposition of exchange or price controls or other restrictions on
the conversion of foreign currencies could also have a material adverse effect
on our business, results of operations and financial condition.

IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY OR BECOME
SUBJECT TO A CLAIM OF INFRINGEMENT, OUR BUSINESS MAY BE MATERIALLY ADVERSELY
AFFECTED.

         Our success and ability to compete depends substantially upon our
internally developed and acquired technologies. Any misappropriation of our
technology could seriously harm our business. We regard a substantial portion of
our software products and systems as proprietary and rely on a combination of
statutory and common law copyright, trademark and trade secret laws, customer
licensing agreements, employee and third party non-disclosure agreements and
other methods to protect our proprietary rights.

          Our software is licensed for use and is not sold, thereby enabling us
to protect our intellectual property in that software through the use of license
manager mechanisms to prevent or inhibit unauthorized use. These mechanisms can
be violated by sophisticated users. Our license agreement for the software
includes clauses that protect our intellectual property rights. Further, we
generally enter into confidentiality agreements with our employees, consultants,
and our software and systems development partners, and limit access to and
distribution of proprietary information.
<PAGE>

         Despite our efforts to protect our intellectual property rights,
unauthorized parties may attempt to bypass our license manager, copy or
otherwise obtain our software or technology or develop software with the same
functionality. We cannot be certain that the steps we have taken will prevent
misappropriation, particularly in those foreign countries where the laws may not
protect our intellectual property to the same extent as the laws of the United
States. If we have to resort to legal proceedings to enforce our intellectual
property rights, the proceedings may be burdensome and expensive and may involve
a high degree of risk. These events could seriously harm our business.

         Although we have not received any notices from third parties alleging
infringement claims, third parties could claim that our current or future
products or technology infringe their proprietary rights. Any such claim of
infringement by a third party could cause us to incur substantial costs
defending against the claim, even if the claim is invalid, and could distract
our management from our business. Furthermore, a party making such a claim could
secure a judgment that requires us to pay substantial damages. A judgment could
also include an injunction or court order that could prevent us from selling the
software product concerned. Any of these events could seriously harm our
business.

WE CURRENTLY PARTICIPATE IN OR ARE ENTITLED TO RECEIVE TAX BENEFITS FROM
GOVERNMENT PROGRAMS. THESE PROGRAMS REQUIRE US TO MEET CERTAIN CONDITIONS AND
THESE PROGRAMS AND BENEFITS MAY BE TERMINATED OR REDUCED IN THE FUTURE.

         We are entitled to receive benefits from certain Israeli government
investment incentive programs and tax benefits. For example, we are entitled to
receive tax benefits under Israeli law for capital investments that are
designated as "Approved Enterprises." To maintain our eligibility for these
programs and tax benefits, we must continue to meet certain conditions. If we
fail to comply with these conditions, the tax benefits received could be
cancelled and/or we could be required to refund tax benefits already received.
Additionally, some of these programs and the related tax benefits are available
to us for a limited number of years, and these benefits expire from time to
time.

         Any of the following could have a material effect on our business,
     financial condition and result of operations:


       -  some programs in which we participate may be discontinued;

       -  we may be unable to meet the requirements in order to continue to
          qualify for some programs;

       -  these programs and tax benefits may be unavailable in the future,
          either at all, or at their current levels;

       -  upon expiration of a particular benefit, we may not be eligible to
          participate in a new program or qualify for a new tax benefit that
          would offset the loss of the expiring tax benefit; and

       -  we may be required to refund previously accredited tax benefits
          received if we are found to be in violation of the stipulated
          conditions.

         For more information, see Item 10. "Additional Information - Taxation".

FROM TIME TO TIME, OUR SOFTWARE MAY CONTAIN UNDETECTED ERRORS, PRODUCT DEFECTS
OR SOFTWARE ERRORS. THIS MAY CAUSE US TO EXPERIENCE A DECREASE IN MARKET
ACCEPTANCE AND USE OF OUR SOFTWARE PRODUCTS AND WE MAY BE SUBJECT TO WARRANTY
CLAIMS AND OTHER LIABILITY.

         Our software products are highly complex and may, from time to time,
contain design defects or software errors that may be difficult to detect and
correct. This may cause delays in software product releases or damage customer
satisfaction and may have a material adverse effect on our business, results of
operations and financial condition.

         Since our products are generally used by our customers to perform
important business functions, design defects, software errors, misuse of our
products, incorrect data from external sources or other potential problems
within or out of our control may arise from the use of our products, and may
result in financial or other damages to our customers. Our failure or inability
to meet a customer's expectations in

<PAGE>
providing products or performing data processing and interpretation projects
using our products may result in the termination of our relationship with that
customer or could give rise to claims against us. Although we have agreements
with our customers that contain provisions designed to limit our exposure to
potential claims and liabilities arising from the type of problems described,
these provisions may not fully or effectively protect us against such claims in
all cases. Claims and liabilities arising from customer issues could damage our
reputation, resulting in loss of existing or future customers or loss of or
delay in revenue. These events may adversely affect our business, results of
operations and financial condition.

WE MAY BE ADVERSELY AFFECTED BY POLITICAL AND ECONOMIC CONDITIONS IN ISRAEL, ITS
ADJACENT TERRITORIES AND COUNTRIES, AND IN THE MIDDLE EAST GENERALLY.

         We are organized under the laws of the State of Israel. As of December
31, 2001, approximately 17% of our total staff, our principal research and
development facility and our principal executive offices were located in Israel.
Our operations, financial condition and results of operations are directly
influenced by economic, political and military conditions in and affecting
Israel.

         Terrorist attacks in Israel and the hostilities between the State of
Israel and the Palestinians increased during the past year and have intensified
in the past several months. The future of peace efforts between Israel and its
neighbors remains uncertain and the peace process between Israel and the
Palestinian Authority has seriously deteriorated due to increased violence
between Israel and Palestinians. We cannot predict the effect on the region or
us of the increase in the degree of violence between Israel and the Palestinians
or of any individual act of violence. Some of our officers and employees in
Israel are obligated to perform annual military reserve duty. In the event of a
military conflict, including the ongoing conflict with the Palestinians, these
persons could be required to serve in the military for extended periods of time.
This could disrupt our operations and harm our business. Furthermore, several
countries restrict doing business with Israel and Israeli companies, and
additional companies may restrict doing business with Israel and Israeli
companies, as a result of the recent increase in hostilities. Some of the
companies that are significant suppliers of hydrocarbon products are located in
countries that may participate in boycotts of products and service of Israeli
origin. This may also seriously harm our operating results, financial condition
and the expansion of our business.

OUR SHARE PRICE HAS FLUCTUATED AND COULD CONTINUE TO FLUCTUATE SIGNIFICANTLY.

         The market for our ordinary shares, as well as the prices of shares of
other oilfield services companies and technology companies, has been volatile. A
number of factors, many of which are beyond our control, may cause the market
price of our ordinary shares to fluctuate significantly, such as:

       -  fluctuations in our quarterly revenues and earnings and those of our
          publicly held competitors;

       -  shortfalls in our operating results from the levels forecast by
          securities analysts and from the levels we announce from time to time
          as guidance to the investment community;

       -  public announcements concerning us or our competitors;

       -  changes in pricing policies by us or our competitors;

       -  market conditions in our industry; and

       -  the general state of the publicly traded securities market.

         We have no control over any of these matters and any of them may
adversely affect our business internationally. In addition, trading in shares of
companies listed on the Nasdaq National Market in general and trading in shares
of technology companies in particular has been subject to extreme price and
volume fluctuations that in some cases have been unrelated or disproportionate
to operating performance. These broad market and industry factors may depress
our share price, regardless of our actual operating results.
<PAGE>

IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US, OUR OFFICERS AND
DIRECTORS AND OUR ISRAELI AUDITORS OR TO ASSERT U.S. SECURITIES LAW CLAIMS IN
ISRAEL.

         Service of process upon our directors and officers and our Israeli
auditors may be difficult to effect in the United States because almost all
these parties reside outside the United States and a substantial portion of our
assets and the assets of these persons are located outside the United States.
Any judgment obtained in the United States against such parties may be
unenforceable outside the United States.

         It is not clear whether civil liabilities under the Securities Act and
the Securities Exchange Act can be enforced in Israel. However, subject to time
limitations, Israeli courts may enforce a U.S. judgment in a civil matter, if:


       -  the application for enforcement was filed within five years after the
          judgment;

       -  adequate service of process has been effected and the defendant has
          had a reasonable opportunity to be heard;

       -  the judgment and its enforcement are not contrary to the law, public
          policy, security or sovereignty of the State of Israel;

       -  the judgment was rendered by a court of competent jurisdiction, in
          compliance with due process and the rules of private international law
          prevailing in Israel;

       -  the judgment was not obtained by fraudulent means and does not
          conflict with any other valid judgment in the same matter between the
          same parties;

       -  no action between the same parties in the same matter is pending in
          any Israeli court at the time the lawsuit is instituted in a U.S.
          court; and

       -  the U.S. courts are not prohibited from enforcing judgments of the
          Israeli courts.

PROVISIONS OF ISRAELI LAW MAY DELAY, PREVENT OR MAKE MORE DIFFICULT AN
ACQUISITION OF OUR COMPANY, WHICH COULD DEPRESS OUR SHARE PRICE.

         Provisions of our Articles of Association restricting business
combinations with interested shareholders and provisions of Israeli law may
delay, prevent or make difficult an acquisition of our company, which could
prevent a change of control and therefore depress the price of our stock.
Israeli corporate law regulates mergers and acquisitions of shares through
tender offers in certain circumstances, requires special approvals for
transactions involving significant shareholders and regulates other matters that
may be relevant to these types of transactions. For further details see Item 10
"Anti-Takeover Provisions; Mergers and Acquisitions under Israeli Law."

         In addition, Israeli tax law treats certain acquisitions, particularly
stock-for-stock swaps between an Israeli company and a foreign company, less
favorably than United States tax law. Israeli tax law may, for instance, subject
a shareholder who exchanges his company shares for shares in a foreign
corporation to immediate taxation.
<PAGE>

ITEM 4.         INFORMATION ON THE COMPANY

A.       HISTORY AND DEVELOPMENT OF THE COMPANY

         Paradigm Geophysical Ltd. was incorporated and registered in Israel in
1987 under the laws of the state of Israel as a company with limited liability,
under the name G.T. Graphic Technology Ltd. We changed our name to Paradigm
Geophysical Ltd. in October 1993.

         Our principal executive offices are located at Shenkar St. 9, Gav Yam
Center No.3, Herzlia 46120, Israel and our telephone number is + 972-9-9709300.

         Our agent in the United States is Paradigm Geophysical Corp. and its
principal offices are located at Two Memorial Plaza, 820 Gessner, Houston, TX
77024.

         Our business is conducted through subsidiaries and representative
offices in several locations worldwide and aims to provide technical information
solutions, including software products and product-driven services to companies
involved in the exploration and production of oil and gas and to oilfield
service companies.

DEVELOPMENTS SINCE JANUARY 1, 2001

         In May 2001, we acquired Sysdrill Limited, a Scottish company, for a
cash consideration and ordinary shares of Paradigm in the aggregate amount of
$8.5 million. Its primary operations are located in Aberdeen, Scotland. Sysdrill
is one of the leading software and service providers of drilling engineering and
well operations solutions. The cash portion of the Sysdrill transaction was
financed mainly through a note payable to the Sysdrill proprietor which was
redeemed in May 2002.

         Aside from the capital utilized for the above acquisitions, our
principal capital expenditures in 2001 were for computer and peripheral
equipment. These purchases totaled $8.7 million in 2001 and resulted in a
significant expansion in computer capacity for our geophysical services
operations worldwide.

         During the fourth quarter of 2001, we commenced a resource
rationalization and restructuring program, focused primarily on the
consolidation of our operations (acquired through the Flagship acquisition) in
Pau, France, rather than continuing full operations in both Paris, France and in
Pau. In addition, certain service operations which were not providing adequate
profitability were closed and others were expanded. We have also strengthened
operational management in the United States, in our Europe, Africa and Middle
East regional offices, and in our Canadian operations. We recorded a
restructuring charge of approximately $0.5 million in the fourth quarter of 2001
and approximately $0.8 million in the first quarter of 2002 in connection with
this program.

DEVELOPMENTS SINCE JANUARY 1, 2002

         On May 22, 2002, we announced a definitive merger agreement pursuant to
which we would be acquired by Paradigm B.V. in a merger transaction. Paradigm
B.V., a company formed to invest in energy related technology and service firms,
will be indirectly owned as of the merger by a non-U.S. limited partnership
being organized by Fox Paine & Company, LLC, a San Francisco-based private
equity firm. If the proposed merger is consummated, we will cease to be a
publicly traded company.

         On June 13, 2002, the holders of 98.2% of our shares present (in person
or by proxy) at a Special Meeting of Shareholders voted in favor of the merger
agreement, the merger and the transactions contemplated thereby.

         The proposed merger transaction remains subject to the satisfaction or
waiver of a number of conditions, including:
<PAGE>

       -  the absence of any legal order prohibiting or restraining the merger;

       -  receipt of certain governmental consents, and the expiration of the
          70-day statutory waiting period under the Israeli Companies Law, which
          will expire on or about August 1, 2002;


       -  absence of the occurrence of any event since May 21, 2002 that would
          reasonably be likely to have a Material Adverse Effect (as defined in
          the merger agreement) on us;

       -  the performance of each party's obligations under the merger agreement
          and the accuracy of each party's representations and warranties
          contained in the merger agreement; and


       -  other closing conditions specified in the merger agreement.

        For more information, see Part I. - "Recent Developments."

B.       BUSINESS OVERVIEW

         We provide technical information solutions for the oil and gas industry
worldwide consisting of software solutions and services to companies involved in
the exploration and production of oil and gas and to oilfield service companies.

         We provide integrated, scientifically advanced productivity solutions,
technical services, data processing services and reservoir studies services for
reservoir description. Our products include:


       -  SOFTWARE SOLUTIONS - Software products and add-on packs, designed to
          accommodate a customer's technical workflows, for analysis of
          hydrocarbon prospects.

       -  TECHNICAL SERVICES - On-site support, post contract support and
          technical training designed to complement our software solutions in
          order to maximize the added-value of the customer investment in our
          software solutions.


       -  DATA PROCESSING SERVICES - Advanced seismic data processing based on
          our software solutions and our seismic data analysis experts.

       -  RESERVOIR STUDIES - Advanced reservoir characterization and integrated
          studies based on our software solutions using our interpretation and
          reservoir characterization experts.

         We operate a global network of sales, users' support and services with
21 offices in 18 countries, serving all major oil-and gas-producing provinces in
the world.

THE OIL AND GAS INDUSTRY BACKGROUND

         Our business and operations are substantially dependent upon the
condition of the global oil and gas industry. The oil and gas industry is highly
cyclical and has been subject to significant economic fluctuations at various
times as a result of numerous factors affecting the supply of and demand for oil
and natural gas, including the level of capital expenditures of the oil and gas
industry, the level of drilling activity, the level of production activity,
market prices of oil and gas, worldwide economic conditions, interest rates and
the cost of capital, environmental regulations, tax policies, the political
stability and political risk exposure in some of the oil producing countries,
political requirements of national governments, coordination by members of OPEC,
political requirements of national governments, market behavior of oil producers
who are not members of OPEC, cost of producing oil and natural gas and
technological advances.

         Crude oil prices remained relatively stable for the first nine months
of 2001, although well below the high prices of 2000. The softening and
increased volatility of oil prices following September 11, 2001 resulted in an
average oil price in the last quarter of 2001 significantly below the 2001 oil
price assumptions of oil companies generally. By the end of 2001, oil prices
were at about 60% of the 2000 peak prices. U.S. natural gas prices also faced a
steady decline from the high levels of 2000, declining by the end of

<PAGE>
2001 to about 50% of the price at the commencement of 2001. The oil and gas
prices, and the events of September 11, 2001, materially affected the capital
budget execution of the major international oil companies, and those operating
primarily within the U.S. and Canada.

         Due to the steady oil price in the first nine months of 2001, rig
counts rose in the U.S. and capital spending in the U.S. and Canada were
reported in the capital spending surveys of the oil companies to be greater than
originally budgeted, with resources moved from international (outside of North
America) investment into North America. Following the events of September 11,
2001, capital spending was reported to have ceased in most projects, continuing
selectively in some on-going projects and a handful of new initiatives.

THE OIL AND GAS EXPLORATION SECTOR - EVENTS IN 2002 TO  DATE

         Since the beginning of 2002, oil and gas prices have risen steadily.
The political uncertainty resulting from continuing Middle East hostilities has
impacted oil prices. Rig counts in the U.S. have continued to decline while
international rig counts have risen.

OUR PRODUCTS

         In line with the technological advances in the geoscience knowledge
industry and a changing focus in the use of high-end geoscience solutions for
hydrocarbon exploration and production, in 2001 we further enhanced our
solutions based on our existing product modules and the product modules we
acquired in recent acquisitions.

          - MORE PETROPHYSICS AND GEOLOGY: We have enhanced our product suite
through further integration, and the addition of new tool-sets, such as the
geological solutions from the Flagship and Geoscene acquisitions, and the new
petrophysical and geological modules from Chevron and TotalFinaElf.

          - MORE KNOWLEDGE FROM EXISTING DATA: We have further advanced the
concept of "interoperability" -- a computer science development that permits our
solutions to use all the corporate prospect data bases in whatever format they
exist and without the need to reformat or undertake large "data management"
efforts.

          - NEW WORKFLOWS: We have combined our software modules into
industry-standard cost-effective workflows. While these are offered as the seven
primary industry-standard workflows, our integrated software is structured such
that any combination of modules can be tailor-made for workflows specific to the
analysis needs for each prospect. We released our "PG2" suite of software to the
industry in early September 2001. This release is a significant technological
advance to provide fully integrated workflows for a range of seismic data
processing methodologies. We announced that our "PG3" suite would be released in
the second half of 2002. This is planned to integrate seismic data processing,
petrophysics and geology, with visualization.

          - EXPANDED GLOBAL SERVICE CAPACITY: We have expanded our global
service capacity with additional super computer power in Houston and expanded
computing capacity and staff in Asia Pacific, Russia and Latin America, to meet
the demand for out-sourced seismic data processing.

         - RESERVOIR STUDIES: We have expanded our service offering to include
reservoir studies -- the search for the smaller reservoirs within the larger
producing fields.

         We currently offer the following software workflow solutions:
<PAGE>

         - SEISMIC DATA PROCESSING & IMAGING SOLUTIONS for customers that are
using our products for production seismic data processing. This solution
integrates Focus(R) and Geodepth(R) Power(TM) and Probe(TM) products.

          - SEISMIC DATA ANALYSIS AND QUALITY CONTROL SOLUTIONS based on
Geodepth(R), Power(TM), Probe(TM), Vanguard(TM) and Earthstudy(TM) as standalone
and integrated workflows including industry standard techniques, such as
interpretive AVO (amplitude velocity offset) analysis, seismic modeling and
velocity analysis.

         - PROSPECT GENERATION INTERPRETATION SOLUTIONS for customers that are
using our interpretation products for rapid, production-oriented generation of
prospects. This solution combines our latest visual data management and large
volume roaming with the new Reservoir Navigator(R), SeisX(TM) and Voxelgeo(R),
for prospect generation, with workflows from Stratimagic(R) for seismic facies
classification, and Geoscene(R) for geological interpretation.

          - RESERVOIR EVALUATION INTERPRETATION SOLUTIONS for customers that are
using our products for quantitative interpretation and delineation of the
reservoir framework. This uses the capabilities of Reservoir Navigator(R),
Voxelgeo(R), SeisFacies(TM), Nexmodel(TM) and Geosec(TM) workflows.

          - RESERVOIR CHARACTERIZATION & SIMULATION SOLUTIONS for customers that
are using our products for analysis and modeling of reservoir properties using
seismic data inversion, petrophysical analysis and rock physics in our
Vanguard(TM), GeoLog(R), Stratimagic(R) and Voxelgeo(R) based workflows.

         - PETROPHYSICAL ANALYSIS & ROCK PHYSICS SOLUTIONS for customers that
are using our products for analysis and modeling of rock properties based on
Geolog(R), for formation evaluation and petrophysical analysis.

          - WELL PLANNING & DRILLING SOLUTIONS for customers that are using our
products for well planning, drilling design and monitoring. We have integrated
our geological and geophysical solutions with Sysdrill's engineering solutions.
The introduction of the Sysdrill product line and DirectorGeo(R) move our
solutions further downstream into the well operations area and provide a
critical link between drilling engineering, well planning and the geosciences.

         We offer the following service solutions:

         - Our service centers worldwide offer the skills and knowledge of
specialist and experienced geoscientists in partnership with our customers
expert teams, together with super computing resources utilizing our software
solutions.

         - SEISMIC DATA IMAGING SERVICES - for customers that require production
seismic data processing services we offer delivery of large-scale seismic data
imaging projects.

         - RESERVOIR STUDIES SERVICES - for customers that require integrated
reservoir studies services we offer quality delivery of large-scale integrated
studies and reservoir characterization and simulation projects.

POST-CONTRACT CUSTOMER SUPPORT

         We employ geoscientists and computer scientists to provide installation
and user training, online support, on-call problem prevention and resolution and
on-site troubleshooting. On-line product support enables customers to download
product enhancement and support packs and product documentation and to submit
technical support incident reports or questions to the customer support group.
We have initiated on-line discussion forums. A typical software license
agreement provides the customer's first year of support in conjunction with the
initial purchase of the software license. Most of our customers have entered
into

<PAGE>
post-contract maintenance and support agreements, which entitles them to receive
product updates as well as the professional and technical support described
above. These agreements are renewable annually.

MARKETING AND SALES

         We market and sell our products and services to the oil and gas
industry, primarily through local sales offices, and to a lesser extent, sales
agents and representatives in a small number of markets in which we do not have
a regional or local sales presence. Our local offices are staffed with a sales
force, technical experts and operating managers. Our sales and marketing
strategy is to maintain and enhance our local presence in the markets in which
we operate by acquiring significant in-house professional expertise on the local
geology and hydrocarbon conditions, and commercial knowledge of the local
markets.

          We engage in a variety of marketing activities, including:


       -  conducting high level educational workshops and seminars in several
          locations worldwide to demonstrate the application of our products and
          to upgrade the end users skills and efficiency in the use of our
          products;

       -  participating in regional trade shows showcasing our technology at
          customized demonstration booths;

       -  encouraging our technical staff to present papers at technical
          conferences;

       -  participating in all major industry events worldwide; and

       -  advertising on a regular basis in trade and technical magazines.

RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES ETC.

         We believe that significant investment in research and development is
essential to maintaining our technological expertise in the market for
geoscience knowledge solutions for the oil and gas industry, and to our strategy
of being a leading provider of innovative geoscience software products and
services.

         Net research and development expenses were $9.3 million, $11.2 million
and $12.9 million in 1999, 2000 and 2001, representing between 17%-18% of annual
revenues.

         We have launched six major new products between October 1997, when we
acquired CogniSeis Development Inc., and the end of 2001. The products include
Probe, Vanguard, GeoSec3D, DirectorGeo (a new product within the Sysdrill family
of solutions), Volume Navigator, and the "Common Reflection Angle Migration"
system for advanced seismic data processing. The latter three products were
provided to the industry during 2001 as beta-site products.

         Our products and modules are enhanced and upgraded on an ongoing basis
to provide new analysis features and, in some cases, re-engineered, to keep pace
with advances in computer operating systems, data base systems, computer
graphics and changes in hardware. We have introduced "interoperability" within
our systems platform which is planned to be a common element for all our
products. Interoperability enables our software to access our clients' technical
data bases irrespective of the format of any specific data-set, and without the
need for data conversion or reformatting prior to use with our software.

         Each of our acquisitions has added new technologies and products to our
existing range of products and solutions. We have invested in the full
integration of these products into the overall Paradigm solutions offering.

         Our research and development efforts are focused both on the immediate
competitiveness of our current solutions and products and on expected leading
edge requirements and competitiveness over the next several years. We believe
that our product development sights must be set far ahead not only to anticipate
industry requirements, but to also ensure that today's products remain viable
over the long run, thereby providing continuing added value to our customers.
<PAGE>

         Research and development continues to be managed as an integrated
global team with seven centers in Israel, Houston, Pau, Aberdeen, Moscow,
Calgary and Brisbane. Each center has its areas of specialization and expertise
while product commercialization, integration and delivery are the responsibility
of the research and development group in Israel.

         In the fourth quarter of 2001 and the first quarter of 2002, we
streamlined our research and development department following the release of
PG2. At the end of May 2002, the research and development staff numbered 150
persons worldwide, compared to 137 at the end of 2000, after taking into account
the addition of 11 research and development personnel from the acquisitions of
Geoscence and Sysdrill Limited.

INTELLECTUAL PROPERTY

         We believe that our patents, trademarks and other intellectual property
rights are an important factor in maintaining our technological advantage,
although no one patent is considered essential to our success. Typically, we
seek to protect our intellectual technology in all jurisdictions where we
believe that the cost of such protection is warranted. While we have patented
certain key technologies, we have not patented all of our proprietary technology
even where we regard such technology as patentable. We also protect our
intellectual property and trade secrets through confidentiality agreements with
staff and customers. We have licensed certain technology from third parties,
including software or modules which are incorporated into Paradigm-developed
software or which we use in our service centers. The intellectual property
rights of the vendors are protected by appropriate license agreements.

CUSTOMERS AND COMPETITION

         Our installed base of customers consists of approximately 550 customers
and about 3,750 multi-user licenses, representing a full range of the high-end
users in the industry worldwide. We are not dependant on any single customer
and, in 2001, only one customer represented over 5% of our total revenues
(approximately 5.2%).

         In certain aspects of our activities we are both a supplier and a
competitor with our peer group in the oilfield service companies.

         The oilfield service industry is led by three conglomerates,
Schlumberger, Halliburton and Baker Hughes, each of which provides
vertically-integrated oilfield services including in various mixes, seismic data
acquisition and processing, related software, wire line data gathering and
analysis, drilling, well completion and design and supply of oil field
infrastructure. Schlumberger and Halliburton own and operate geoscience and data
management software divisions with significant installed bases. GeoQuest is a
division of Schlumberger and Landmark Graphics Corporation is a subsidiary of
Halliburton. We compete with these two companies and a number of smaller niche
technology providers providing geoscience software solutions to the oil and gas
industry.

         Seismic data acquisition, processing and analysis are provided by
several large companies, including WesternGeco, a joint-venture of Schlumberger
and BakerHughes, Compagnie Generale Geophysique, a major shareholder in
Paradigm, and the recently announced proposed joint venture between Petroleum
Geo-Services and Veritas DGC Inc. We compete with these companies and a range of
smaller companies in providing seismic data processing services and, to a lesser
extent, in connection with services related to reservoir studies. Some of our
competitors in this field have purchased software licenses from us.
<PAGE>
         Many oil exploration companies have their own in-house capabilities for
seismic data processing and analysis. Some of these in-house service groups are
customers for both our software solutions, and our data processing services, as
a supplement for their internal capacity.

         We compete with companies that have longer operating histories, larger
customer bases, substantially greater financial, technical, sales, marketing and
other resources, and greater name recognition than us. Current and potential
competitors have established, and may establish in the future, cooperative
relationships among themselves or with third parties to increase their ability
to address the needs of prospective customers. New competitors or alliances
among competitors may emerge and acquire significant market share. As a result,
our competitors may be able to adapt to new or emerging technologies and changes
in customer requirements, and our larger competitors may be able to devote
greater resources to the promotion and sale of their products and services.
There can be no assurance that we will be able to compete successfully with
existing or new competitors. Failure by us to adapt to changing market
conditions and to compete successfully with established or new competitors may
have a material adverse effect on our results of operations and financial
condition.

 GEOGRAPHICAL AND OPERATIONAL DISTRIBUTION OF REVENUES

         Set forth below is a summary of our revenues by category and our total
revenues in the major geographical regions in which we operate.

REVENUES - PRODUCTS  ($ MILLIONS)

<TABLE>
<CAPTION>
                                        2001       2000       1999
                                        --------------------------

<S>                                    <C>       <C>        <C>
North and South America                 20.7      21.3       16.6
Europe, Africa, Middle East             19.7      14.8       11.9
Far East and China                      10.4      10.3       14.5
                                       ---------------------------
TOTAL                                  $50.8     $46.4      $43.0
                                       ===========================
</TABLE>

REVENUES - SERVICES ($ MILLIONS)

<TABLE>
<CAPTION>
<S>                                    <C>       <C>        <C>
North and South America                 12.8       10.8       7.7
Europe, Africa, Middle East              5.5        4.4       2.7
Far East and China                       3.7        1.7       1.1
                                       ---------------------------
TOTAL                                  $22.0      $16.9     $11.5
                                       ===========================
</TABLE>

REVENUES - TOTAL ($ MILLIONS)

<TABLE>
<CAPTION>
<S>                                    <C>       <C>        <C>
North and South America                 33.5      32.1       24.3
Europe, Africa, Middle East             25.2      19.2       14.6
Far East and China                      14.1       2.0       15.6
                                       ---------------------------
TOTAL                                  $72.8     $63.3      $54.5
                                       ===========================
</TABLE>



C.       ORGANIZATIONAL STRUCTURE

         Set forth below is a list of our significant subsidiaries, each of
which is wholly owned:

       -  Paradigm Geophysical Corp., incorporated in the State of Delaware

       -  Paradigm Geophysical (R&D) Corp., incorporated in the State of
          Delaware

       -  Paradigm Geophysical (UK) Limited, incorporated in the United Kingdom

       -  Paradigm Geophysical (Europe) Limited, incorporated in the United
          Kingdom
<PAGE>

       -  Paradigm Geophysical (Services) Limited, incorporated in the United
          Kingdom

       -  Sysdrill Limited, incorporated in the United Kingdom

       -  Paradigm Geophysical Canada Ltd., incorporated in Canada

       -  Paradigm Geophysical Pty Ltd., incorporated in Australia

       -  PT Paradigm Geophysical (Indonesia), incorporated in Indonesia

       -  Paradigm Geophysical Sdn Bhd., incorporated in Malaysia

       -  Paradigm Geophysical Pte Ltd., incorporated in Singapore

       -  Paradigm Geophysical BV, incorporated in The Netherlands

       -  Paradigm Geophysical de Venezuela, incorporated in Venezuela

       -  Paradigm Geophysical SA, incorporated in Argentina

       -  Paradigm Geophysical do Brasil LTDA, incorporated in Brazil

       -  Paradigm Geophysical Holdings EURL, incorporated in France

       -  Paradigm Geophysical (France) SA, incorporated in France

       -  Paradigm Geophysical (Hungary) Group Financing LLC, incorporated in
          Hungary

       -  Paradigm Geophysical LLC, incorporated in Russia

       -  Paradigm Geophysical (Luxembourg) SARL, incorporated in Luxembourg

       -  Paradigm Geophysical (Nigeria) Limited, incorporated in Nigeria

D.       PROPERTY PLANTS AND EQUIPMENT

         Our headquarters are located in Herzlia, Israel. Set forth below is a
summary of locations of our principal facilities, the facility activities and
their square footage for our continuing operations. All of our facilities are
leased.

<TABLE>
<CAPTION>

          Location                             Activities                 Floor area
                                                                             Sq.ft
<S>                                      <C>                              <C>
          Herzlia, Israel                Corporate headquarters             33,000
                                                   R&D

          Houston, Texas                      Sales office                  59,000
                                             Service center
                                                   R&D

          Woking, U.K.                        Sales office                  13,000
                                             Service center

          Calgary, Canada                     Sales office                  16,000
                                             Service center
                                                   R&D

          Moscow, Russia                      Sales office                  13,000
                                             Service center
                                                   R&D

          Pau, France                         Sales Office                   5,000
                                                   R&D

          Perth, Australia                    Sales office                   6,500
                                             Service center
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
<S>                                      <C>                              <C>

          Brisbane, Australia                      R&D                       6,000

          Aberdeen, Scotland                  Sales office                   5,000
                                                   R&D
</TABLE>

         In addition to the above principal facilities, we also lease premises
in Beijing, Jakarta, Kuala Lumpur, Bahrain, Caracas, Buenos Aries, Rio de
Janeiro and Almaty. We also lease premises near Paris which we have recently
vacated following restructuring of our French operations. We are currently
seeking to sublet the vacated premises. We believe that the facilities we
currently occupy are suitable and adequate for our current needs.

ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS

         Statements in this Annual Report concerning our business outlook or
future economic performance; anticipated revenues, expenses or other financial
items; introductions and advancements in development of products, and plans and
objectives related thereto; and statements concerning assumptions made or
expectations as to any future events, conditions, performance or other matters,
and/or statements preceded by, followed by or that include the words "believes,"
"could," "expects," "anticipates," "intends," "projects," or similar
expressions, are "forward-looking statements" as that term is defined under the
United States Federal Securities Laws. Forward-looking statements are subject to
risks, uncertainties and other factors which could cause actual results to
differ materially from those stated in such statements. Factors that could cause
or contribute to such differences include, but are not limited to, those set
forth under "Risk Factors" in this Annual Report as well as those discussed
elsewhere in this Annual Report and in our other filings with the Securities and
Exchange Commission. You are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date of this Annual
Report.

         The following discussion and analysis is based on and should be read in
conjunction with our consolidated financial statements, including the related
notes contained in Item 18.

A.       OPERATING RESULTS

OVERVIEW

         We provide technical information solutions to the leaders of the oil
and gas industry worldwide, offering software solutions and product-driven
services to companies involved in the exploration and production of oil and gas
and to oilfield service companies.

         Our business solution comprises scientifically advanced software
solutions, technical services, data processing services and reservoir studies
services. Our products include:

-        SOFTWARE SOLUTIONS- Software products and add-on packs, designed to
         accommodate a customer's technical workflow for analysis of hydrocarbon
         prospects.

-        TECHNICAL SERVICES - On-site support, post-contract support and
         technical training designed to complement our software solutions in
         order to maximize the added value of the customer investment in our
         software solutions.

-        DATA PROCESSING SERVICES - Advanced seismic data processing based on
         our software and our seismic data analysis experts.

-        RESERVOIR STUDIES SERVICES - Advanced reservoir characterization and
         integrated studies based on our software solutions and utilizing our
         interpretation and reservoir characterization experts.
<PAGE>

         We operate a global network of sales, users' support and services with
21 offices in 18 countries, serving all major oil-and gas-producing countries in
the world.

MARKET CONDITIONS IN 2001

         Our results in 2001 should be viewed within the context of the
developments and trends in the oil field services sector in which we operate.
This sector is directly affected by the overall macroeconomics of oil and gas
supply and demand, international oil prices and the worldwide and domestic
capital investments by the oil and gas companies.

         Surveys issued near the end of 2000 by industry analysts indicated that
capital spending by oil and gas companies on exploration and production would
increase in early 2001. Increased spending did take place during the first eight
months of 2001 at the levels predicted in the 2000 surveys. However, industry
surveys in late 2001 showed that the geographic distribution of these capital
expenditures differed significantly from earlier expectations and budget plans,
with higher emphasis on investments in North America and Canada than in the
international arena. The events of September 11, 2001 and the subsequent
military operations caused many oil and gas companies to curtail their capital
spending for the remainder of 2001.

         Crude oil prices remained relatively stable for the first nine months
of 2001, although below the highs experienced in 2000, but within the
survey-reported price range assumptions by oil companies generally for their
2001 budgets. The softening and increased volatility of oil prices post
September 11, 2001, resulted in an average oil price in the last quarter of 2001
significantly below the aforementioned survey-reported price range assumptions
for 2001 budgets. By year-end 2001, oil prices were about 60% below 2000 peak
prices. U.S. natural gas prices faced a steady decline from 2000 highs,
declining at the end of 2001 to about 50% of the price at the start of the year.
These oil and gas prices, and the events of September 11, 2001, significantly
impacted the capital budget execution, particularly of the largest of the
international oil companies, and those operating primarily within the U.S. and
Canada.

IMPACT ON PARADIGM

         In the first half of 2001, we experienced demand for products and
services in line with expectations and in line with the overall increases in
industry spending.

         The oil and gas industry's reaction to the events of September 11, 2001
and its aftermath resulted in a significant slowdown of software license
purchases in the second half of 2001, as capital spending within the oil and gas
companies was broadly reduced, if not completely suspended. Demand for our
seismic data analysis and reservoir studies services continued, much as
anticipated.

INDUSTRY TRENDS AND THEIR SIGNIFICANCE FOR FUTURE MARKET DEVELOPMENT

         There remains a shortage of skilled geoscience-knowledge staff to
provide reservoir-related data analysis and interpretation and we continue to
believe that this will create an increased demand for more resource-effective
workflows and for outsourced services by oil and gas companies.

         Within the seismic data processing industry, the trends identified in
1999 and 2000 continued - i.e., to extract more geoscience knowledge from
existing data sets. There is an increasing review and reprocessing of archived
corporate data of hydrocarbon prospects, and the purchase and reprocessing of
library data on hydrocarbon fields. This reprocessing is being done with the
more advanced processing tools now available from data processing service
companies.
<PAGE>

         Looking forward, we believe that there will be an increase in new
seismic 4D and 4C surveys to enable better-informed decisions on on-going
production, rather than for exploration decisions. Such new survey datasets will
require high-end processing solutions and services, and, therefore, we believe
this trend to utilize seismic data for prospect development and production
decisions may increase the demand for out-sourced services for analysis of the
new 4D and 4C seismic surveys, integrated with well-log and production data for
reservoir studies.

         Recent industry surveys indicate that exploration activity will expand
to areas with complex geological structures and operating environments, such as
sub-salt and ultra deep sea. Exploration and development in these types of
prospects may increase the demand for high value-added software solutions and
out-sourced data analysis services, such as depth inversion and AVO seismic data
processing with volume and structural interpretation solutions, integrated with
petrophysical and geological data and related model building. Our announcement
in September 2001 of our Common Reflection Angle Migration solution, which
enables a target-oriented approach to depth imaging in seismic data analysis,
could become of increasing significance for these new exploration frontiers.

         Drilling , both for exploration and production, in such structures will
require improved well-path and well bore engineering, and examination of
drilling programs in the context of the geology between the surface and the
reservoir and the areas immediately surrounding the hydrocarbon targets. With
the technology acquired from Sysdrill we are now developing software that
integrates geophysics, geology and well engineering.

         For 2002, industry capital expenditure surveys of the oil companies
issued towards the end of 2001, indicate planned budgeted increases for 2002 in
seismic survey and analysis spending, especially outside of North America. This
could translate into increased demand for our services and products later in
2002 and 2003 as the seismic survey data requires more refined analyses.

ACQUISITIONS

ACQUISITION  IN 1999

ACQUISITION OF PTM:

         On March 31, 1999, we acquired the net assets of the Petroleum
Technology Division of Mincom Limited ("PTM"), an Australian entity, for $8.4
million in cash (including $0.3 million in acquisition costs). PTM is the
developer of the Geolog product, which is an information software tool for log
analysis and petrophysics.

         The transaction has been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed, based upon their fair values. The excess of
the purchase price over the fair value of the tangible assets acquired and
liabilities assumed has been allocated to identifiable intangible assets
including acquired technology of $ 5.1 million, assembled work-force of $0.9
million and goodwill of $ 2.7 million.

ACQUISITION IN 2000

THE FLAGSHIP ACQUISITION

         On October 4, 2000, we acquired all the assets and assumed all
liabilities of Flagship S.A., a French based company, and Flagship LLC, a U.S.
based company (together "Flagship"), wholly owned subsidiaries of Compagnie
Generale de Geophysique ("CGG"). Flagship products provide structural
<PAGE>
geological interpretation and reservoir characterization. The total
consideration paid by Paradigm in the acquisition was $14.2 million (including
$1.1 million of costs related to the acquisition), which included the issuance
of 1,500,000 of our ordinary shares and a $5.1 million cash payment.

         The transaction has been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based upon their fair values. The excess of the
purchase price over the fair value of the tangible assets acquired and
liabilities assumed has been allocated to identifiable intangible assets
including acquired technology of $3.4 million, assembled work-force of $1.2
million, customer base of $2.4 million and goodwill of $ 7.1 million.

         The Flagship products, Stratimagic(R) and Integral Plus(R), continue to
be supported by Paradigm, and are being integrated into the full suite of
Paradigm's product offerings.

ACQUISITION IN 2001

SYSDRILL ACQUISITION

         On May 15, 2001, we acquired all the outstanding capital stock of
Sysdrill Ltd. ("Sysdrill"), a Scottish based company. Sysdrill's solutions
provide well planning and drilling engineering products. The total consideration
paid by Paradigm in the acquisition was $8.5 million (including $0.3 million of
costs related to the acquisition), which included the issuance of 200,000
ordinary shares valued at $1.1 million, $0.9 million paid in cash and an
additional $6.3 million through the issuance of an interest bearing note,
which was paid in full on May 1, 2002.

         The transaction has been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based upon their fair values. The excess of the
purchase price over the fair value of the tangible assets acquired and
liabilities assumed has been allocated to identifiable intangible assets
including acquired technology of $3.0 million and goodwill of $3.2 million.

         With the acquisition of Sysdrill, we are able to combine our
technologies with those of Sysdrill to offer technical solutions that integrate
geoscience knowledge with drilling and well operations solutions. The first
product combining these technologies was introduced in beta version during 2001,
and will be delivered in commercial versions in 2002.
<PAGE>

ANALYSIS AND COMPARISONS OF ANNUAL OPERATING RESULTS

         The following table sets forth for the fiscal years ended December 31,
2001, 2000 and 1999, our consolidated statements of operations reflected as a
percentage of total revenues:

<TABLE>
<CAPTION>

                                              1999           2000            2001
                                              -----          -----          -----
REVENUES:

<S>                                           <C>            <C>            <C>
   Products                                    78.9%          73.3%          69.8%
   Services                                    21.1%          26.7%          30.2%
                                              -------------------------------------
                 TOTAL REVENUES               100.0%         100.0%         100.0%
                                              -------------------------------------


OPERATING EXPENSES:

   Cost of products                            22.8%          17.1%          14.6%
   Cost of services                            10.6%          10.0%          13.5%
   Research and development                    17.1%          17.7%          17.7%
   Selling and marketing, general and          37.9%          37.2%          36.9%
      administrative
   Depreciation                                 7.1%           7.5%           7.7%
   Amortization of intangible assets            5.6%           5.3%           4.4%
   Restructuring charges                        0.0%           0.0%           0.7%
   Non recurring expenses                       5.0%           0.0%           0.0%
                                              -------------------------------------
      TOTAL OPERATING EXPENSES                106.1%          94.8%          95.4%
                                              -------------------------------------

  OPERATING INCOME (LOSS)                      (6.0%)          5.2%           4.6%
   Financial expenses, net                     (0.9%)         (0.9%)         (0.9%)
                                              -------------------------------------
  INCOME (LOSS) BEFORE TAXES ON INCOME         (6.9%)          4.3%           3.7%
                                              -------------------------------------
   Taxes on income                              0.0%           0.6%           0.8%
  NET INCOME(LOSS)                             (6.9%)          3.7%           2.9%
                                              -------------------------------------
</TABLE>


         The results of operations for the year ended December 31, 2001
described in this Annual Report include 12 months of operations of Paradigm,
consolidated with seven and a half months of Sysdrill operations.

         The results for the period ending December 31, 2000, include three
months of post-acquisition operations (October through December) of Flagship.
The results of operations for the year ended December 31, 1999 described in this
Annual Report include 12 months of operations of Paradigm, consolidated with
nine months of post-acquisition operations (April through December) of PTM.

         Our discussion and analysis of our 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. The preparation of these financial statements requires us to make
estimations and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. We evaluate our estimates on an on-going basis, including those
related to revenue recognition, bad debts, goodwill and other intangible assets,
income taxes and legal contingencies. We base our estimates on our historical
experience and various other assumptions that we believe to be reasonable and
which form the basis for our judgment regarding the

<PAGE>
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

         We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

Revenue recognition

         We recognize revenue in accordance with Statement of Position 97-2
"Software Revenue Recognition" (SOP 97-2) and the SEC Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements (SAB 101), as amended. SAB
101 requires four basic criteria to be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred or
services rendered; (3) the fee is fixed and determinable; and (4) collectibility
is reasonably assured. Determination of criteria (3) and (4) are based on our
judgment regarding the fixed nature of the fee charged for services rendered or
products delivered and the collectibility of those fees. Should changes in
conditions cause us to determine that these criteria are not being met for
certain future transactions, revenue recognized for a reporting period could be
adversely affected.

         Our seismic data processing, interpretation, reservoir-studies and
significant customization of software business derives revenue from fixed price
contracts, which require the accurate estimation of the cost, scope and duration
of each project. Revenue and related cost for these services are recognized on a
percentage of completion basis, using the input and output measure to assess the
percentage completed with revisions to estimates reflected in the period in
which changes become known. If we do not accurately estimate the resources
required and the scope of work to be performed, or we do not manage the project
efficiently in connection with the utilization of resources or satisfy our
contractual obligations to our customers, project margins may be significantly
and negatively effected or we may not make a profit. Any such resulting
reductions in our margins or losses could have a material adverse effect on our
operating results.

Allowance for doubtful accounts and provision for bad debts

         We maintain allowances for doubtful accounts and for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.

Goodwill and other identifiable intangible assets

         Goodwill associated with the excess purchase price over the fair value
of assets acquired and other identifiable intangible assets, such as acquired
technology, assembled workforce, customer base etc., are currently amortized on
the straight-line method over their estimated useful lives.

         These assets are currently reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.

         The Financial Accounting Standards Board issued SFAS 141 and SFAS 142
in June 2001. SFAS 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting and broadens
the criteria for recording intangible assets separate from goodwill. SFAS 142
requires the use of a non-amortization approach to account for purchased
goodwill and certain intangibles. We plan to adopt these pronouncements
effective January 1, 2002. At such time we anticipate that amortization
associated with purchased goodwill will cease.
<PAGE>

Income taxes

         We operate within multiple taxing jurisdictions and we are subject to
audit in these jurisdictions. These audits can involve complex issues, which may
require an extended period of time to resolve. In our opinion, adequate
provisions for income taxes have been made for all years.

Legal contingencies

         We are currently involved in certain legal proceedings and claims,
including those discussed in Item 8 of this Annual Report. As discussed in Note
12 and 15 of our consolidated financial statements, as of December 31, 2001, we
have estimated the probable costs for the resolution of these claims in
consultation with outside counsel handling our defense in these matters and such
costs are based upon an analysis of potential results, assuming a combination of
litigation and settlement strategies. We do not believe these proceedings will
have a material adverse effect on our consolidated financial condition. It is
possible, however, that future results of operations for any particular
quarterly or annual period could be materially affected by changes in our
assumptions, of the effectiveness of our strategies, related to these
proceedings.

Impact of acquisitions on comparisons

         We believe that the contribution of Sysdrill, Flagship and PTM products
and operations, and their integration with our activities, cannot be adequately
portrayed in a typical year-by-year discussion. As a consequence, the financial
results described in this annual report for these periods are not directly
comparable.

         Note 1 to our audited financial statements for the year ended December
31, 2001 includes:

  -      the pro-forma unaudited results of operations of Paradigm and Sysdrill
         for the years ended December 31, 2000 and 2001, assuming that the
         Sysdrill acquisition had been completed on January 1 2000 and 2001,
         respectively;

  -      the pro-forma unaudited results of operations of Paradigm and Flagship
         for the years ended December 31, 1999 and 2000, assuming that the
         Flagship acquisition had been completed on January 1 1999 and 2000,
         respectively;

  -      the pro-forma unaudited results of operations of Paradigm and PTM for
         the year ended December 31, 1999, assuming that the Flagship
         acquisition had been completed on January 1 1999.

     Where we have considered it relevant to an understanding of our results of
operations for the years ended December 31, 1999, 2000 and 2001, we have
referred to the consolidated pro forma results.

REVENUES

         "PRODUCT REVENUES" are derived mainly from the sale of software-use
perpetual licenses and period-specific rentals, and related software maintenance
and customer support contracts (including user-training). Maintenance and
support revenues provide a predictable revenue stream, as generally these are
contracts that are renewable annually.

         "SERVICES REVENUES" are derived mainly from providing seismic data
processing and reservoir studies services.

         In choosing to market both products and services, we aim to diversify
revenue sources to try to minimize risk in seasonal and regional downturns.
Service contracts provide visibility during the year due to their multi-month
implementation.
<PAGE>
         Total revenues in 2001 increased by 15% over 2000 resulting from
increased volume of sales from core products and services and the positive
impact of acquisitions.

         Total revenues in 2000 increased by 16% over 1999. The increase
attributable to increased volume of sales from core products and services is 8%
when comparing pro-forma 2000 (assuming that the Flagship acquisition had not
taken place ) total revenues to pro-forma 1999 total revenues, assuming that the
PTM acquisition had been completed as of January 1 1999.

         In 2001, the relative proportion of revenues derived from services
increased to 30% of total revenues, compared to 27% of total revenue in 2000 and
21% in 1999. The increase over this three-year period is due principally to our
decision to respond to growth in demand for outsourced seismic data processing
services with increased computing capacity and staff capabilities in our
offices.

PRODUCT REVENUES

         This revenue category includes the sale of perpetual licenses for
software usage, annual rentals of software, the annual maintenance and support
charges for this software and the occasional sale of hardware. See Note 2h to
our consolidated financial statements for details of our accounting policy on
revenue recognition of products.

         Product revenues in 2001 increased by 9% over 2000, due to increased
volume of sales from core products and the positive impact of acquisitions. The
Sysdrill business acquired in May 2001 contributed $ 1.1 million of total
product revenues in 2001, which constituted approximately 2.2% of total product
revenues for the year.

         Within the limits of the analysis of pro-forma estimates and assuming
that the Sysdrill acquisition had been completed on January 1, 2000, pro-forma
product revenues in 2001 increased by 6% over 2000.

         We have experienced an increase in demand for new software licenses on
a period-over-same-period basis. However the impact of the September 11 events
resulted in an immediate slowdown in new license purchases, especially in the
North American and European markets, while the larger oil companies reassessed
their capital spending decisions. At that time many software purchase decisions
were postponed into the 2002 budget year. The modest fourth quarter recovery of
software license revenues when compared to the third quarter can be attributed
to year-end budget utilization by some of our customers although in 2001 this
was not as prevalent as in previous years.

         The capital budget surveys for 2002 indicate that the oil companies
plans to increase capital spending internationally, and cut back in North
America. This created expectations by industry analysts that the turnaround in
the international markets would become visible early in 2002. To date, this has
not been observed to the level expected, and analyst expectations have been
modified during the course of the first quarter of 2002, and they now place
recovery into the second half of 2002 and into 2003.

SERVICE REVENUES

         The services revenue category includes seismic data processing and
reservoir studies services. See Note 2h of our consolidated financial statements
for details of our accounting policy on recognition of revenues from services.

         Revenues from services in 2001 increased by 30% over 2000, which was
47% higher than in 1999. In 2001, we continued to see growth in high-end seismic
data processing.

         We continued to expand capacity in our service centers in response to
growing regional demand (see discussion below on Regional Service Revenues
Distribution).
<PAGE>

         In response to advancing capabilities in the computer cluster
configurations that, in time, could represent a significant savings in computer
hardware costs (at current price relationships between the cluster configuration
and mainframes), we installed and tested our first cluster configuration in the
U.S. in 2001. This configuration was placed into production early in 2002.

REGIONAL DISTRIBUTION OF REVENUES

         The following table presents the geographic distribution of our
revenues.


<TABLE>
<CAPTION>
                                  2001        2000        1999
                                  ----        ----        ----
<S>                               <C>         <C>         <C>
REVENUES - PRODUCTS

North and South America             41%         46%         39%
Europe, Africa, Middle East         39%         32%         28%
Far East and China                  20%         22%         34%
                                  ------------------------------
    TOTAL                          100%        100%        100%

REVENUES - SERVICES

North and South America             58%         64%         66%
Europe, Africa, Middle East         25%         27%         23%
Far East and China                  17%         10%         10%
                                  ------------------------------
    TOTAL                          100%        100%        100%

REVENUES - TOTAL

North and South America             46%         51%         44%
Europe, Africa, Middle East         35%         30%         27%
Far East and China                  19%         19%         29%
                                  ------------------------------
    TOTAL                          100%        100%        100%
</TABLE>

         The changes in regional distribution of revenues for the period 1999 to
2001 for our two revenue segments reflects the relative impact of annual changes
in each of the regions general economic situation, the impact of changes in
international prices of oil, merger activity in oil companies and the regionally
different growth in outsourcing demand for services.

          This change in distribution also reflects our deliberate strategy to
expand into the emerging economies' hydrocarbon markets and provide solutions
and services to the national and regional producers of oil and gas worldwide.

         The tables above demonstrates the importance of our global presence as
a significant contributing factor to our revenue growth, as well as the
geographic risk-balancing achieved by maintaining a presence in multiple markets
with a consequent wide customer spread.

         REGIONAL PRODUCTS REVENUE DISTRIBUTION: 2001 regional distribution
changes over 2000 reflect both the growth of our market penetration into the
emerging economies, particularly Russia and Latin America, the increased
activity of the state owned oil companies and some of the international
activities of the major oil companies. It also reflects the slowdown in
exploration and production capital spending by the major oil companies in their
more traditional activities in the lower 48 states in the U.S. (except for
activity in the Gulf of Mexico - see Services discussion below), and in the
North Sea.

         REGIONAL SERVICES REVENUE DISTRIBUTION: Our regional distribution is
primarily influenced by the significantly larger size of the computer
installation in the U.S. than in any other region, and the rapid growth of
demand for services at this center since 1999. With the purchase of the super
computer for the

<PAGE>
U.S. operations at the commencement of 1999, our position in that market has
since improved consistently. The U.S. services center has in 2001 processed not
only new seismic data from Gulf of Mexico surveys, but also other U.S. land and
marine seismic data, as well as international hydrocarbon prospects.

         Recovery of energy prices from mid-2000 through 2001 has had a positive
impact on demand for our services, and has contributed to the relative growth in
demand for our services in Latin America, the former Soviet Union, and, in 2001,
in the Asia-Pacific region. As a consequence of this growth in demand outside of
the U.S. market, we have increased our service capacity in these markets, in
line with our strategy of diversifying revenue sources. Looking forward, we
believe that this could result in a reduction in our dependency on the U.S.
market for a high proportion of our service revenues.

OPERATING COSTS

COST OF REVENUES & MARGINS:

COST OF REVENUES


<TABLE>
<CAPTION>
($ millions)                                1999             2000             2001
<S>                                      <C>              <C>              <C>
PRODUCT COSTS                            $  12.4          $  10.8          $  10.6
year-over-year increase (decrease)                            (13%)             (2%)

SERVICE COSTS                            $   5.8          $   6.4          $   9.8
year-over-year increase                                         9%              53%

TOTAL COSTS                              $  18.2          $  17.2          $  20.4
year-over-year increase (decrease)                             (6%)             19%
</TABLE>


GROSS MARGINS
<TABLE>
<CAPTION>

($ millions)                                1999             2000             2001

<S>                                      <C>              <C>              <C>
PRODUCT MARGIN                           $  30.6          $  35.6          $  40.2
% margin                                      71%              77%              79%

SERVICE MARGIN                           $   5.7          $  10.6          $  12.2
% margin                                      49%              62%              55%

GROSS MARGIN                             $  36.3          $  46.1          $  52.4
% margin                                      67%              73%              72%

</TABLE>

           PRODUCT COSTS comprise software production and distribution costs,
personnel costs associated with providing maintenance and support, third party
software royalties, agents commissions, hardware costs for turnkey solutions and
the maintenance of production equipment.

         SERVICE COSTS comprise personnel costs associated with providing
services, cost of materials, the operation and maintenance of equipment, lease
of premises and the cost of utilities.
<PAGE>

         Depreciation of capital equipment and amortization of product research
and development and acquired technology costs are accounted for as separate line
items in our Statement of Operations.

         The material differences between 2001 and 2000 in connection with the
components of our cost of revenues, and the margins, are attributable to:

     -   PRODUCTS: (i) the lower levels of hardware expenses in 2001 compared to
         2000 ($0.6 million in 2001 compared to $2.4 million in 2000), and (ii)
         an increasing proportion of customer maintenance and support revenues,
         and therefore a higher proportion of associated support costs in total
         cost of product revenues.

     -   SERVICES: The decline in service margins reflects (i) increasing impact
         of service centers outside the U.S., where computers are significantly
         smaller than the supercomputer in use in our U.S. center resulting in
         relatively slower and less efficient data throughput compared to the
         U.S. and relatively less efficient use of personnel, (ii) a significant
         increase in computer capacity and personnel in the Asia Pacific region
         in anticipation of receiving significant projects which commenced only
         in the fourth quarter of 2001, and (iii) a significant increase in
         computer capacity and personnel in our Latin America operation in
         anticipation of receiving significant projects, which commenced only in
         the in the first quarter of 2002 .

         Looking forward we envisage a continuing negative impact on service
operating margins due primarily to :


     -   the expected continuing difficult labor markets, almost worldwide, for
         high caliber geoscience staff that we need in order to expand the
         delivery of our service solutions; and


     -   the opening or expansion of smaller centers that do not have the
         economies of scale of the large U.S. center, and whose relative
         significance in the cost structure mix may increase over time.

           This downward pressure on service operating margins may be offset by
efficiency gains from changes in our software to utilize the expected systems,
computational and data handling efficiencies of the new generation of computers
and new computer configurations (e.g. the use of "cluster configurations") and
the current downward price pressure on the unit cost of new computing hardware.

RESEARCH AND DEVELOPMENT EXPENSES

<TABLE>
<CAPTION>
($ millions)                             1999        2000        2001
<S>                                     <C>         <C>       <C>
RESEARCH AND DEVELOPMENT EXPENSES        $9.3        $11.2    $12.8
As a % of Total Revenue                    17%          18%      18%
year-over-year increase                                 21%      15%

YEAR END RESEARCH AND DEVELOPMENT
STAFF                                      98          137      157
year-over-year increase                                 40%      15%
</TABLE>



         Research and development expenses consist primarily of salaries and
other related expenses and the operating cost of facilities. In 2001,
expenditures on research and development increased, reflecting primarily the
acquisition of the research and development personnel of Sysdrill .

         In the fourth quarter of 2001 and the first quarter of 2002 we
streamlined our research and development department following the release of
PG2. At the end of May 2002, the research and development staff numbered 150
persons worldwide, seven persons less than at the end of 2001.
<PAGE>

         Research and development continues to be managed as an integrated
global team with centers in our Israel headquarters, Houston, Pau, Moscow,
Brisbane and Calgary, with the addition this year of Aberdeen, and the closing
of Paris. Each center has its areas of specialization and expertise. The global
research and development function is managed and coordinated at our corporate
headquarters in Israel, which is also responsible for the integration and
commercialization of product releases.

         Competition for high caliber research and development staff is likely
to be a permanent feature of the various labor markets in which we operate. We
continue to face labor market pressures on computer engineering skills and
similar pressures on retaining and recruiting high caliber geoscience research
staff. The present moderation in the labor market (due to the decline of the
high-tech sector, the past layoffs by the major oil companies and current
uncertainties in the energy sector) is expected to be temporary . Those labor
markets that have, up to now, not been impacted by the upward pressures on
salaries and benefit packages we believe will begin to feel this impact as more
companies establish globally distributed research and development centers, and
the demand for high caliber geoscientists increases with the recovery of the
global economy in general and the energy sector in particular.

         We believe that high levels of reinvestment in new product development
remains an essential element of our competitive strategy in order to sustain and
to further improve our market position, with continuing delivery of innovative
technologically advanced solutions. The expected demands of the industry for an
expanded set of solutions, scalable to the range of computing devices from NT
through UNIX and LINUX to supercomputers, also sets the level of our product
development expenditures.

         We continue with our efforts to provide truly integrated software
across all our applications, serviced from a common data base, transparent to
each application. This effort is also a necessary component in our product
acquisition strategy, and ensures that, each newly acquired product will work
with our existing offerings, and on our and other industry standard databases -
referred to as our "interoperability" features. Because of the open-architecture
expected by the industry, we are continuing to expend efforts that permit our
software to work on our competitors' databases, and to interact with our
competitors' software. We also provide our customers with tool-kits that permit
the incorporation of their proprietary workflows and algorithms into our
software.

         Looking forward, excluding consideration of any future acquisitions, we
would expect to continue the levels of research and development expenditures at
similar absolute levels with adjustments for (i) the impact of the restructuring
in the fourth quarter of 2001 and the first quarter of 2002, (ii) competitive
labor market conditions, and (iii) minor expansions in very selected specialized
areas where we consider the need to expand our geoscience or computing
engineering scope. At the same time, we continue to seek efficiencies in the
development and production of software, especially in the area of common
infrastructure and utilities for the integrated solutions suite.

SALES AND MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES

<TABLE>
<CAPTION>
($ millions)                             1999       2000       2001
<S>                                     <C>        <C>        <C>
SALES AND MARKETING, GENERAL AND
ADMINISTRATIVE EXPENSES                 $20.6      $23.5      $26.9
As a % of Total Revenue                    38%        37%        37%
Year-over-year increase                               14%        14%

</TABLE>



         Sales and marketing, general and administrative expenses consist
primarily of salaries, commissions on sales, advertising, trade shows, outside
professional fees, cost of facilities and other related
<PAGE>


expenses. Sales and marketing, general and administrative expenses in 2001
remained at the same proportion of revenues as in 2000, and were slightly lower
as a proportion compared to 1999. This was achieved while integrating
acquisitions that included sales and marketing, general and administrative staff
resources and other costs.

DEPRECIATION  AND AMORTIZATION

<TABLE>
<CAPTION>
($ millions)                            1999        2000             2001
<S>                                      <C>         <C>          <C>

DEPRECIATION                             $3.9        $4.7         $   5.6
As a % of Total Revenue                     7%          7%              8%
year-over-year increase                                23%             18%

AMORTIZATION                             $3.1        $3.4         $   3.2
As a % of Total Revenue                     6%          5%              4%
year-over-year increase(decrease)                      10%             (4%)

TOTAL DEPRECIATION AND
AMORTIZATION                             $6.9        $8.1         $   8.8
As a % of Total Revenue                    13%         13%             12%
year-over-year increase                                17%              9%
</TABLE>

         Depreciation expense consists of the depreciation of capital equipment
and leasehold improvements . See note 2f of our consolidated financial
statements for details of our accounting policy on depreciation.

         Amortization expense consists of amortization of acquired developed
technology, assembled work force, customer base, capitalized research and
development costs and amortization of goodwill. See note 2g of our consolidated
financial statements for details of our accounting policy on amortization of
acquired developed technology and goodwill, and note 2i for details of our
accounting policy on amortization of capitalized research and development costs.

         The overall decrease in amortization in 2001 resulted from the decrease
in the annual amortization charge following review of the useful life of
acquired technologies. Amortization was increased resulting from the additions
to goodwill and acquired developed technology attributable to the acquisition of
Sysdrill (in May 2001), as well as the full year impact of the amortization
resulting from the acquisition of Flagship in October 2000.

         In the future, if we are successful in acquiring complementary
businesses, accounted for using the purchase method of accounting, further
increases in the amortization expense can be expected due to the addition of
acquired technology.

         Under SFAS 142, effective for fiscal years beginning after December 15,
2001, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in accordance
with the statement. The goodwill portion of the amortization charge was $0.3
million, $0.5 million and $0.7 million in 1999, 2000 and 2001, respectively.
<PAGE>

RESTRUCTURING CHARGES

         In the fourth quarter of 2001, we recorded $0.5 million in
restructuring charges, associated primarily with the rationalization of our
operations in France. We expect that the full cost of this restructuring program
will be about $1.6 million. In the first quarter of 2002, we recorded a
restructuring charge of $0.8 million. We expect to complete the restructuring
program in the second quarter of 2002.

FINANCIAL EXPENSES, NET

<TABLE>
<CAPTION>
($ millions)                   1999       2000          2001
<S>                            <C>        <C>        <C>
FINANCIAL EXPENSES             $0.48      $0.55      $0.64
As a % of Total Revenue            1%         1%         1%
year-over-year increase                      14%        16%
</TABLE>

         These expenses result from (i) interest expenses from the use of bank
lines of credit and capital lease obligations and interest income on cash
balances, and (ii) bank charges, including commitment fees for lines of bank
credit.

OPERATING INCOME AND NET INCOME

<TABLE>
<CAPTION>
($ millions)                      1999             2000            2001

<S>                              <C>              <C>             <C>
OPERATING INCOME(LOSS)           $(3.3)            $3.3            $3.3
As a % of Total Revenue             (6%)              5%              5%

NET INCOME(LOSS)                 $(3.8)            $2.4            $2.1
As a % of Total Revenue             (7%)              4%              3%
</TABLE>



         Our operating income and net income have recovered since 1999. In 2001
our net income was less than that achieved in 2000, primarily due to the
post-September 11 impact on operations, and the restructuring charge in the
fourth quarter of 2001 (continued into 2002 as noted above). Net income before
restructuring charge was $2.7 million in 2001 compared with $ 2.4 million in
2000, where there was no restructuring charge.

 B.     LIQUIDITY, CAPITAL RESOURCES AND FINANCING

<TABLE>
<CAPTION>
($ millions)                          1999            2000             2001

<S>                                  <C>             <C>             <C>
Cash from(used) in operations        $ (0.9)         $12.6           $  2.8
Cash (used) in investments           $(15.4)         $(9.4)          $(10.9)
Cash from(used) in financing         $ 18.9          $(0.1)          $  9.6
Exchange rate impact                 $ (0.6)         $ 0.1           $ (0.3)
                                     -------         -------         -------
Net cash flow                        $  2.0          $ 3.2           $  1.2
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
<S>                                  <C>             <C>             <C>
Opening cash balance                 $3.5            $5.5            $8.6
                                     ----            ----            ----
Closing cash balance                 $5.5            $8.7            $9.8
                                     ====            ====            ====
</TABLE>

CASH FROM OPERATIONS, DAYS SALES OUTSTANDING, OR DSO, AND WORKING CAPITAL

         Our operating activities generated cash in the amount of $2.8 million
in 2001, compared $12.6 million in 2000. This decline over 2000 is due (i) to
the high level of collections in 2000 resulting from the turnkey project income
from which was recognized in 1999 and (ii) a deterioration of the DSOs from 115
days in 2000 to 160 days in 2001.


<TABLE>
<CAPTION>
($ millions)                                1999          2000            2001

<S>                                         <C>           <C>          <C>
Trade receivables                           $21.6         $22.7          $28.3
year-over-year increase(decrease)                             5%            25%

Accrued income                               $9.0          $4.1          $ 5.5
year-over-year increase(decrease)                           (54%)           34%

DSO(at December 31) - number of days          167           115            160
year-over-year increase(decrease)                           (31%)           39%
</TABLE>



         As at December 31, 2001, our net working capital was $17.2 million (of
which $11.8 was in cash and cash equivalents and short term bank deposits),
compared to working capital of $10.9 million (of which $8.6 million was in cash
and cash equivalents) as at December 31, 2000. This increase in net working
capital is attributable primarily to an increase in cash holdings and accounts
receivable and a decrease in the trade payables and current maturities of long
term debt.

<TABLE>
<CAPTION>
($ millions)                                  1999             2000            2001

<S>                                          <C>              <C>             <C>
Current assets                               $38.5            $39.5           $51.2
Current liabilities                          $23.2            $28.7           $34.0
                                             ----------------------------------------
Net working capital                          $15.3            $10.9           $17.2
                                             ----------------------------------------
year-over-year increase(decrease)                               (29%)            59%

Cash, cash equivalents and short term
deposits                                     $ 5.5            $ 8.6           $11.8

year-over-year increase(decrease)                                56%             37%

</TABLE>

DEBT FINANCING

         We finance our operations and capital requirements mainly through
internal cash generated from operations, and bank credit facilities.

         On October 10, 2001, we entered into a convertible loan agreement (the
"Convertible Loan Agreement") with The Israel Mezzanine Fund, L.P., The Israel
Mezzanine Fund (in Israel), Limited Partnership and The Jordan (Bermuda)
Investment Company Ltd. (collectively, "FIMI") pursuant to which we issued FIMI
an aggregate of $8.0 million

<PAGE>
principal amount convertible debentures (the "Convertible Loan"), with the
option to purchase an additional $3.0 million on the same terms under certain
conditions. The terms of the Convertible Loan provide for an annual interest
rate of three months LIBOR minus 1% payable quarterly. The Convertible Loan is
convertible into ordinary shares by FIMI at any time at $7.50 per share (the
"Conversion Price").

         In the event that the average closing price of our ordinary shares as
recorded on the Nasdaq over the sixty consecutive trading days immediately
preceding Nov. 7, 2003 (the "2003 Market Price") is lower than $7.50 per share,
the Conversion Price will be adjusted to the 2003 Market Price, provided that
the Conversion Price will not be adjusted to less than $3.26 per share. In the
event that the average closing price of our ordinary shares as recorded on the
Nasdaq over the sixty consecutive trading days immediately preceding Nov. 7,
2004 (the "2004 Market Price") is less than the 2003 Market Price, the
Conversion Price will be adjusted to the 2004 Market Price, provided that the
Conversion Price will not be adjusted to less than $3.26 per share. In the event
that the average closing prices of our ordinary shares as recorded on the Nasdaq
in the sixty consecutive trading days immediately preceding any date on which
convertible debentures, or any portion thereof, are converted into our ordinary
shares (the "Conversion Closing Price") is equal to or higher than $20 but less
than $30, the adjusted Conversion Price in respect of such convertible
debentures so converted shall be $9.00 per share. Further, in the event that the
Conversion Closing Price is equal to or higher than $30, the adjusted Conversion
Price in respect of such convertible debentures so converted shall be $12.00 per
share.

         The outstanding convertible loan amount is repayable in three equal
annual payments commencing on Nov. 7, 2003; provided, however, that prior to
each payment date, FIMI, at its sole discretion, may elect, by giving an
irrevocable written notice to have any portion of the principal deferred and
repaid on the fifth anniversary of the agreement closing date. The agreement
provides for certain covenants, including, that as long as the Convertible Loan
has not been repaid, our shareholders' equity will not be less than (i) our
shareholders' equity as of June 30, 2001 and (ii) 40% of our total assets, as
reflected in certain financial statements.

         Upon the closing of a merger or consolidation or a sale of our
securities which results in our shareholders, prior to the transaction, owning
less than 51% of the surviving entity, FIMI has the right to require that we
repay the Convertible Loan. In addition, we are required to repay the
Convertible Loan upon the acquisition of 90% or more of our securities by a
third party. Consequently, we will repay the Convertible Loan upon the
acquisition of 100% of our ordinary shares by Paradigm B.V. in the proposed
merger, if consummated.

         On May 28, 2002, following the public announcement of the merger, FIMI
notified us that: (a) pursuant to the Convertible Loan Agreement, it was
electing to have the outstanding convertible debentures repaid in full as a
result of the proposed merger, (b) it believes we have been in default under
Section 4(b) of the Convertible Loan Agreement (which contains our obligation
to maintain certain levels of shareholders' equity) since the date the
convertible debentures were issued, and that it believes we continue to be in
such default, (c) as a result of such alleged default, FIMI is demanding
immediate repayment of the outstanding convertible debentures, and (d) FIMI
believes its right to purchase the additional $3.0 million of convertible
debentures will remain in full force and effect notwithstanding repayment of
the outstanding convertible debentures in connection with the merger.

         We have advised FIMI that we reject any claim by FIMI that we are in
default under the Convertible Loan Agreement. We have also advised FIMI that
its right to purchase the additional $3.0 million of convertible debentures will
expire upon repayment of the outstanding convertible debentures, which we
intend to repay at the closing of the merger. Although the continued existence
of a right to purchase additional convertible debentures following repayment
would be a breach of the merger agreement, we do not believe that any such
right will continue to exist or that we are (or will be) in breach of the
merger agreement with respect to the Convertible Loan Agreement.

         On December 31, 2001, short term bank debt, including current
maturities of long term loans, was $6.8 million, and long term loans (including
the Convertible Loan ) was $13.1 million, compared to $7.6 million and $1.3
million, respectively, as at December 31, 2000. As at December 31, 2001, our
aggregate obligations under equipment leases were $0.3 million compared to $0.8
million as at December 31, 2000.

         On March 31, 2002, cash and cash equivalents were $12.3 million, short
term bank debt, including current maturities of long term loans, was $7.3
million, long term bank loans and convertible debentures totaled $12.6 million
and total lease obligations were $0.4 million.

         In 2001, we increased our bank credit facilities for short-term and
long-term borrowings from an unsecured bank facility of about $20.0 million to a
secured bank facility of $22.0 million, of which an aggregate amount of $ 11.9
million was utilized as at December 31, 2001. The current interest rate on these
borrowings is the London Inter Bank Offer Rate ("LIBOR") for three to six
months, plus 1.0% to 1.5% . As security for the banks' credit facilities, we
have registered a floating charge on all of our assets in favor of the banks.
Additionally, we are required to maintain certain covenants according to which,
(i) our shareholders' equity will not be less than 40% of our total assets, and
(ii) our net profit excluding one time expenses will be positive on an annual
basis.

         Part of the purchase price of Sysdrill was financed with a twelve month
note payable with a due date of May 1, 2002. This note was repaid in May 2002
partly with cash generated from operations, and the balance from the available
medium term bank credit lines.
<PAGE>

USES OF AVAILABLE CASH RESOURCES

         We used cash in investing activities of $ $15.4 million in 1999, $9.4
million in 2000, and $10.9 million in 2001. Our principal investing activities
were the purchase of computer hardware, and the acquisitions made by us in 1999,
2000 and 2001, including the PTM, Flagship and, in 2001, the Sysdrill
acquisition (the latter initially funded through a one year note payable).

         In 2001, capital equipment purchases totaled $8.7 million, primarily
for computer resources. Our anticipated capital expenditure budget for 2002 for
ongoing equipment replacement and intrinsic growth needs is estimated at
approximately $6.0 million, of which $1.3. million had been spent as of March
31, 2002 , and a further $1.0 million is committed by the end of June 2002.

         Where appropriate, we have availed ourselves of equipment leasing
facilities for the acquisition of fixed assets and may continue to do so in the
future.

         Our ability to increase our operating income and cash flow is dependent
upon continued capital spending and investment. Looking forward, we believe that
our cash flow from operations, the convertible debenture and our available bank
credit facilities are adequate for any immediate financing requirements arising
from normal operations, working capital and capital expenditures. However, a
more ambitious expansion program for our operations and acquisitions may have to
be financed from external sources either as additional leverage on the balance
sheet or through a range of equity related financing instruments or otherwise.

ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.       Directors and Senior Management

         The following table sets forth certain information regarding our
executive officers and directors as of May 31, 2002.

<TABLE>
<CAPTION>
                 NAME:                             AGE:                         POSITION:
                 ----                              ---                          --------
<S>                                                <C>            <C>
Eldad Weiss (2)                                     46            Chairman of the Board and Chief
                                                                  Executive Officer
Yehezkel Marueli                                    48            President and Chief Operating Officer
Brian W. Berman                                     56            Chief Financial Officer
Elie Barr (1)                                       55            Director
Jacob Dunietz (2)                                   46            Director
Michael Geiger (2)                                  64            Director
Thierry LeRoux                                      48            Director
Jay Seid (1)                                        41            Director
General (Res.) Zvi Zamir (1)                        77            External Director
Mary Safrai (1) (2)                                 58            External Director
Jonathan Keller                                     50            Corporate Secretary
</TABLE>

(1)      Member of the Audit Committee

(2)      Member of the Compensation Committee


<PAGE>

         The background of each of our directors and executive officers is as
follows:

ELDAD WEISS has served as our Chief Executive Officer and as a Director since
the commencement of Paradigm's operations in 1988 and as Chairman since July
1999. From July 1992 to July 1993, Mr. Weiss served as the Vice President of
Grant-Tensor Geophysical Corporation, a Houston based geophysical services
company, where he was Senior Vice President in charge of the computer aided
exploration division. From June 1985 until February 1988, Mr. Weiss was employed
in the research and development department of Scitex Corporation Ltd. Mr. Weiss
holds a Bachelors and a Masters degree in Electrical Engineering from Tel Aviv
University.

YEHEZKEL MARUELI has served as our Chief Operating Officer since April 1997 and
as President since January 2000. From November 1995 until December 1996,
Mr. Marueli served as the Vice President of Business Operations at Scitex Europe
S.A., and from January 1991 until November 1995, he served as Scitex Corporation
Ltd.'s Vice President of Corporate Logistics. Mr. Marueli holds a Bachelor
degree in Economics, with honors, from Tel Aviv University.

BRIAN W. BERMAN has served as our Chief Financial Officer since April 1998. From
February 1993 until April 1998, Mr. Berman served in various capacities at the
World Bank, including a position as the head of a strategy and advisory group on
agribusiness investments. Prior to that time, Mr. Berman served as a consultant
for Israeli high technology start-up companies. Mr. Berman holds a Bachelors
degree in Chemistry and Physics and a Masters degree in Chemistry from the
University of Natal in South Africa. In addition, Mr. Berman holds an M.B.A.
from the Columbia University Graduate School of Business in New York.

ELIE BARR has served as a Director since June 1996. Mr. Barr has been a Managing
Partner of Mofet Israel Technology Fund since 1996. Prior to that, Mr. Barr was
a consultant to high-tech companies and certain governmental entities. From 1992
to 1996, Mr. Barr was an Executive Vice President of Teledata Communications
Ltd., a telecommunications company, whose securities were publicly traded on the
Nasdaq National Market and which was subsequently acquired by Agree Reality
Corporation (ADC). Mr. Barr has a Bachelors degree in Economics and Political
Sciences from Tel Aviv University and a Bachelors degree in Philosophy from
Bar-Ilan University.

JACOB DUNIETZ has served as a Director since July 1993 and served as Chairman of
our Board of Directors from July 1993 until July 1999. Mr. Dunietz is the
President of Ai Research and Development in Artificial Intelligence Ltd., an
international privately owned company. Mr. Dunietz is also Chairman of the Board
of Directors of Dunietz Brothers Ltd., a construction and real estate company,
whose securities are publicly traded on the Tel Aviv Stock Exchange, and he also
serves as a member of the Board of Directors of all of its subsidiaries. Until
December 2000, Mr. Dunietz was Chief Executive Officer and a director of Magic
Software Enterprises Ltd., an Israeli software company whose securities are
publicly-traded on the Nasdaq National Market, and a member of the Board of
Directors of BVR Systems Ltd., a holding company, whose securities are publicly
traded on the Nasdaq National Market. Until December 1999, Mr. Dunietz was Chief
Executive Officer and a director of Mashov Computers Ltd. Mr. Dunietz holds a
Bachelors degree in Computer Science from The Technion - Israel Institute of
Technology.

MICHAEL GEIGER has served as a Director since May 1999. Mr. Geiger has been a
senior international consultant to the Shamrock International Group since 1987.
Prior to that, Mr. Geiger served as a consultant to Occidental Petroleum
Corporation for their energy and chemical industry activities in Israel.
Mr. Geiger holds a Bachelors degree in Economics from Tel-Aviv University, of
which he is a Governor, and a Masters degree in Economics from the University of
California in Los Angeles.

THIERRY LE ROUX has served as a Director since November 2000. Mr.Le Roux has
served as Senior Executive Vice-President of Compagnie Generale de Geophysique
("CGG"), a French company, whose securities are publicly quoted on the New York
Stock Exchange and the Paris Stock Exchange, since October 1998. From January
1995 until September 1998, Mr. Le Roux served as Executive Vice-President of
CGG. Mr. Le Roux has served as Chairman and Chief Executive Officer of Sercel
S.A , a French company which is a subsidiary of CGG since June 1995. Mr. Le Roux
currently serves as a director of

<PAGE>
Consotium Francais de Localisation S.A., Interactive Network Technologies Inc.
and Tronics Microsystems S.A. From 1996 until 1998, Mr. Le Roux was a director
of Dassault Sercel Navigation Positionnement S.A. From 1995 until 1999, Mr. Le
Roux was a director of Mobiloc S.A.S. Mr. Le Roux holds an Engineering degree
from Ecole Nationale des Ponts et Chaussees, Paris and a Business degree from
Centre de Perfectionnement aux Affaires (CPA), Paris.

JAY SEID has served as a Director since April 1999. Mr. Seid is a Managing
Director of Bachow & Associates Inc. Prior to joining Bachow & Associates Inc.
in December 1992, Mr. Seid was President of Judicate, Inc., a publicly traded
nationwide provider of alternative dispute resolution (mediation and
arbitration) services. Previously, he was an attorney specializing in mergers
and acquisitions at Wolf, Block, Schorr and Solis-Cohen in Philadelphia.
Mr. Seid is a member of the Board of Directors of Berger Holdings, Ltd. Mr. Seid
also serves on the Boards of Directors of several privately-held companies.
Mr. Seid holds a Bachelors degree, Summa Cum Laude, from Rutgers University and
a J.D., with honors, from New York University School of Law.

GENERAL (RES.) ZVI ZAMIR has served as an External Director since November 2000.
Gen.(res.) Zamir is a director of The Israel Corporation, Pardess Industries and
Magor Holdings. Gen.(res.) Zamir is also a director of Oil Refineries Ltd. a
company owned jointly by the government of Israel and The Israel Corporation and
of several private companies and public bodies. Gen.(res.) Zamir holds a
Bachelors degree in Middle East History, Arabic and Geography from the Hebrew
University, Jerusalem.

MARY D. SAFRAI has served as an External Director since November 2000. From 1984
until 1991 and from 1996 until 2000, Ms. Safrai was an advisor in corporate
finance and an analyst of oil exploration and production companies and oil
service companies at Carl H. Phorzheimer & Co. in New York. Ms. Safrai is a
Chartered Financial Analyst, a member, and former officer of the National
Association of Petroleum Analysts, a member of the Oil Analysts of New York and
of the New York Society of Security Analysts where she chaired the energy
committee. Ms. Safrai holds a Master of Business Administration in finance and
economics from New York University, a Masters degree in English Literature from
Boston College, and a Bachelors degree from Syracuse University.

JONATHAN KELLER has served as our Corporate Secretary since January 1994. From
January 1994 until August 1997, Mr. Keller served as our Financial Controller.
Prior to January 1994, Mr. Keller was a self employed Certified Public
Accountant and in this capacity provided financial services to Paradigm.
Mr. Keller is a qualified Israeli Certified Public Accountant and is a Fellow of
the Institute of Chartered Accountants in England and Wales. Mr. Keller holds an
accounting degree from London Guildhall University.


AGREEMENTS FOR NOMINATION OF DIRECTORS

         Pursuant to our agreement with Shamrock Holdings Inc., or Shamrock,
dated March 12, 1999, we undertook that as long as Shamrock holds more than
three and a half percent (3.5%) of our issued and outstanding shares , we will
recommend to our shareholders prior to any general meeting of shareholders at
which directors may be proposed to be elected, to elect a representative of
Shamrock to our Board of Directors and will take all lawful actions to solicit
such election.

         Pursuant to our agreement with Jerusalem Venture Partners, or JVP,
dated March 12, 1999 , we undertook to use our best efforts to ensure that as
long as JVP holds more than three and a half percent (3.5%) of our issued and
outstanding shares , at least one of two members of our Board of Directors who
will be individuals who have expertise in our field of operations , and who are
not employed by us and who have no material economic connection to any of our
shareholders , will be nominated for election by agreement between us and JVP.
As long as JVP holds more than three and a half percent (3.5%) of our issued and
outstanding shares , we will recommend to our shareholders at the annual general
meeting of shareholders to elect Mr. Erel Margalit to our Board of Directors.
JVP no longer holds more than 3.5% of our outstanding ordinary shares. In
December 2000, Mr. Margalit, who served as a director since May 1995, resigned.

         Pursuant to our agreement with Compagnie Generale de Geophysique
("CGG") dated October 4, 2000, as long as CGG and its affiliates hold in the
aggregate more than 5% of our ordinary shares, we undertook to recommend to our
shareholders prior to any general meeting of shareholders, at which

<PAGE>

directors may be proposed to be elected, to elect a representative of CGG (the
"CGG Representative") to our board of directors, and to take all lawful
actions to solicit such election provided that:

(i)      the CGG Representative is not directly involved in any business in
         competition with any of our material businesses (defined in the
         agreement as geoscience software and data processing and
         interpretation); and

(ii)     prior to the third anniversary date of the agreement, without the
         approval of our Board of Directors, CGG and its Affiliates have not
         acquired additional ordinary shares causing them to then hold in the
         aggregate in excess of 10.2% of our outstanding ordinary shares.

EXTERNAL AND INDEPENDENT DIRECTORS

         The Israeli Companies Law requires Israeli companies with shares that
have been offered to the public in or outside of Israel to appoint at least two
external directors. No person may be appointed as an external director if the
person or the person's relative, partner, employer or any entity under the
person's control as of the date of appointment as an external director, has or
had, within the two-year period preceding the date of appointment, any
affiliation with the company, any entity controlling the company, or any entity
controlled by or under common control with the company. The term affiliation
includes:

-        an employment relationship;
-        a business or professional relationship maintained on a regular basis;
-        control; and
-        service as an officer holder.

         No person may serve as an external director if the person's position or
other business create, or may create, a conflict of interest with the person's
responsibilities as an external director or may otherwise interfere with the
person's ability to serve as an external director. If, at the time external
directors are to be appointed, all current members of the Board of Directors are
of the same gender, then at least one external director shall be of the other
gender.

         External directors are appointed by a majority vote at a shareholders'
meeting, provided that either:

-        the majority of shares voted at the meeting, including at least
         one-third of the shares held by non-controlling shareholders, voted at
         the meeting, vote in favor of the appointment; or

-        the total number of shares held by non-controlling shareholders voting
         against the election of the director at the meeting does not exceed one
         percent of the aggregate voting rights in the company.

         The initial term of an external director is three years and may be
extended for an additional three years. External directors may be removed only
by the same percentage of shareholders as is required for their election, or by
a court, and then only if the external director ceases to meet the statutory
qualifications for his or her appointment or if he or she violates his or her
fiduciary duty to the company. Each committee of a company's board of directors
must include at least one external director. An external director is entitled to
compensation as provided in the regulations adopted under the Israeli Companies
Law and is otherwise prohibited from receiving any other compensation, directly
or indirectly, in connection with service provided as an external director. Our
shareholders have elected General(res.) Zvi Zamir and Ms. Mary Safrai as
external directors at our annual general meeting in November 2000.

         In addition, the Nasdaq National Market requires us to have at least
three independent directors on our board of directors and to establish an audit
committee, at least a majority of whose members are independent of management.
We have three directors who qualify as independent directors under the Nasdaq
National Market requirements.
<PAGE>

B.    COMPENSATION OF DIRECTORS AND OFFICERS

         The following table sets forth all compensation we paid with respect to
all of our directors and executive officers as a group for the year ended
December 31, 2001.


<TABLE>
<CAPTION>
                                                               Salaries, fees,       Pension, retirement
                                                           commissions and bonuses   and similar benefits
                                                           -----------------------   -------------------
<S>                                                        <C>                       <C>

All directors and executive officers
 as a group consisting of 11 persons ....................  $  817,000                $ 105,000
</TABLE>

        During the fiscal year ended December 31, 2001, the aggregate
remuneration paid to all persons who served in the capacity of executive officer
or director in 2001 was approximately $922,000. This does not include amounts
expended by us for automobiles made available to our officers, expenses
including business, travel, professional and business association dues and
expenses reimbursed to officers and other fringe benefits commonly reimbursed or
paid by companies in Israel.

        As of May 31, 2002, we had granted options under various 1994 Stock
Option Plans to certain directors and officers to purchase an aggregate of
139,439 ordinary shares at exercise prices ranging from $.59 to $7.00 per share
all of which are fully vested, and under various 1997 Stock Option Plans to
purchase an aggregate of 546,934 ordinary shares at exercise prices ranging from
$5.00 to $7.00 per share, of which 445,324 options are vested. In each case, the
option exercise price was equal to the fair market value of the ordinary shares
on the date of grant, as determined by the Board of Directors.

C.  BOARD PRACTICES

APPROVAL OF RELATED PARTY TRANSACTIONS UNDER ISRAELI LAW

FIDUCIARY DUTIES OF OFFICE HOLDERS

         Israeli Companies Law codifies the fiduciary duties that "office
holders", including directors and executive officers, owe to a company. An
"office holder" as defined in the Israeli Companies Law is a director, general
manager, chief business manager, deputy general manager, vice general manager,
chief business manager, executive vice president, vice president, other manager
directly subordinate to the managing director or any other person assuming the
responsibilities of any of the foregoing positions without regard to such
person's title. An office holder's fiduciary duties consist of a duty of care
and a duty of loyalty. The duty of care requires an office holder to act at a
level of care which a reasonable office holder in the same position would employ
under the same circumstances. This includes the duty to utilize reasonable means
to obtain :

         -    information regarding the appropriateness of a given action
              brought for his approval or performed by him by virtue of his
              position; and

         -    all other information of importance pertaining to the foregoing
              actions.

         The duty of loyalty includes avoiding any conflict of interest
between the office holder's position in the company and his personal affairs,
avoiding any competition with the company, avoiding exploiting any business
opportunity of the company in order to receive personal gain for the office
holder or others, and disclosing to the company any information or documents
relating to the company's affairs which the office holder has received due to
his position as an office holder. Each person listed as a director or executive
officer in the table under " -- E. Beneficial Ownership of Executive Officers
and Directors " below is an office holder.
<PAGE>

         Under Israeli Companies Law, all arrangements as to compensation of
office holders who are not directors require approval of our Board of Directors,
and the compensation of office holders who are directors must be approved by our
Audit Committee, Board of Directors and shareholders.

DISCLOSURE OF PERSONAL INTEREST OF AN OFFICE HOLDER

         The Israeli Companies Law requires that an office holder promptly
disclose any personal interest that he or she may have and all related material
information known to him or her, in connection with any existing or proposed
transaction by us. In addition, if the transaction is an extraordinary
transaction, that is, a transaction:

-        other than in the ordinary course of business,

-        other than on market terms, or

-        likely to have a material impact on the company's profitability, assets
         or liabilities.

The office holder must also disclose any personal interest held by:

-        the office holder's spouse, siblings, parents, grandparents,
         descendants, spouse's descendants,

-        the spouses of any of the foregoing, or

-        any corporation in which the office holder is a 5% or greater
         shareholder, director or general manager or in which he or she has the
         right to appoint at least one director or the general manager.

         Some transactions, actions and arrangements involving an office holder
(or a third party in which an office holder has an interest) must be approved by
the board of directors or as otherwise provided for in a company's articles of
association, as not being adverse to the company's interest. In some cases, such
a transaction must be approved by the audit committee and by the board of
directors itself (with further shareholder approval required in the case of
extraordinary transactions). An office holder who has a personal interest in a
matter, which is considered at a meeting of the board of directors or the audit
committee, may not be present during the board of directors or audit committee
discussions and may not vote on this matter.

DISCLOSURE OF PERSONAL INTERESTS OF A CONTROLLING SHAREHOLDER

         The Israeli Companies Law also provides that some transactions between
a public company and a controlling shareholder, or transactions in which a
controlling shareholder of the company has a personal interest but which are
between a public company and another entity, require the approval of the board
of directors and of the shareholders. Moreover, an extraordinary transaction
with a controlling shareholder or the terms of compensation of a controlling
shareholder must be approved by the audit committee, the board of directors and
shareholders.

         The shareholder approval for an extraordinary transaction must include
at least one-third of the shareholders who have no personal interest in the
transaction and are present at the meeting. The transaction can be approved by
shareholders without this one-third approval, if the total shareholdings of
those shareholders who have no personal interest and voted against the
transaction do not represent more than one percent of the voting rights in the
company. In addition, a private placement of securities that will increase the
relative holdings of a shareholder that holds 5% or more of the company's
outstanding share capital or that will cause any person to become, as a result
of the issuance, a holder of more than five percent of the company's outstanding
share capital, requires approval by the board of directors and the shareholders
of the company.
<PAGE>

         However, under the Companies Regulations (Relief From Related Party
Transactions), 5760-2000, promulgated under the Companies Law and amended in
January 2002, certain transactions between a company and its controlling
shareholder(s) do not require shareholder approval.

         In addition, pursuant to the recent amendment to these regulations,
directors' compensation and employment arrangements do not require the approval
of the shareholders if both the audit committee and the board of directors agree
that such arrangements are for the benefit of the company. If the director or
the office holder is a controlling shareholder of the company, then the
employment and compensation arrangements of such director or office holder do
not require the approval of the shareholders provided that certain criteria are
met.

         The above exemptions will not apply if one or more shareholders,
holding at least 1% of the issued and outstanding share capital of the company
or of the company's voting rights, objects to the grant of such relief, provided
that such objection is submitted to the company in writing not later than seven
(7) days from the date of the filing of a report regarding the adoption of such
resolution by the company pursuant to the requirements of the Israeli Securities
Law. If such objection is duly and timely submitted, then the compensation
arrangement of the directors will require shareholders' approval as detailed
above.

         The Israeli Companies Law provides that an acquisition of shares in a
public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% or greater shareholder of the
company. This rule does not apply if there is already another 25% shareholder of
the company. Similarly, the Israeli Companies Law provides that an acquisition
of shares in a public company must be made by means of a tender offer if as a
result of the acquisition the purchaser would become a 45% shareholder of the
company, unless there is a 50% shareholder of the company. Regulations under the
Israeli Companies Law provide that the Israeli Companies Law's tender offer
rules do not apply to a company whose shares are publicly traded outside of
Israel, if pursuant to the applicable foreign securities laws and stock exchange
rules there is a restriction on the acquisition of any level of control of the
company, or if the acquisition of any level of control of the company requires
the purchaser to make a tender offer to the public shareholders.

EXCULPATION OF OFFICE HOLDERS

         The Israeli Companies Law provides that an Israeli company cannot
exculpate an office holder from liability with respect to a breach of his duty
of loyalty, but may exculpate in advance an office holder from his liability to
the company, in whole or in part, with respect to a breach of his duty of care.
Our Articles of Association provide that, subject to any restrictions imposed by
corporate law, we may enter into a contract for the insurance of the liability
of any of our office holders with respect to:

         -    a breach of his duty of care to us or to another person;

         -    a breach of his duty of loyalty to us, provided that the office
              holder acted in good faith and had reasonable cause to assume that
              his act would not prejudice our interests; or

         -    a financial liability imposed upon him in favor of another person
              in respect of an act performed by him in his capacity as an office
              holder.

INDEMNIFICATION OF OFFICE HOLDERS

         We may, under our Articles of Association, indemnify an office holder
against:

         -    a financial liability imposed on him in favor of another person by
              any judgment, including a settlement or an arbitrator's award
              approved by a court in respect of an act performed in his capacity
              as an office holder; and

         -    reasonable litigation expenses, including attorneys' fees,
              expended by such office holder or charged to him by a court, in
              proceedings we institute against him or instituted on our behalf
              or by another

<PAGE>
         person, or in a criminal charge from which he was acquitted, all in
         respect of an act performed in his capacity as an office holder.

LIMITATIONS ON EXCULPATION AND INDEMNIFICATION

         These provisions are specifically limited in their scope by the Israeli
Companies Law, which provides that a company may not indemnify an office holder,
nor enter into an insurance contract which would provide coverage for any
monetary liability incurred as a result of any of the following:

         -    a breach by the office holder of his duty of loyalty unless the
              office holder acted in good faith and had a reasonable basis to
              believe that the act would not prejudice the company;

         -    a breach by the office holder of his duty of care if such breach
              was done intentionally or in disregard of the circumstances of the
              breach or its consequences;

         -    any act or omission done with the intent to derive an illegal
              personal benefit; or

         -    any fine levied against the office holder as a result of a
              criminal offense.

         Under the Israeli Companies Law, our shareholders may amend our
Articles of Association to include either of the following provisions:

         -    a provision authorizing us to grant in advance an undertaking to
              indemnify an office holder, provided that the undertaking is
              limited to types of events which the board of directors deems to
              be anticipated and limited to an amount determined by the board of
              directors to be reasonable under the circumstances; or

         -    a provision authorizing us to retroactively indemnify an office
              holder.

         In addition, pursuant to the Israeli Companies Law, indemnification of,
and procurement of insurance coverage for, our office holders must be approved
by our Audit Committee and our Board of Directors and, in specified
circumstances, by our shareholders.

         We have indemnified our office holders to the fullest extent permitted
under Israeli Law. In addition, we currently maintain directors and officers
liability insurance for the benefit of our office holders.

ELECTION OF DIRECTORS

         Pursuant to our Articles of Association, our Board of Directors shall
consist of a minimum of two and a maximum of eleven directors and all of our
directors (except for our Chief Executive Officer and external directors as
detailed below) are elected at our annual general meeting of shareholders by a
vote of the holders of a majority of the voting power represented and voting at
such meeting. All the members of our Board of Directors (except the external
directors as detailed below) may be re-elected upon completion of their term of
office. Our Articles of Association provide that, subject to the limitation on
the number of directors, the Board of Directors may appoint another person as a
director, whether to fill a vacancy or to add to their number; any directors so
appointed shall hold office until the next annual general meeting and may be
re-elected. Our Articles of Association also provide that our Chief Executive
Officer shall by virtue of his office always serve as a director and his term of
office shall expire automatically and immediately upon the effective date of the
termination of his employment as Chief Executive Officer. Of the eight directors
currently in office, five were elected by our shareholders at our annual general
meeting of shareholders in December 2001.
<PAGE>

EMPLOYMENT AGREEMENTS

      We have not entered into employment or service agreements with directors
other than our Chairman and Chief Executive Officer, Mr. Eldad Weiss, details of
which are provided below.

      We have entered into an employment agreement with Mr. Eldad Weiss for an
initial term of three years commencing in March 1997 which was automatically
renewed after the expiration of the initial term and remains in force unless and
until either party terminates the agreement, by giving the other party twelve
months prior written notice, for any reason and without explanation. Pursuant to
his employment agreement, Mr. Weiss receives an annual base salary and may, at
the discretion of the Board of Directors, receive a bonus based on achieving
annual targets set by the Board of Directors. The employment agreement provides
that if after a change in ownership of Paradigm or a change in Mr. Weiss' title
or office or other specified changes, he may voluntarily terminate his
employment and receive twelve months of base salary and use of company vehicle.
Furthermore, Mr. Weiss has received options to purchase 368,440 of our ordinary
shares. Mr. Weiss's employment agreement also contains confidentiality and
non-competition provisions.

      We entered into an employment agreement with Mr. Hezi Marueli in April
1997 which is terminable by either party upon twelve months prior written
notice. Pursuant to his employment agreement, Mr. Marueli receives an annual
base salary and may, at the discretion of the Board of Directors, receive a
bonus based on achieving annual targets set by the Board of Directors.
Furthermore, Mr. Marueli has received options to purchase 125,000 of our
ordinary shares. Mr. Marueli's employment agreement also contains
confidentiality and non-competition provisions.

      We entered into an employment agreement with Mr. Brian Berman in April
1998 which is terminable by either party upon nine months prior written notice.
Pursuant to his employment agreement, Mr. Berman receives an annual base salary
and may, at the discretion of the Board of Directors, receive a bonus based on
achieving targets set by the Board of Directors. Furthermore, Mr. Berman has
received options to purchase 70,000 of our ordinary shares. Mr. Berman's
employment agreement also contains confidentiality and non-competition
provisions.

      If the employment of all of our executive officers were to terminate under
circumstances requiring the provision of severance benefits (during a "notice
period" or otherwise), we would be obligated to pay them an aggregate of
approximately $1.8 million (of which approximately $0.4 million has been paid by
Paradigm into segregated accounts for the benefit of such executive officers).

AUDIT COMMITTEE

      The Israeli Companies Law provides that public companies must appoint an
audit committee. The responsibilities of the audit committee include identifying
irregularities in the management of a company's business and approving
related-party transactions as required by law. Under the Israeli Companies Law,
an audit committee must consist of at least three members, and include all of
the company's external directors. However, the chairman of the board of
directors, any director employed by the company or providing services to the
company on a regular basis, any controlling shareholder and any relative of a
controlling shareholder may not be a member of the audit committee. An audit
committee may not approve an action or a transaction with a controlling
shareholder, or with an office holder, unless at the time of approval two
external directors are serving as members of the audit committee and at least
one of the external directors was present at the meeting in which an approval
was granted. Our audit committee is currently composed of Messrs. Barr, Said,
Gen.(res.) Zamir and Ms. Safrai. It is currently contemplated that the audit
committee meet at least four times each year.

INTERNAL AUDIT

      The Israeli Companies Law requires the board of directors of a public
company to appoint an internal auditor nominated by the audit committee. A
person who does not satisfy the Israeli Companies Law's independence
requirements may not be appointed as an internal auditor. The role of the
internal

<PAGE>
auditor is to examine, among other things, the compliance of the company's
conduct with applicable law and orderly business practice. Our internal auditor
complies with the requirements of the Israeli Companies Law.

     D.       EMPLOYEES.


<TABLE>
<CAPTION>
                                   MAY 31,       DECEMBER 31,      DECEMBER 31,
                                     2002           2001              1999
<S>                                <C>           <C>               <C>
  Research and Development           150             157             137
     Sales and Marketing              83              96             105
      Customer Support                97              96              76
          Services                    86              97              69
Management and Administration         77              78              67
                                     -------------------------------------------
            TOTAL                    493             524             454
                                     -------------------------------------------


   North and South America           161             172             158
 Europe, Africa, Middle East         250             273             219
     Far East and China               82              79              77
                                     -------------------------------------------
            TOTAL                    493             524             454
                                     -------------------------------------------

</TABLE>
         We have to comply with various labor and immigration laws throughout
the world, including laws and regulations in Argentina, Australia, Brazil,
Canada, China, France, Indonesia, Israel, Kazakhstan, Malaysia, Russia, the
United Kingdom, the United States and Venezuela. To date, compliance with such
laws has not been a material burden for us. If, however, the number of our
employees increases materially over time, our compliance with such regulations
could become more burdensome.

         Our principal operating subsidiaries are not party to any collective
bargaining agreements. However, Paradigm is subject to certain labor-related
statutes and to certain provisions of collective bargaining agreements between
the Histadrut (General Federation of Labor in Israel) and the Coordinating
Bureau of Economic Organizations (including the Industrialists' Association),
which are applicable to our Israeli employees by virtue of expansion orders of
the Israeli Ministry of Labor and Welfare. A significant provision applicable to
all employees in Israel under collective bargaining agreements and expansion
orders is the automatic adjustment of wages in relation to increases in the
consumer price index, or CPI. The amount and frequency of these adjustments are
modified from time to time. We consider our relationship with our employees to
be good and have never experienced a labor dispute, strike or work stoppage. All
employees in France are represented by unions.
<PAGE>

E.       SHARE OWNERSHIP

     BENEFICIAL OWNERSHIP OF EXECUTIVE OFFICERS AND DIRECTORS

      As of May 31, 2002, 14,891,902 ordinary shares of Paradigm were issued and
outstanding.

      The following table sets forth, as of May 31, 2002, certain information
with respect to the beneficial ownership of our ordinary shares, by all
directors and officers. Except as otherwise specified the named beneficial owner
has the sole voting and investment power over the shares listed.


<TABLE>
<CAPTION>
     NAME                                    NO. OF SHARES(1)      PERCENTAGE      OPTIONS TO PURCHASE
                                                                                    ORDINARY SHARES(2)

<S>                                          <C>                   <C>             <C>
     Eldad Weiss                                 577,722              3.90%              368,440         (3)
     Yehezkel Marueli                            124,370                *                125,000         (4)
     Brian W. Berman                             47,486                 *                 70,000         (5)
     Elie Barr                                   30,000                 *                 30,000         (6)
     Jacob Dunietz                               68,900                 *                 30,000         (6)
     Michael Geiger                                 -                   *                   -
     Thierry LeRoux                                 -                   *                   -
     Jay Seid                                       -                   *                   -
     General (Res.) Zvi Zamir                    12,000                 *                 12,000         (6)
     Mary Safrai                                 12,000                 *                 12,000         (6)
     Jonathan Keller                             43,933                 *                 38,933         (7)
     All  directors and officers as a            916,411              6.2%               686,373
     group (11 persons)
</TABLE>

     * The percentage of shares beneficially owned does not exceed 1% of the
  outstanding Paradigm ordinary shares.


(1) Includes options exercisable within 60 days of May 31, 2002.
(2) Includes all options whether vested or unvested.
(3) The exercise price of the options ranges between $4.00 and $7.00 per share
    and the options expire between 2004-2006.
(4) The exercise price of the options ranges between $3.66 and $7.00 per share
    and the options expire between 2005-2006.
(5) The exercise price of the options ranges between $3.66 and $7.00 per share
    and the options expire between 2006-2008.
(6) The exercise price of the options is $4.00 per share and the options expire
    in 2003.
(7) The exercise price of the options ranges between $0.59 and $7.00 per share
    and the options expire between 2004-2006.
<PAGE>

Stock Option Plans

         Our 1994 and 1997 Stock Option Plans (the "Plans") provide for the
grant of stock options to our directors, employees (including officers) and
consultants. The purpose of the Plans is to attract and retain qualified
personnel and to motivate such persons by providing them with an equity interest
in Paradigm. Of the 2,300,000 ordinary shares originally available for issuance
under the Plans, options to purchase 1,917,028 ordinary shares have been granted
as of May 31, 2002, of which 1,821,680 are outstanding.

         The Plans are administered by our Board of Directors and its
Compensation Committee which have broad discretion, subject to certain
limitations, to determine the persons entitled to receive options, the terms and
conditions on which the options are granted and the number of shares subject to
each grant. Generally, the option exercise price per ordinary share shall not be
less than the fair market value of each option share at the date of the option
grant, unless otherwise determined by the Board or the Compensation Committee.
The option exercise price is payable in cash, by check or by any other form of
payment that is satisfactory to the Board of Directors or Compensation
Committee.

         Options granted under the Plans are not transferable by the option
holder, other than by will or pursuant to the laws of descent and distribution.
The options expire immediately upon the termination of the option holder's
employment, unless the Board of Directors or the Compensation Committee
authorizes an extension of the exercise term beyond the holder's employees
termination date. In the event of a termination of employment without cause, any
unexpired vested options may be exercised up to 90 days following the date of
termination, but only with respect to the number of shares purchasable at the
time of the option holder's termination of employment. In the event of the
termination of employment as a result of death or disability of the option
holder, any unexpired vested options may be exercisable up to six months from
the date of such termination but only with respect to the number of shares
purchasable at the time of such termination. In the event of the option holder's
retirement, any outstanding options shall, at the discretion of the Board of
Directors or Compensation Committee, accelerate and become immediately
exercisable as of the later of the date of retirement or one year following the
date of the grant.

THE 1994 STOCK OPTION PLANS

         The 1994 Stock Option Plans (the "1994 Plans") consist of three
separate plans. (i) the stock option plan for key employees (the "Key Employee
Plan"), (ii) the May 1994 Stock Option Plan (the "May 1994 Plan"); and the 1994
General Stock Option Plan (the "1994 General Plan"). Options granted under the
May 1994 Plan and 1994 General Plan, if unexercised, expire ten years from the
date of grant.

         Under the Key Employee Plan, we granted options to six of our key
employees to purchase a total of 63,336 Ordinary Shares, exercisable at $.59 per
ordinary share, with the purchase price of the ordinary shares payable in full
against issuance of the ordinary shares. The options issued pursuant to the Key
Employee Plan are vested and became exercisable immediately upon the grant of
such options. As of May 31, 2002, options to purchase a total of 63,336 ordinary
shares were outstanding under the Key Employee Plan.

         Under the May 1994 Plan, we granted options to purchase a total of
226,184 ordinary shares. The option exercise price for 114,678 ordinary shares
is $2.50 per ordinary share, and for 111,506 ordinary shares is $4.00 per
ordinary share. As at May 31, 2002, 200,696 options under the May 1994 Plan were
outstanding. All outstanding options are vested and are currently exercisable.

         Under the 1994 General Plan, we granted options to purchase a total of
60,176 ordinary shares. The option exercise price is $7.00 per ordinary share.
As at May 31, 2002, 48,352 options were outstanding. All outstanding options are
vested and are currently exercisable.

THE 1997 STOCK OPTION PLANS

         Under the 1997 Stock Option Plan for Qualifying Israel Employees, the
1997 Executive Stock Option Plan and the 1997 Stock Option Plan for U.S.
Employees (collectively, the "1997 Plans"), we have

<PAGE>
reserved for issuance an aggregate of 1,950,000 ordinary shares. The 1997 Plans
will terminate on January 4, 2005. The majority of options granted under the
1997 Plans vest as to 25% of the options granted after a period of employment
with us or our subsidiaries of 12 consecutive months from the date of the grant.
The remaining 75% of the options granted vest in 12 equal quarterly installments
commencing from the end of the first 12 month vesting period. Options expire
eight years from the date of grant. The shares underlying any options which
expire or are cancelled prior to exercise are subject to future options grants
under the 1997 Plans.

         As of May 31, 2002, options to purchase a total of 1,528,458 ordinary
shares under the 1997 Plans were outstanding at exercise prices ranging from
$3.66 to $7.00 per share. Of these outstanding options, 1,230,371 are vested and
are currently exercisable.

         See Item 1. - "Recent Developments" for a description of the treatment
of Paradigm options in connection with the proposed merger.
<PAGE>
ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     A. MAJOR SHAREHOLDERS

         As a result of the concentration of ownership of our ordinary shares,
some shareholders may be able to exercise control over matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions. This control may have the effect of delaying
or preventing a change in control of Paradigm.

         The following table sets forth certain information with respect to the
beneficial ownership of our ordinary shares as of May 31, 2002 by each person
who is known by us to own beneficially more than 5% of our outstanding ordinary
shares. Unless otherwise indicated, the entities identified in this table have
sole voting and investment power with respect to all ordinary shares shown as
beneficially owned by them.

<TABLE>
<CAPTION>
                                                                          Ordinary Shares,
Name and Address of                                                      Beneficially Owned
                                                                         ------------------
Beneficial Owner                                                  Number(1)                   Percent
----------------                                                  ---------                   -------
<S>                                                             <C>                           <C>
Shamrock Holdings Inc.                                          1,649,943(2)                     11.1%
4444 Lakeside Drive
Burbank, California 91510-7774


Mashov Gruss Investments  Ltd.                                  1,569,201(3)                     10.5%
3, Hagalim Boulevard, Herzlia, Israel 46766


Compagnie Generale de Geophysique                               1,500,000(4)                     10.1%
Tour Montparnasse,
33 Ave du Maine, BP 191 75755
Paris, Cedex 15
France

Bachow Investment Partners III L.P.                             1,399,000                         9.4%
3 Bala Plaza East, 5th floor
Bala Cynwyd, PA 19004

Harbourvest Partners,                                             973,300                         6.5%
1, Financial Center(flr.44) Boston MA

Systeia Capital Management                                        912,500                         6.1%
43-47, Avenue de Grand Armee  75116 Paris France
</TABLE>

(1)  Includes options and warrants exercisable within 60 days of May 31, 2002.

(2)  As part of a private placement in May 1999, Shamrock Holdings Inc. acquired
     877,193 ordinary shares. Shamrock Holdings of California Inc., acquired a
     further 772,750 ordinary shares on the
<PAGE>
     open market. Shamrock Holdings Inc. is a controlling person of Shamrock
     Holdings of California. Shamrock Holdings Inc. and Shamrock Holdings of
     California may be deemed to constitute a group within the meaning of Sec.
     13(d)(3) of the Securities Exchange Act of 1934 as amended, with respect to
     the ordinary shares each owns. Accordingly, Shamrock Holdings Inc. may be
     deemed to beneficially own 1,649,943 ordinary shares.

(3)  Includes warrants to acquire 71,435 Paradigm ordinary shares, which will be
     terminated at the closing of the merger pursuant to a voting agreement
     between Mastron and Paradigm BV, if consummated.

(4)  In October 2000, Compagnie Generale de Geophysique received 1,500,000
     ordinary shares as partial consideration for the acquisition of the
     Flagship business.

         As of May 31, 2002, 14,891,902 of our ordinary shares were outstanding,
all of which carry equal voting rights. At such date, there were 10 record
holders of our ordinary shares in the United States who collectively held 73.0%
of our outstanding ordinary shares.

SHAREHOLDERS AGREEMENTS

         For a description of the agreements between the between us and certain
of our shareholders regarding the nomination of directors, see Item 6. -
"Agreement for Nomination of Directors."

REGISTRATION RIGHTS

         Shareholders holding an aggregate of 7,412,370 ordinary shares and
holders of warrants exercisable into an aggregate of up to 362,862 ordinary
shares (collectively, "Registrable Securities"), have certain demand and
incidental registration rights with respect to those shares. The holders of up
to 5,757,688 of the Registrable Securities have the right to demand that
Paradigm effect an aggregate of three registrations, and two demand
registrations on Form F-3, but not more than one during any six month period.
Two groups of shareholders holding an aggregate of up to 877,193 and up to
1,140,351 ordinary shares, respectively, each have two demand registrations or
one registration on Form F-3. Each demand and request on Form F-3 must relate to
the registration of shares in a minimum amount of $3.0 million. Shareholders
holding 1,500,000 ordinary shares and warrants to purchase 250,000 ordinary
shares only have incidental registration rights. Holders of a convertible
debenture under the Convertible Loan Agreement have demand and incidental
registration rights with respect to the shares issuable upon conversion of the
debentures. See Item 5.B. - "Debt Financing" for a full description of the
convertible debenture.

         The demand registration rights are subject to an underwriter's right of
cutback, provided that all shares of shareholders holding other than Registrable
Securities are first excluded from such registration. We have undertaken not to
cause any other registration of securities for our own account to become
effective within 120 days after the effective date of any such demand
registration. Form F-3 registration may be delayed for up to 120 days (and in
some cases 180 days) in the event that we furnish the holders of Registrable
Securities a certificate signed by our President or Chief Executive officer
stating that, in the good faith judgment of the Board of Directors, it would be
seriously detrimental to us or our shareholders for such F-3 registration to be
effected at that time, provided that we may not utilize this right more than
once in any 12 month period. The incidental registration rights are unlimited,
subject to an underwriter's right of cutback, provided that all Registrable
Securities must be included in the registration prior to the shares of any other
holder (with the exception of shares issued by us to the public). All expenses
incurred in connection with such registrations will be borne by us , except that
participating shareholders will be obligated to pay their proportionate share of
the fees, discounts or commissions payable to any underwriter.

VOTING AGREEMENTS

         In connection with the proposed merger transaction, certain of our
shareholders, including our Chairman and Chief Executive Officer, who together
beneficially own
<PAGE>
approximately 42% of our outstanding ordinary shares, have entered into voting
agreements with Paradigm B.V. Pursuant to those agreements, those shareholders
voted their ordinary shares in favor of the merger at the June 13, 2002 Special
Meeting. The voting agreements impose certain restrictions on the transfer or
disposition of our ordinary shares by these shareholders and prohibit these
shareholders from taking certain actions, including actions that might
reasonably be expected to result in a takeover proposal or that would challenge
the proposed merger transaction. These voting agreements expire at the earliest
to occur of the termination of the Paradigm B.V. merger, the effectiveness of
our merger with Paradigm B.V., September 30, 2002 and certain other events
specified in the voting agreements. See Part I "Recent Developments" for more
information regarding the proposed merger transaction.

B.       RELATED PARTY TRANSACTIONS

LOANS TO OFFICERS

         We entered into two loan agreements with Mr. Yehezkel Marueli, our
President and Chief Operating Officer, one in March 1999 and the second in July
1999. Under the terms of the agreements, we loaned Mr. Marueli an aggregate
amount of $110,000, linked to the Israeli Consumer Price Index, with interest at
the rate of 2% per annum until May 31, 2000 and 4% per annum from June 1, 2000.
These loans were originally repayable on December 31, 2000, but repayment has
been extended to December 31, 2002.

ITEM 8.  FINANCIAL INFORMATION

 A.      CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

         See Item 18.

         LEGAL PROCEEDINGS

         On December 11, 1997, we filed suit for a declaratory judgment in the
District Court of Dallas County, Texas to determine whether we have any
obligation to Geophysical Micro Computer Application (International) Ltd.("GMA")
under a letter of intent (the "letter of intent"). Under the terms of the letter
of intent, we and GMA contemplated a transaction in which GMA would purchase
certain computer software programs and related products ("SeisX") from us,
provided that we acquired the SeisX assets from a third party. On May 5, 1998,
GMA filed a counterclaim for breach of contract, claiming that the letter of
intent required us to sell SeisX to GMA. GMA sought compensatory, injunctive and
declaratory relief. On September 11, 1998, the trial court granted summary
judgment in our favor and declared that we had no obligation to sell the SeisX
assets or related products to GMA, and that GMA takes nothing on its
counterclaim. On December 7, 1998, GMA filed an appeal against this summary
judgment. Oral arguments were presented before the Court of Appeals in April
2001. On July 30, 2001, the Dallas Court of Appeals reversed and remanded for
further proceedings the trial court decision of September 1998. The Court of
Appeals concluded that factual issues exist which preclude summary judgment in
our favor on our claim and on GMA's counterclaim for breach of contract. On May
9, 2002, the Texas Supreme Court denied our appeals on the Texas appellate court
decision. The case will be returned to the Dallas County District Court for
further proceedings. We believe that the outcome of the above claim will not
have a material adverse effect on our business or on our consolidated financial
condition.

         On December 10 1999, our Canadian subsidiary ("Paradigm Canada") filed
a claim for breach of contract, breach of obligation of confidence, breach of
copyright and trademark infringement, and passing off against Zokero
Incorporated, Edward Van Wieren and Shane Stogrin (the "defendants"). In
addition, Paradigm Canada applied for and obtained an Anton Pillar Order on
seizing certain property from the defendants and preserving it pending a trial
of the action. An expert is reviewing the seized material. The
<PAGE>
defendants, Van Wieren and Stogrin, were former employees of Paradigm Canada.
Paradigm Canada maintains that Van Wieren and Stogrin have, through their
company, Zokero, utilized for their own commercial gain, confidential
information and software and source code for software, all of which was
developed by Paradigm Canada and is it's property. Paradigm Canada is seeking
unspecified damages and loss of profits, as well as injunctive relief and
declaratory relief, with respect to the rights to the information and software
in question. The defendants filed their statement of defense on April 15, 2002
and we are in the process of preparing our affidavits of records and preparing
for discovery. We believe that the outcome of the above claim will not have a
material adverse effect on our business or on our consolidated financial
statements.

         On April 24, 2002, Leumi & Co. Investment House filed a claim in the
Tel Aviv Magistrates court against us and against Eldad Weiss, our Chairman and
Chief Executive Officer, claiming a finder's fee in connection with the FIMI
Convertible Loan transaction (see Item 5.B. - "Liquidity, Capital Resources and
Financing") in a total amount of approximately $250,000. We and Mr. Weiss have
not yet filed a Statement of Defense. This legal proceeding is in a preliminary
stage but we and our legal counsel do not expect it to have a material adverse
effect on our financial condition.

         On April 9, 2002, Dr. Cesar A. Egas-Teran filed a lawsuit against Mr.
Cesar Yepes, our registered agent in Ecuador, and Mr. Alberto Jaramillo-De
Howitt, our former registered agent in Ecuador, both individually and as
representatives in Ecuador of our subsidiaries, Paradigm Geophysical de
Venezuela S.A and Paradigm Geophysical B.V. and against these two companies, in
the Ecuador civil courts, requesting that the judge order payment to Dr.
Egas-Teran of $727,000 in commissions which he claims are allegedly owing to him
in connection with contracts awarded to us in Ecuador, plus interest and legal
expenses. In addition, the plaintiff asked that the judge order that this amount
be retained by Petroproduccion, our customer in Ecuador, from monies owed to us.
We believe that there is no basis for commissions between either Paradigm
Geophysical de Venezuela S.A or Paradigm Geophysical B.V and the plaintiff.
On April 12, 2002, the judge confirmed retention of the amount by
Petroproduccion and ordered the defendants to be subpoenaed for trial. Mr. Yepes
has informed us that he only became aware of this lawsuit on June 12, 2002 and,
therefore, he did not inform us of this action, including the order requiring
retention of funds by Petroproduccion, until June 12, 2002. We are not in
contact with Mr. Jaramillo-De Howitt. We are currently examining the claims
against us and have not yet filed a Statement of Defense. At this time, we and
our legal counsel cannot predict the outcome of this lawsuit.

         Other than as set forth above, we are not a party to any other material
legal proceedings.

DIVIDEND POLICY

         To date we have not declared or paid dividends to our shareholders . We
retain our earnings for use in the expansion and operation of the business. The
payment of any future dividends will be based on conditions then existing,
including our earnings, financial condition and capital requirements as well as
other conditions we deem relevant.

         The terms of our existing debt agreements and any additional debt that
may be incurred by us may effectively limit our ability to pay dividends.
<PAGE>
ITEM 9.  THE OFFER AND LISTING

         A.       OFFER AND LISTING DETAILS

         Our ordinary shares have been quoted on the Nasdaq National Market
under the symbol "PGEO" since June 15, 1998. Since February 19, 2001, we have
also been quoted on the Tel Aviv Stock Exchange, under the symbol "PGEO", under
the dual-listing legislation enabling companies that are quoted on U.S. markets
to dual-list on the Tel Aviv Stock Exchange with no additional regulatory
requirements.

         The following table sets forth, for the periods indicated, the high and
low sale prices of our ordinary shares as reported on the Nasdaq National
Market.

<TABLE>
<CAPTION>
                        PERIOD                      HIGH              LOW
                        ------                      ----              ---
<S>                                               <C>               <C>
         FOR 1998                                  $7.375           $4.190
         FOR 1999                                  $7.250           $4.250
         FOR 2000                                 $10.063           $4.250
         FOR 2001                                  $6.730           $3.120

         2000

         First quarter                             $10.06            $4.50
         Second quarter                             $7.81            $5.20
         Third quarter                              $6.88            $5.56
         Fourth quarter                             $7.00            $4.25

         2001

         First quarter                              $6.00            $4.25
         Second quarter                             $6.73            $4.97
         Third quarter                              $6.70            $3.70
         Fourth quarter                             $4.59            $3.12

         December 2001                              $4.43            $3.65

         2002

         First quarter                              $4.06            $2.97
         Second quarter (through May 31)            $5.03            $3.30
         January                                    $4.06            $3.35
         February                                   $3.65            $2.97
         March                                      $3.92            $3.16
         April                                      $4.11            $3.30
         May                                        $5.03            $3.81
</TABLE>
<PAGE>
B.       PLAN OF DISTRIBUTION

         Not applicable.

C.       MARKETS

         Our ordinary shares have been quoted on the Nasdaq National Market
under the symbol "PGEO" since June 15, 1998. Since February 19, 2001 our
ordinary shares have also been quoted on the Tel Aviv Stock Exchange, under the
symbol "PGEO", under the dual-listing legislation.

D.       SELLING SHAREHOLDERS

         Not applicable.

E.       DILUTION

         Not applicable.

F.       EXPENSES OF THE ISSUE

         Not applicable.

ITEM 10. ADDITIONAL INFORMATION

     A.   SHARE CAPITAL

          Not applicable.

     B.   MEMORANDUM AND ARTICLES OF ASSOCIATION

          1.   OBJECTS AND PURPOSES IN OUR  ARTICLES OF ASSOCIATION

         We were first registered under Israeli law on July 27, 1987 as a
private company, and on November 11, 1997, became a public company. Our
registration number with the Israeli Registrar of Companies is 52-004351-4. Our
objects and purposes are specified in Section 2 of our Memorandum of
Association.

         2.    PROVISIONS REGARDING DIRECTORS

         Pursuant to Article 54(b) of our Articles of Association, a transaction
entered into by us in which one of our directors has a personal interest,
directly or indirectly, will be valid in respect of Paradigm and the given
director only if approved by our Board of Directors and, if such transactions
are "irregular transactions" as defined in the Israeli Companies Law, only if
approved in accordance with the requirements of the Israeli Companies Law.

         An "irregular transaction" pursuant to the Israeli Companies Law is
defined as a transaction which is not in the ordinary course of business, a
transaction which is not under ordinary market conditions or any transaction
which might substantially affect the profitability of a company, its assets and
liabilities.

         The Israeli Companies Law provides that a director who has personal
interest in a given transaction with the a company, brought to the approval of
that company's Board of Directors, shall not be present and vote at that meeting
unless a majority of the directors have a personal interest in the transaction.
Article 55 of our Articles of Association, provides that a director who has a
personal interest in a matter
<PAGE>
which is brought for discussion before the Board of Directors may participate in
said discussion, provided that he shall neither vote with respect to nor attend
discussions concerning the approval of the activities or the arrangements. If
said director did vote or attend as aforesaid, the approval given to the
aforesaid activity or arrangements shall be invalid.

         Pursuant to Article 72 of our Articles of Association, at any meeting
of the Board of Directors at which a quorum is present, the board will have the
authority to exercise all or part of the authorities, power of attorney and
discretion invested at such time in the directors or regularly exercised by
them. In respect of a legal quorum at our Board meetings the Israeli Companies
Law provides that, unless determined otherwise by us , a legal quorum at the
Board meetings shall consist of the majority of the Board members. We have not
decided otherwise and therefore, the legal quorum at our Board meetings will
consist of the majority of the Board members.

         Any transaction concerning compensation to a director requires the
approval of both our Board of Directors and the shareholders .

         The Board of Directors may from time to time, in its discretion, cause
us to borrow or secure the payment of any sum or sums of money for the purpose
of Paradigm , and may secure or provide for the repayment of such sum or sums in
such manner, at such times and upon such terms and conditions in all respects as
it sees fit and in particular, by the issuance of bonds, perpetual or redeemable
debentures, debenture stock, or any mortgages, charges or other securities on
the undertaking, or the whole or any part of the property of Paradigm, both
present and future, including units uncalled or called but unpaid capital for
the time being.

         There is no mandatory retirement age for the directors under our
Articles of Association or the Israeli Companies Law.

         There is no requirement concerning the number of shares one individual
must hold in order to qualify him or her as a director under our Articles of
Association or the Israeli Companies Law.

         3. DIVIDENDS AND LIQUIDATION RIGHTS

         Subject to any preferential, deferred, qualified or other rights,
privileges or conditions attached to any special class of shares with regard to
dividends, our profits available for dividend and resolved to be distributed
shall be applied in payment of dividends upon our shares in proportion to the
amount paid up or credited as paid up per the nominal value thereon
respectively. Unless not otherwise specified in the conditions of issuance of
the shares, all dividends with respect to shares which were not fully paid up
within a certain period, for which dividends were paid, shall be paid
proportionally to the amounts paid or credited as paid on the nominal value of
the shares during any portion of the above-mentioned period.

         The Board of Directors may declare a dividend to be paid to the
shareholders according to their rights and interests in the profits, and may fix
the record date for eligibility and the time for payment.

         The directors may from time to time pay to our shareholders on account
of the next forthcoming dividend such interim dividends as, in their judgment,
our position justifies.

         A transfer of shares shall not pass the right to any dividend declared
thereon after such transfer and before the registration of the transfer.

         The Board of Directors may determine that, a dividend may be paid,
wholly or partly, by the distribution of our specific assets or by distribution
of paid-up shares, debentures or debenture stock or any other securities of
Paradigm or of any other companies or in any one or more of such ways in the
manner and to the extent permitted by the Israeli Companies Law.
<PAGE>
         4.  VOTES OF SHAREHOLDERS

         Except as otherwise provided in our Articles of Association, any
resolution at a General Meeting shall be deemed adopted if approved by the
holders of a majority of our voting rights represented at the meeting in person
or by proxy and voting thereon. In the case of an equality of votes, either on a
show of hands or a poll, the chairman of the meeting shall not be entitled to a
further or casting vote.

         Subject to any rights or restrictions for the time being attached to
any class or classes of shares, every shareholder shall have one vote for each
share of which he is the holder. Votes may be given either personally or by
proxy. A proxy need not be a shareholder of Paradigm.

         5.  MODIFICATION OF CLASS RIGHTS

         If, at any time, the share capital is divided into different classes of
shares, the rights attached to any class (unless otherwise provided by the terms
of issuance of the shares of that class) may be varied with the consent in
writing of the holders of all the issued shares of that class, or with the
sanction of a majority vote at a meeting of the shareholders passed at a
separate meeting of the holders of the shares of the class. The provisions of
the Articles of Association relating to General Meetings shall apply, mutatis
mutandis, to every such separate General Meeting. Any holder of shares of the
class present in person or by proxy may demand a secret poll.

         Unless otherwise provided by the conditions of issuance, the
enlargement of an existing class of shares, or the issuance of additional shares
thereof, shall not be deemed to modify or abrogate the rights attached to the
previously issued shares of such class or of any other class.

         6   GENERAL MEETINGS

         General Meetings shall be held at least once in every calendar year at
such time, not being more than fifteen months after the holding of the last
preceding General Meeting, and at such time and place as may be determined by
the Board of Directors. Such Annual General Meetings shall be called "Annual
Meetings," and all other General Meetings of the shareholders shall be called
"Special Meetings".

         Only shareholders of record as reflected on our share register at the
close of business on the date fixed by the board of directors as the record date
determining the then shareholders who will be entitled to vote, shall be
entitled to notice of, and to vote, in person or by proxy, at a General Meeting
and any postponement or adjournment thereof.

         7.  PROCEEDINGS AT GENERAL MEETINGS

         No business shall be transacted at any General Meeting unless a quorum
is present when the meeting proceeds to business. The quorum at any meeting
shall be two shareholders present in person or by proxy, holding or representing
at least one-quarter of our total voting rights . A company being a shareholder
shall be deemed to be personally present for the purposes of our Articles of
Association if represented by its representative duly authorized in accordance
with Article 42 of our Articles of Association.

         If, within half an hour from the time appointed for the holding of a
General Meeting, a quorum is not present, the meeting shall stand adjourned to
the same day in the next week at the same time and place, or any time and hour
as the Board of Directors shall designate and state in a notice to the
shareholders entitled to vote at the original meeting, and if, at such adjourned
meeting, a quorum is not present within half an hour from the time appointed for
holding the adjourned meeting any two shareholders present in person or by proxy
shall constitute a quorum. Notwithstanding the aforesaid, if a General Meeting
was convened at the demand of shareholders as permitted by Section 63(b) of the
Israeli Companies Law, then a quorum at such adjourned meeting shall be present
only if one or more shareholders are present who held
<PAGE>
in the aggregate at least 5% of our issued share capital and at least 1% of the
our voting rights or one or more shareholders who hold in the aggregate at least
5% of the our voting rights.

         8.  RESTRICTION ON NON-RESIDENTS

         Our Memorandum and Articles of Association do not restrict in any way
the ownership of ordinary shares by nonresidents, except with respect to
subjects of countries which are in a state of war with Israel, and neither the
Memorandum and Articles of Association nor Israeli law restricts the voting
rights of nonresidents of the State of Israel.

         9. RESTRICTIONS ON MERGERS; TAKEOVERS AND BUSINESS COMBINATIONS

         Pursuant to our Articles of Association, a merger requires approval by
the Board and by our shareholders. In accordance with the provisions of the
Israeli Companies Law and our Articles of Association, the Board may delay or
impede a merger in the event that, in its opinion, there is a reasonable
suspicion that as a result of the merger the surviving company will not be able
to meet Paradigm's obligations to its creditors.

         In addition, our current Articles of Association provide that we may
not engage in any business combination with an interested shareholder (in
general, the Articles of Association defines an interested shareholder as any
entity or person beneficially owning 15% or more of our outstanding voting
shares and any entity or person affiliated with, controlling or controlled by
such entity or person) for a period of three years following the date that such
shareholder became an interested shareholder, unless:

-        prior to such date, the Board of Directors approved either the business
         combination or the transaction that resulted in the shareholder
         becoming an interested shareholder; or

-        upon consummation of the transaction that resulted in the shareholder
         becoming an interested shareholder, the interested shareholder owned at
         least 75% of our outstanding voting shares at the time the transaction
         commenced.

         A business combination includes:

-        any merger or consolidation involving Paradigm and the interested
         shareholder;

-        any sale, transfer, pledge or other disposition of 10% or more of our
         assets in a transaction involving the interested shareholder;

-        subject to certain exceptions, any transaction that results in the
         issuance or transfer by us of any of our shares to the interested
         shareholder;

-        subject to certain minor exceptions, any transaction involving us (or
         any of our direct or indirect majority owned subsidiaries ) which has
         the effect of increasing the proportionate shareholding or convertible
         securities of Paradigm (or any such subsidiary) which is owned by the
         interested shareholder; or

-        the receipt by the interested shareholder of the benefit of any loans,
         advances, guarantees, pledges or other financial benefits provided by
         us.


         We have 2,000,000 special preferred shares ("Special Preferred
Shares")authorized. The Board of Directors has the authority to issue the
Special Preferred Shares in one or more series and to fix the rights,
<PAGE>
preferences, privileges and restrictions of such shares, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption
(including price), liquidation preferences and the number of shares constituting
any series, without further vote or action by the shareholders. The issuance of
Special Preferred Shares may have the effect of delaying, deferring or
preventing a change in control of Paradigm without further action by the
shareholders. For example, the Board of Directors could issue Special Preferred
Shares with voting and conversion rights that may adversely affect the voting
power of the holders of ordinary shares, including the loss of voting control to
others. We have not issued, and currently have no plans to issue, any Special
Preferred Shares.

         Although Israeli law does not prohibit the issuance of preferred shares
with rights which were not approved by the shareholders at the time such
preferred shares were authorized, this matter has not been determined by Israeli
courts, and there is substantial doubt as to the validity of such an issuance.
Consequently, to the extent that the rights, preferences and privileges attached
to the Special Preferred Shares, if and when issued, derogate from the rights of
the our ordinary shares , there can be no assurance that, if such issuance was
challenged in legal proceedings, the legality of such issuance would be upheld
by an Israeli court.

         10.  APPROVAL OF SPECIAL TRANSACTIONS UNDER ISRAELI LAW

         Under the Israeli Companies Law, only the approval of the Board of
Directors is required for arrangements with respect to compensation of a
company's chief executive officer. Arrangements regarding the compensation of
directors also require audit committee and shareholder approval.

         The Israeli Companies Law requires that an officer or a controlling
shareholder in a public company, including an Israeli company that is publicly
traded outside of Israel, promptly disclose to the audit committee, Board of
Directors and, in certain circumstances, the shareholders, any personal interest
that he may have and all related material information known to him, in
connection with any existing or proposed transaction by the company (an officer
and a controlling shareholder are under no such duty of disclosure when the
personal interest stems only from the personal interest of a relative in a
transaction that is not exceptional). In addition, if the transaction is an
exceptional transaction, as defined in the Israeli Companies Law, the officer
must also disclose any personal interest held by the officer's spouse, siblings,
parents, grandparents, descendants, spouse's descendants and the spouse of any
of the foregoing, or by a corporation in which the officer is a 5% or greater
shareholder, director or general manager or in which he or she has the right to
appoint at least one director or the general manager. The disclosure must be
made without delay and not later than the Board of Directors meeting at which
the transaction is first discussed. For these purposes, the definition of a
controlling shareholder under the Israeli Companies Law includes a shareholder
that holds 25% or more of the voting rights in a company, unless another
shareholder holds more than 50% of the voting rights (if two or more
shareholders are interested parties in the same transaction their shareholdings
shall be deemed cumulative).

         Once the officer or controlling shareholder complies with these
disclosure requirements, the company may approve the transaction in accordance
with the provisions of the Israeli Companies Law and its articles of
association. Generally, the approval of the majority of the disinterested
members of the audit committee and the Board of Directors is required. If audit
committee approval is required for a transaction with an interested party, an
officer or a controlling shareholder, such approval may not be given unless, at
the time the approval was granted two members of the audit committee were
external directors and at least one of them was present at the meeting at which
the audit committee decided to grant the approval. Shareholder approval may also
be required if the transaction is an exceptional transaction. An exceptional
transaction is a transaction other than in the ordinary course of business,
otherwise than on market terms or that is likely to have a material impact on
the company's profitability, assets or liabilities. In such event, the principal
terms of such transaction must be disclosed in a notice to the shareholders
which will include all substantive documents relating to the transaction. If the
transaction is with an officer or with a third party in which the officer or the
controlling shareholder has a personal interest, the approval must confirm that
the transaction is not adverse to the company's interest. Shareholders must also
approve all compensation paid to directors in whatever capacity, a company's
undertaking to indemnify a director or indemnification under
<PAGE>
a permit to indemnify and any transaction in which a majority of the board
members have a personal interest. An officer with a personal interest in any
matter may not be present at any audit committee or Board of Directors meeting
where such matter is being approved, and may not vote thereon, unless the
majority of the members of the audit committee or of the Board of Directors have
a personal interest in such approval. Shareholders' approval for an exceptional
transaction must include at least one third of the shareholders who have no
personal interest in the transaction and are present at the meeting. However,
the transaction can be approved by shareholders without this one-third approval
if the total shareholdings of those who vote against the transaction do not
represent more than one percent of the voting rights in the company, unless the
Minister of Justice shall determine a different percentage.

         However, under the Companies Regulations (Relief From Related Party
Transactions), 5760-2000, promulgated under the Israeli Companies Law and
amended in January 2002, certain transactions between a company and its
controlling shareholder(s) do not require shareholder approval.

         In addition, pursuant to the recent amendment to these regulations,
directors' compensation and employment arrangements do not require the approval
of the shareholders if both the audit committee and the board of directors agree
that such arrangements are for the benefit of the company. If the director or
the office holder is a controlling shareholder of the company, then the
employment and compensation arrangements of such director or office holder do
not require the approval of the shareholders provided that certain criteria are
met.

         The above exemptions will not apply if one or more shareholders,
holding at least 1% of the issued and outstanding share capital of the company
or of the company's voting rights, objects to the grant of such relief, provided
that such objection is submitted to the company in writing not later than seven
days from the date of the filing of a report regarding the adoption of such
resolution by the company pursuant to the requirements of the Israeli Securities
Law. If such objection is duly and timely submitted, then the compensation
arrangement of the directors will require shareholders' approval as detailed
above.

11.   ANTI-TAKEOVER PROVISIONS; MERGERS AND ACQUISITIONS UNDER ISRAELI LAW

         Pursuant to the Israeli Companies Law, if following any acquisition of
shares of a public company or of a class of shares of a public company the
acquiror holds 90% or more of that company's shares or 90% of any class of that
company's shares, respectively, then the acquiror must make a tender offer for
all of the remaining shares or the particular class of shares of the company. In
the event that 5% or more of the shareholders have not responded favorably to a
tender offer, the offeror may not purchase more than 90% of that class of
shares. According to the prevailing interpretation of the Israeli Companies Law,
this rule does not apply if the acquisition is made by way of a merger by a
party who is not a direct or indirect significant shareholder of the company.
Furthermore, the Israeli Companies Law provides that as long as a shareholder in
a public company holds more than 90% of the company's shares or of a class of
shares, such shareholder shall be precluded from purchasing any additional
shares of that type.

         The Israeli Companies Law further provides that if following the tender
offer such acquiring shareholder holds more than 95% of the outstanding shares
of any class, the holders of all the remaining shares will be obligated to
transfer such shares to the acquiror at the tender offer price. The Israeli
Companies Law requires that each company that is party to a merger approve the
transaction by a vote of the Board of Directors and by a vote of the majority of
its outstanding shares, generally excluding shares voted by the other party to
the merger or any person holding at least 25% of the other party to the merger.
In addition, the Israeli Companies Law does not generally require court approval
of a merger. Upon the request of a creditor to either party to the proposed
merger, the court may delay or prevent the merger if it concludes that there
exists a reasonable concern that as a result of the merger, the surviving
company will be unable to satisfy the obligations of any of the parties to the
merger. In addition, a merger may not be completed unless at least 70 days have
passed from the time that a proposal for approval of the merger has been filed
with the Israeli Registrar of Companies and certain notification and information
have been provided to debtors.
<PAGE>
         Notwithstanding the approval requirements set forth in the Israeli
Companies Law, companies, such as ours, which have been incorporated prior to
the Israeli Companies Law coming into effect, must specifically amend their
articles of association to provide for the shareholder voting requirements
contained in the Israeli Companies Law. We accordingly amended our articles of
association on November 30, 2000.

         The Israeli Companies Law also provides that an open market acquisition
of shares in a public company must be made by means of a tender offer if as a
result of the acquisition the purchaser would become a holder of at least 25% of
the voting rights in the company. This rule does not apply if there already is
another holder of at least 25% of the voting rights in the company. Similarly,
the Israeli Companies Law provides that an open market acquisition of shares in
a public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become the holder of at least 45% of the voting
rights in the company. This rule does not apply if another party already holds
more than 50% of the voting rights in the company. Regulations promulgated under
the Israeli Companies Law provide that these tender offer requirements do not
apply to companies whose shares are listed for trading on a stock exchange or
stock market outside of Israel only if, according to the laws in the country in
which its shares are traded there is either a limitation on the acquisition of a
specified percentage of control in the company or the acquisition of a specified
percentage of control requires the purchaser to also make a tender offer to the
public.

         The Israeli Companies Law extends the disclosure requirements
applicable to an office holder to a shareholder that holds 25% or more of the
voting rights in a public company, including an Israeli company that is publicly
traded outside of Israel such as on Nasdaq. Certain transactions between a
public company and a 25% shareholder, or transactions in which a 25% shareholder
of the company has a personal interest but which are between a public company
and another entity, require the approval of the Board of Directors and of the
shareholders. Moreover, an extraordinary transaction with a 25% shareholder or
the terms of compensation of a 25% shareholder must be approved by the audit
committee, the Board of Directors and shareholders.

         The shareholder approval for an extraordinary transaction must include
at least one third of the shareholders who have no personal interest in the
transaction and are present at the meeting; the transaction can be approved by
shareholders without this one third approval, if the total share holdings of
those who vote against the transaction do not represent more than 1% of the
voting rights in the company.

         The Israeli Companies Law requires that certain transactions, actions
and arrangements be approved as provided for in the company's Articles of
Association, by the company's Board of Directors, by the audit committee and/or
by the company's shareholders. The vote required by the Audit Committee and the
Board for approval of such matters, in each case, is a majority of the
disinterested directors participating in a duly convened meeting.

      C.   MATERIAL CONTRACTS

         Other than the definitive merger agreement discussed in Part I and Item
4 and the acquisition transaction agreements and related documents discussed in
Item 4. "Information on the Company - History and Development of the Company,"
in Item 5. "Operating and Financial Review and Prospects - Acquisitions," and in
Item 5. "Operating and Financial Review and Prospects - Debt Financing," in the
past two years we have not entered into any material contracts other than
contracts entered into in the ordinary course of our business.

     D.       EXCHANGE CONTROLS

         There are no restrictions under Israeli law on the payment of dividends
or other distributions in respect of ordinary shares and any amounts payable
upon the dissolution, liquidation or winding up of our affairs, as well as the
proceeds of any sale in Israel of our securities to an Israeli resident are
freely repatriable into non-Israeli currencies at the rate of exchange
prevailing at the time of conversion, provided that Israeli income tax has been
paid on (or withheld from) such payments.
<PAGE>
         Neither our Memorandum of Association, Articles of Association nor the
laws of the State of Israel restrict in any way the ownership or voting of
shares by non-residents, except with respect to subjects of countries that are
in a state of war with Israel.

    E.   TAXATION

    ISRAELI TAXATION AND INVESTMENT PROGRAMS

         The following discussion summarizes the material current tax laws of
the State of Israel as they relate to us, our shareholders and ownership and
disposition of our ordinary shares. This summary does not discuss all aspects of
Israeli tax law that may be relevant to a particular shareholder's personal
investment circumstances or to certain types of investors subject to special
treatment under Israeli law (for example, traders in securities or persons that
own, directly or indirectly, 10% or more of our outstanding voting shares). The
following also includes a discussion of certain Israeli government programs
benefiting various Israeli businesses, including Paradigm. To the extent that
the discussion is based on new legislation still subject to judicial or
administrative interpretation, there can be no assurance that the views
expressed herein will accord with any such interpretation in the future. In
addition, this discussion does not cover all possible tax consequences or
situations. Investors should consult with their own tax advisors regarding their
personal tax situation.

PROPOSED TAX REFORM

         In February 2002, the Minister of Finance appointed a committee to
review the current Israeli tax structure and to make recommendations (the "Tax
Reform Committee"). The Tax Reform Committee presented its recommendations to
the Minister of Finance on June 12, 2002. If implemented, the recommendations
might result in the imposition of Israeli capital gains taxes at the rate of 15%
to 35% on sales of securities of Israeli companies by Israeli residents. In
addition, the committee has proposed that a tax be imposed on all income of
Israeli residents (individuals and corporations) regardless of the territorial
source of income and tax will be imposed on income of foreign corporations
controlled by Israeli residents if the majority of profits or income of such
foreign company originate from "passive income", including interest, dividends,
royalties and rental income. We cannot predict whether such recommendations will
be adopted and eventually enacted into law.

GENERAL CORPORATE TAX STRUCTURE

         Israeli companies are generally subject to "Company Tax" at the rate of
36 % of taxable income, such rate having become effective January 1, 1996.
However, the effective tax rate payable by a company which derives income from
an Approved Enterprise (as further discussed below), may be considerably less.
Subject to relevant tax treaties, dividends or interest received by an Israeli
corporation from foreign subsidiaries are generally subject to tax regardless of
its status as an Approved Enterprise.

TAXATION UNDER INFLATIONARY CONDITIONS

         The Income Tax Law (Adjustment for Inflation), 1985 (the "Adjustment
for Inflation Law") attempts to overcome some of the problems experienced in a
traditional tax system by an economy experiencing rapid inflation, which was the
case in Israel at the time the Adjustment for Inflation Law was enacted.
Generally, the Adjustment for Inflation Law was designed to neutralize, for
Israeli tax purposes, the erosion of capital investments in businesses and to
prevent unintended tax benefits resulting from the deduction of inflationary
financing expenses. The Adjustment for Inflation Law applies a supplementary
<PAGE>
set of inflationary adjustments to a normal taxable profit computed according to
regular historical cost principles.

         The Adjustment for Inflation Law introduced a special adjustment for
the preservation of equity for tax purposes based on changes in the Israeli CPI,
whereby corporate assets are classified broadly into fixed (inflation resistant)
assets and non-fixed assets. Where the shareholders' equity, as defined in the
Adjustment for Inflation Law, exceeds the depreciated cost of fixed assets, a
corporate tax deduction which takes into account the effect of inflationary
change on such excess is allowed (up to a ceiling of 70% of taxable income in
any single tax year, with the unused portion permitted to be carried forward on
an inflation-linked basis with no ceiling). If the depreciated cost of fixed
assets exceeds shareholders' equity, then such excess, multiplied by the annual
rate of inflation is added to taxable income.

         In addition, subject to certain limitations, depreciation on fixed
assets and loss carry forwards are adjusted for inflation based on changes in
the Israeli CPI. The net effect of the Adjustment for Inflation Law on us might
be that our taxable income, as determined for Israeli corporate tax purposes,
would be different from our dollar income, as reflected in our financial
statements, due to the difference between the annual changes in the CPI and in
the NIS exchange rate with respect to the dollar, causing changes in the actual
tax rate.

CAPITAL GAINS AND INCOME TAXES APPLICABLE TO NON-ISRAELI RESIDENT SHAREHOLDERS

         Under existing regulations, any capital gain realized by an individual
shareholder with respect to our ordinary shares acquired on or after the listing
of such shares for trading will be exempt from Israeli capital gains tax if the
ordinary shares are listed on an approved foreign securities market (which
includes Nasdaq in the United States), provided that we continue to qualify as
an Industrial Company under Israeli law and that the individual does not hold
such shares for business purposes. If we do not maintain our status as an
Industrial Company, then subject to any applicable tax treaty, the Israeli
capital gains tax rates would be up to 50% for non-Israeli resident individuals,
and 36% for companies, who are our shareholders. The Tax Reform Committee
proposes to institute capital gains tax on the real gains from the sale of
securities traded on foreign exchanges (including the securities of Israeli
companies traded on Nasdaq).

         Upon a distribution of dividends other than bonus shares (stock
dividends), income tax is generally withheld at source at the rate of 25% (or
the lower rate payable with respect to Approved Enterprises), unless a double
taxation treaty is in effect between Israel and the shareholder's country of
residence that provides for a lower tax rate in Israel on dividends.

         A tax treaty between the United States and Israel (the "Treaty")
provides for a maximum tax of 25% on dividends paid to a resident of the United
States (as defined in the Treaty). Dividends distributed by an Israeli company
and derived from the income of an Approved Enterprise are subject to a 15%
dividend withholding tax. The Treaty further provides that a 12.5% Israeli
dividend withholding tax applies to dividends paid to a United States
corporation owning 10% or more of an Israeli company's voting shares throughout
the current year to the date the dividend is paid and the preceding taxable year
(as applicable). The 12.5% rate applies only on dividends from a company that
does not have any projects with Approved Enterprise status in the applicable
period.

         If for any reason shareholders do not receive the above exemption for a
sale of shares in an Industrial Company, the Treaty provides U.S. resident
investors with an exemption from Israeli capital gains tax in certain
circumstances (there may still be U.S. taxes) upon a disposition of shares in
the company if they held under 10% of the company's voting stock throughout the
12 months prior to the share disposition. If Israeli capital gains tax is
payable, it can be credited against a shareholder's U.S. federal tax under the
circumstances specified in the Treaty.

         A non-resident of Israel who has derived or accrued dividend income in
Israel from which the applicable tax was withheld at source is currently exempt
from the duty to file an annual Israeli tax return
<PAGE>
with respect to such income, provided such income was not derived from a
business carried on in Israel by such non-resident and that such non-resident
does not derive other non-passive income from sources in Israel.

LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969

         We currently qualify as an "Industrial Company" within the meaning of
the Law of the Encouragement of Industry (Taxes), 1969 (the "Industry
Encouragement Law") According to the Industry Encouragement Law, an "Industrial
Company" is a company resident in Israel, at least 90% of the income of which in
any tax year, determined in Israeli currency (exclusive of income from defense
loans, capital gains, interest and dividends) is derived from an "Industrial
Enterprise" that it owns. An "Industrial Enterprise" is defined by that law as
an enterprise whose major activity in a given tax year is industrial production
activity.

         Included among the tax benefits for an Industrial Company are
deductions of 12.5% per annum of the purchase price of a patent or of know-how,
an election under certain conditions to file a consolidated return and
accelerated depreciation rates on equipment and buildings.

         Eligibility for the benefits under the Industry Encouragement Law is
not subject to receipt of prior approval from any governmental authority. No
assurance can be given that we will continue to qualify as an "Industrial
Company" or that the benefits described above will be available in the future.

LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959

         The Law for the Encouragement of Capital Investments, 1959, as amended
(the "Investment Law"), provides that a capital investment in production
facilities (or other eligible facilities) may, upon application to the Israel
Investment Center, be designated as an Approved Enterprise. Each certificate of
approval for an Approved Enterprise relates to a specified capital investment
program delineated both by its financial scope, including its capital sources,
and its physical characteristics, i.e. the equipment to be purchased and
utilized pursuant to the program. The tax benefits derived from any such
certificate of approval relate only to taxable profits attributable to the
specific Approved Enterprise.

         Taxable income derived from an Approved Enterprise is subject to a
reduced corporate tax rate of 25% (the "Corporate Tax"). Such income is eligible
for further reductions in tax rates depending on the percentage of the foreign
investment in the company's share capital (conferring rights to profits, voting
and appointment of directors) and of its combined share and loan capital which
is owned by non-Israeli residents. The tax rate is 20% if the foreign investment
is 49% or more but less than 74%; 15% if the foreign investment is 74% or more
but less than 90%; and 10% if the foreign investment is 90% or more. The lowest
level of foreign investment during the year is used to determine the relevant
tax rate for that year. These tax benefits are granted for a limited period not
exceeding 7 or 10 years from the first year in which the Approved Enterprise has
taxable income. The period of benefits may in no event, however, exceed the
lesser of twelve years from the year in which production commenced or fourteen
years from the year of receipt of Approved Enterprise status.

         A company that has an Approved Enterprise status which was approved
after April 1, 1986 may elect to forego any entitlement to the grants otherwise
available under the Investment Law and, in lieu of the foregoing, participate in
an alternative benefits program (the "Alternative Benefits Program"), under
which the undistributed income from the Approved Enterprise is fully tax exempt
for a defined period of time. The period of tax exemption ranges between 2 and
10 years, depending upon the location within Israel of the Approved Enterprise
and the type of Approved Enterprise. On the expiration of the exemption period,
the Approved Enterprise would be eligible for beneficial tax rates under the
Investment Law for the remainder, if any, of the otherwise applicable benefits
period. We elected to participate in the Alternative Benefits Program. There can
be no assurance that the current Alternative Benefits Program will continue to
be available or that we will qualify for the benefits under the current program.
<PAGE>
         A company that has elected to participate in the Alternative Benefits
Program and that subsequently pays a dividend out of the income derived from the
Approved Enterprise during the tax exemption period will be subject to Corporate
Tax (in the year in which the dividend is distributed) with respect to the
amount distributed (plus withholding tax thereon) at the rate that would have
been applicable in the year in which the distributed income was generated had
the company not been exempt from tax in such year. The dividend recipient is
taxed at the reduced rate of 15% applicable to dividends from Approved
Enterprise if the dividend is distributed within twelve years after the tax
exemption period. The withholding tax rate will be 25% after such period. In
case of a company with over 25% foreign shareholding (as defined by law), the
twelve-year limitation on reduced withholding tax on dividends does not apply.
This tax should be withheld by a company at source, regardless of whether the
dividend is converted into foreign currency.

          We have been granted "Approved Enterprise" status under the Investment
Law with respect to four projects. Pursuant to the provisions of the Investment
Law, we chose the Alternative Benefits Program which, as discussed above,
provides for the waiver of grants in return for tax-exemption. Accordingly,
income derived from each Approved Enterprise is tax-exempt for a period of two
to four years, commencing with the year it first earns taxable income, and is
then subject to Corporate Tax at the rate of 10% - 25%, dependant on the
percentage of foreign investment as described above, for additional periods of
six to eight years.

         The Investment Law also provides that a company with an Approved
Enterprise is entitled to accelerated depreciation on its property and equipment
included in an approved investment program.

         Future applications to the Investment Center will be reviewed
separately, and decisions as to whether or not to approve such applications will
be based, among other things, on the then prevailing criteria set forth in the
Investment Law, on the specific objectives of the applicant company set forth in
such applications and on certain financial criteria of the applicant company.
Accordingly, there can be no assurance that any such applications will be
approved. In addition, the benefits available to an Approved Enterprise are
conditional upon the fulfillment of certain conditions stipulated in the
Investment Law and its regulations and the criteria set forth in the specific
certificate of approval, as described above. In the event that these conditions
are violated, in whole or in part, the company would be required to refund the
amount of tax benefits, plus the CPI linkage adjustment and interest.

TAX BENEFITS FOR RESEARCH AND DEVELOPMENT

         Under certain conditions, Israeli tax law allows a tax deduction in the
year incurred for expenditures (including depreciation on capital expenditures
but excluding depreciable capital expenditures) in connection with scientific
research and development projects, if the expenditures are approved by the
relevant Israeli Government Ministry (determined by the field of research) and
the research and development is for the promotion of the enterprise.
Expenditures not so approved are deductible over a three-year period. However,
expenditures made out of the proceeds of government grants are not deductible,
i.e. we will be able to deduct the unfunded portion of the research and
development expenditures but not the gross amount.

LAW FOR THE ENCOURAGEMENT OF INDUSTRIAL RESEARCH AND DEVELOPMENT, 1984

         Under the Law for the Encouragement of Industrial Research and
Development, 1984, (the "Research Law") and the Instructions of the Director
General of the Ministry of Industry and Trade, research and development
programs, plans for the intermediate stage between research and development, and
manufacturing and sales approved by a governmental committee of the Office of
the Chief Scientist (OCS) (the "Research Committee") are eligible for grants of
up to 50% of the project's expenditure, if they meet certain criteria. These
grants are issued in return for the payment of royalties from the sale of
products developed in accordance with the program as follows: 3% of revenues
during the first three years and 3.5% of revenues in the fourth year and
thereafter, with the total royalties not to exceed 100% - 150% of the
<PAGE>
dollar value of the OCS grant (or in some cases up to 300%). Following the full
payment of such royalties, there is no further liability for payment.

         The Israeli government further requires that products developed with
government grants are to be manufactured in Israel. However, in the event that
any portion of the manufacturing is not conducted in Israel, if approval is
received from the OCS, the company would be required to pay royalties that are
adjusted in proportion to manufacturing outside of Israel as follows: when the
manufacturing is performed outside of Israel by the company or an affiliate
company in which the company has no less than 51% ownership, the royalties are
to be paid as described above with the addition of 1%, and when the
manufacturing outside of Israel is not performed by the company or an affiliate
the royalties paid shall be equal to the ratio of the amount of grant received
from the OCS divided by the amount of grant received from the OCS and the
investment(s) made by the company in the project. The payback also will be
adjusted to 120%, 150% or 300% of the grant if the portion of manufacturing that
is performed outside of Israel is up to 50%, between 50% and 90%, or more than
90%, respectively. The technology developed pursuant to the terms of these
grants may not be transferred to third parties without the prior approval of the
Research Committee. Such approval is not required for the export of any products
resulting from such research or development. Approval of the transfer of
technology may be granted only if the recipient abides by all the provisions of
the Research Law and the regulations promulgated thereunder, including the
restrictions on the transfer of know-how and the obligation to pay royalties in
an amount that may be increased.

         In order to meet certain conditions in connection with the grants and
programs of the OCS, we have made certain representations to the Israeli
government about our s future plans for our Israeli operations. From time to
time, the extent of our Israeli operations has differed and may in the future
differ, from our representations. If, after receiving grants under certain
programs, we fail to meet certain conditions to those benefits, including, with
respect to grants received from the OCS, the maintenance of a material preserve
in Israel, or if there is any material deviation from the representations made
by us to the Israeli government, we could be required to refund to the State of
Israel funds or other benefits previously received (including interest and CPI
linkage difference) and would likely be denied receipt of such grants or
benefits, and participation in such programs, thereafter.

         We have participated in programs sponsored by the OCS for the support
of research and development activities (See notes to the Financial Statements).

         Each application to the OCS is reviewed separately, and grants are
based on a program approved by the Research Committee. Expenditures supported
under other incentive programs of the State of Israel are not eligible for OCS
grants. As a result, there can be no assurance that applications to the OCS will
be approved or, if approved, what the amounts of the grants will be.

FUND FOR THE ENCOURAGEMENT OF MARKETING ACTIVITIES

         We have received grants relating to our overseas marketing expenses
from the Marketing Fund. These grants are awarded for specific expenses incurred
by us for overseas marketing and are based upon the expenses reported by us to
the Marketing Fund. All marketing grants recorded from the Marketing Fund until
1997 are linked to the dollar and are repayable as royalties at the rate of 3%
of the amount of increases in export sales realized by us from the Marketing
Fund. Grants recorded beginning January 1, 1998 bear royalties of 4% plus
interest at LIBOR rates. We will be required to pay royalties on grants from the
Marketing Fund only to the extent that it actually achieves increases in export
sales. The proceeds of these grants are presented in our consolidated financial
statements as offsets to marketing expenses. Through December 31, 2001, we had
received grants from the Marketing Fund in the amount of approximately $430,000.
At May 31, 2002, royalties paid to the Marketing Fund had eliminated any
contingent liability for the payment of further royalties.
<PAGE>
UNITED STATED FEDERAL INCOME TAX CONSIDERATIONS

         The following summary describes certain of the material U.S. Federal
income tax consequences to U.S. Holders (as defined below) arising from the
purchase, ownership and disposition of ordinary shares. This summary is based on
the provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
final, temporary and proposed U.S. Treasury Regulations promulgated thereunder,
and administrative and judicial interpretations thereof, all as in effect as of
the date hereof, and all of which are subject to change, possibly with
retroactive effect.

         This summary does not deal with all aspects of U.S. Federal income
taxation that may be relevant to particular U.S. Holders in light of their
particular circumstances, or to U.S. Holders subject to special rules,
including, without limitation, certain retirement plans, insurance companies,
U.S. Holders of securities held as part of a "straddle," "synthetic security,"
"hedge", "conversion transaction" or other integrated investment, persons that
enter into "constructive sales" involving ordinary shares or substantially
identical property with other investments, U.S. Holders whose functional
currency is not the United States dollar, U.S. Holders subject to the
alternative minimum tax, certain expatriates or former long-term residents of
the United States, financial institutions, broker-dealers, tax-exempt
organizations and U.S. Holders who own (directly, indirectly or through
attribution) 10% or more of our outstanding voting stock. The following
discussion does not address the effect of any applicable state, local or foreign
tax laws or any U.S. federal estate or gift tax laws. This summary does not
consider the tax treatment of persons who own ordinary shares through a
partnership or other pass-through entity, and deals only with ordinary shares
held as "capital assets" as defined in Section 1221 of the Code.

         This discussion is addressed only to "U.S. Holders." A U.S. Holder is a
holder of ordinary shares that is a U.S. citizen, an individual resident in the
United States for U.S. Federal income tax purposes, a domestic corporation, an
estate the income of which is includible in its gross income for U.S. Federal
income tax purposes without regard to its source, or a trust if either: (i) a
U.S. court is able to exercise primary supervision over the administration of
the trust and one or more U.S. persons have the authority to control all the
substantial decisions of the trust or (ii) the trust was in existence on August
20, 1996 and, in general, would have been treated as a U.S. Holder under rules
applicable prior to such time, provided the trust elects to continue such
treatment thereafter.

         U.S. HOLDERS OF ORDINARY SHARES ARE ADVISED TO CONSULT WITH THEIR OWN
TAX ADVISORS WITH RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL TAX CONSEQUENCES,
AS WELL AS THE TAX CONSEQUENCES IN OTHER JURISDICTIONS, OF THE PURCHASE,
OWNERSHIP AND SALE OF ORDINARY SHARES APPLICABLE IN THEIR PARTICULAR TAX
SITUATIONS.

TAXATION OF DIVIDENDS

         The gross amount of any distributions received with respect to ordinary
shares, including the amount of any Israeli taxes withheld therefrom, will
constitute dividends for U.S. Federal income tax purposes, to the extent of our
current and accumulated earnings and profits as determined for U.S. Federal
income tax principles. You will be required to include this amount of dividends
in gross income as ordinary income. Distributions in excess of our earnings and
profits will be treated as a non-taxable return of capital to the extent of your
tax basis in the ordinary shares, and, subject to the discussion below under the
heading "Passive Foreign Investment Company," any amount in excess of your tax
basis will be treated as gain from the sale of ordinary shares. See
"--Disposition of Ordinary shares" below for the discussion on the taxation of
capital gains. Dividends will not qualify for the dividends-received deduction
generally available to corporations under Section 243 of the Code.

         Dividends that we pay in NIS, including the amount of any Israeli taxes
withheld therefrom, will be included in your income in a U.S. dollar amount
calculated by reference to the exchange rate in effect on the day such dividends
are received. A U.S. Holder who receives payment in NIS and converts NIS into
U.S. dollars at an exchange rate other than the rate in effect on such day may
have a foreign currency
<PAGE>
exchange gain or loss that would be treated as ordinary income or loss. U.S.
Holders should consult their own tax advisors concerning the U.S. tax
consequences of acquiring, holding and disposing of NIS.

         Any Israeli withholding tax imposed on such dividends will be a foreign
income tax eligible for credit against a U.S. Holder's U.S. Federal income tax
liability, subject to certain limitations set out in the Code (or,
alternatively, for deduction against income in determining such tax liability).
The limitations set out in the Code include computational rules under which
foreign tax credits allowable with respect to specific classes of income cannot
exceed the U.S. Federal income taxes otherwise payable with respect to each such
class of income. Dividends generally will be treated as foreign-source passive
income or, in the case of certain types of U.S.Holders, financial services
income for United States foreign tax credit purposes. The rules relating to the
determination of the foreign tax credit are complex, and you should consult with
your personal tax advisors to determine whether and to what extent you would be
entitled to this credit.

DISPOSITIONS OF ORDINARY SHARES

         If you sell or otherwise dispose of ordinary shares, you will recognize
gain or loss for U.S. Federal income tax purposes in an amount equal to the
difference between the amount realized on the sale or other disposition and the
adjusted tax basis in the ordinary shares. Subject to the discussion below under
the heading "Passive Foreign Investment Companies," such gain or loss generally
will be capital gain or loss and will be long-term capital gain or loss if you
have held the ordinary shares for more than one year at the time of the sale or
other disposition. In general, any gain that you recognize on the sale or other
disposition of ordinary shares will be U.S.-source for purposes of the foreign
tax credit limitation; losses, will generally be allocated against U.S. source
income. Deduction of capital losses is subject to certain limitations under the
Code.

         In the case of a cash basis U.S. Holder who receives NIS in connection
with the sale or disposition of ordinary shares, the amount realized will be
based on the U.S. dollar value of the NIS received with respect to the ordinary
shares as determined on the settlement date of such exchange. A U.S. Holder who
receives payment in NIS and converts NIS into United States dollars at a
conversion rate other than the rate in effect on the settlement date may have a
foreign currency exchange gain or loss that would be treated as ordinary income
or loss.

         An accrual basis U.S. Holder may elect the same treatment required of
cash basis taxpayers with respect to a sale or disposition of ordinary shares,
provided that the election is applied consistently from year to year. Such
election may not be changed without the consent of the Internal Revenue Service
(the "IRS"). In the event that an accrual basis U.S. Holder does not elect to be
treated as a cash basis taxpayer (pursuant to the Treasury regulations
applicable to foreign currency transactions), such U.S. Holder may have a
foreign currency gain or loss for U.S. Federal income tax purposes because of
differences between the U.S. dollar value of the currency received prevailing on
the trade date and the settlement date. Any such currency gain or loss would be
treated as ordinary income or loss and would be in addition to gain or loss, if
any, recognized by such U.S. Holder on the sale or disposition of such ordinary
shares.

PASSIVE FOREIGN INVESTMENT COMPANIES

         For U.S. Federal income tax purposes, we will be considered a passive
foreign investment company ("PFIC") for any taxable year in which either (1) 75%
or more of our gross income is passive income, or (ii) at least 50% of the
average value of all of our assets for the taxable year produce or are held for
the production of passive income. For this purpose, passive income includes
dividends, interest, royalties, rents, annuities and the excess of gains over
losses from the disposition of assets which produce passive income. If we were
determined to be a PFIC for U.S. Federal income tax purposes, highly complex
rules would apply to U.S. Holders owning ordinary shares. Accordingly, you are
urged to consult your tax advisors regarding the application of such rules.
<PAGE>
         Based on our current and projected income, assets and activities, we
believe that we are not currently a PFIC nor do we expect to become a PFIC in
the foreseeable future. However, because the determination of whether we are a
PFIC is determined as of the end of each taxable year and is dependent on a
number of factors, including the value of our assets (based on the fair market
value of our ordinary shares) and the amount and type of our gross income, there
can be no assurances that we will not become a PFIC for any future taxable year.

         If we are treated as a PFIC for any taxable year, then, unless you
elect either to treat your investment in ordinary shares as an investment in a
"qualified electing fund" (a "QEF election") or to "mark-to-market" your
ordinary shares, as described below,

     - you would be required to allocate income recognized upon receiving
certain distributions ("excess distributions") or gain recognized upon the
disposition of ordinary shares ratably over the holding period for such ordinary
shares,

     - the amount allocated to each year during which we are considered a PFIC
other than the year of the excess distribution payment or disposition would be
subject to tax at the highest individual or corporate tax rate, whichever is
applicable, and an interest charge would be imposed with respect to the
resulting tax liability allocated to each such year,

     - gain recognized upon the disposition of ordinary shares would be taxable
as ordinary income,

     - the tax basis in our ordinary shares that are acquired from a decedent
who was a U.S.Holder would not receive a step-up to fair market value as of the
date of the decedent's death but would instead be equal to the decedent's basis,
if lower, and

     - you would be required to make an annual return on IRS Form 8621 regarding
distributions received with respect to ordinary shares and any gain realized on
your ordinary shares.

         If you make either a timely QEF election or a timely mark-to-market
election in respect of your ordinary shares, you would not be subject to the
rules described above. If you make a timely QEF election, you would be required
to include in your income for each taxable year your pro rata share of our
ordinary earnings as ordinary income and your pro rata share of our net capital
gain as long-term capital gain, whether or not such amounts are actually
distributed to you. You would not be eligible to make a QEF election unless we
comply with certain applicable information reporting requirements.

         Alternatively, if you elect to "mark-to-market" your ordinary shares,
you will generally include in income any excess of the fair market value of the
ordinary shares at the close of each tax year over your adjusted basis in the
ordinary shares. If the fair market value of the ordinary shares had depreciated
below your adjusted basis at the close of the tax year, you may generally deduct
the excess of the adjusted basis of the ordinary shares over its fair market
value at that time. However, such deductions generally would be limited to the
net mark-to-market gains, if any, that you included in income with respect to
such ordinary shares in prior years. Income recognized and deductions allowed
under the mark-to-market provisions, as well as any gain or loss on the
disposition of ordinary shares with respect to which the mark-to-market election
is made, is treated as ordinary income or loss. If the mark-to-market election
with respect to ordinary shares is in effect on the date of a U.S. Holder's
death, the tax basis of the ordinary shares in the case of a U.S. Holder who
acquired them from decedent will be the lesser of the decedent's tax basis or
the fair market value of the ordinary shares.

BACKUP WITHHOLDING AND INFORMATION REPORTING

         Payments in respect of ordinary shares may be subject to information
reporting to the U.S. Internal Revenue Service and to U.S. backup withholding
tax. Backup withholding will not apply, however, if you (i) are a corporation or
come within certain exempt categories, and demonstrate the fact when so
required, or (ii) furnish a correct taxpayer identification number and make any
other required
<PAGE>
certification. Any amount withheld under these rules may be credited against
your federal income tax liability.

         Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules may be credited against a U.S. Holder's U.S. tax
liability, and a U.S. Holder may obtain a refund of any excess amounts withheld
under the backup withholding rules by filing the appropriate claim for refund
with the IRS.

         Any U.S. holder who holds 10% or more in vote or value of our ordinary
shares will be subject to certain additional United States information reporting
requirements.

         F. DIVIDEND AND PAYING AGENTS

            Not applicable.

         G. STATEMENT BY EXPERTS

            Not applicable.


         H. DOCUMENTS ON DISPLAY

         This Annual Report and the exhibits thereto and any other document we
file pursuant to the Securities Exchange Act of 1934, as amended, may be
inspected without charge and copied at prescribed rates at the Securities and
Exchange Commission's public reference room at 450 Fifth Street, N.W., Judiciary
Plaza, Room 1024, Washington, D.C. 20549. You may obtain information on the
operation of the Securities and Exchange Commission's public reference room in
Washington, D.C. by calling the Securities and Exchange Commission at
1-800-SEC-0330. The Exchange Act file number for our Securities and Exchange
Commission filings is 0-29538.

         The documents concerning Paradigm which are referred to in this Annual
Report may also be inspected at our offices located at Gav-Yam Center No 3., 9
Shenkar St., Herzlia B 46120, Israel.

         I. SUBSIDIARY INFORMATION

            Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         CURRENCY FLUCTUATIONS

         Approximately 90% of our revenue is in dollars, or linked to the
dollar, and therefore the dollar is our functional currency. Approximately 50%
of our operating expenses are paid in dollars or are linked to dollars. Other
significant currencies in which we receive revenue or pay expenses are
Australian dollars, British pounds, Canadian dollars, the European Monetary
Union currency (the "euro"), Russian Rubles and Israeli shekels. Historically,
the effect of fluctuations in currency exchange rates has had a minimal impact
on our operations. As we expand our operations outside of the United States and
receive revenue and pay expenses in currencies other than the dollar, our
exposure to fluctuations in currency exchange rates could increase. In managing
our foreign exchange risk, where we believe appropriate, we enter into various
foreign exchange contracts. As of December 31, 2001, we had entered into hedging
transactions only in regard to our New Israeli Shekel/ dollar exposure, which
was our most significant exposure.
<PAGE>
         FOREIGN CURRENCY RISK

         Market risks relating to our operations may result from changes in
interest rates, foreign currency exchange rates and weak economic conditions in
foreign markets. In general, we do not invest in foreign currency or engage in
interest-risk hedging or other risk-related tradable financial instruments, and
we do not hold any derivative financial instruments.

         Where we believe appropriate, we enter into foreign exchange forward
contracts to hedge some of our foreign currency exposure. We use such contracts
to hedge exposure to changes in foreign currency exchange rates associated with
revenue denominated in a foreign currency and anticipated costs to be incurred
in a foreign currency. We seek to minimize the risk that the fair value of sales
of our products and services and cash flow required for our expenses denominated
in a currency other than our functional currency, the dollar, will be affected
by changes in exchange rates.

         INTEREST RATE RISK

         Our interest expenses and income are sensitive to changes in interest
rates, as all of our cash reserves and borrowings are subject to interest rate
changes. Excess liquidity is invested in short-term interest-bearing
investments, consisting primarily of short term bank deposits, which bear
minimal interest rate risk. As of December 31, 2001, our total outstanding
indebtedness in regard to short-term debt and current maturities of long term
bank loans was approximately $ 6.8 million bearing interest of three to six
months LIBOR plus 1%-1.5%, in regard to medium term bank loans was $ 5.1
million, also bearing interest of three to six months LIBOR plus 1%-1.5% and in
connection with capital lease obligations our indebtedness was $ 0.3 million.

         In November 2001, we issued an aggregate of $ 8.0 million principal
amount of convertible subordinated debentures pursuant to an agreement with The
Israel Mezzanine Fund, L.P., The Israel Mezzanine Fund (In Israel), Limited
Partnership and The Jordan (Bermuda) Investment Company Ltd. (collectively
"FIMI"). The annual interest rate is three months LIBOR minus 1% payable
quarterly and the outstanding loan principal amount is repayable in three equal
annual payments commencing October 2004. We are required to repay the debentures
upon the acquisition of 90% or more of our securities by a third party pursuant
to which the convertible debentures will be repaid upon the acquisition of 100%
of our outstanding ordinary shares by Paradigm Geotechnology B.V. in the
proposed merger, if consummated.

         In the aggregate, the indebtedness in this "Interest Rate Risk" section
bears a minimal interest rate risk.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

         Not applicable.

                                     PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

         None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
         PROCEEDS

         None

                                    PART III
<PAGE>
ITEM 17. FINANCIAL STATEMENTS

     Not applicable.

ITEM 18 - FINANCIAL STATEMENTS AND EXHIBITS

         The following consolidated financial statements are filed as part of
this Annual Report.

Index to Financial Statements:

   1.   Report of Independent Auditors...................................  F-2

   2.   Consolidated Balance Sheets......................................  F-3

   3.   Consolidated Statements of Operations............................  F-5

   4.   Statements of Changes in Shareholders' Equity....................  F-6

   5.   Consolidated Statements of Cash Flows............................  F-7

   6.   Notes to Consolidated Financial Statements....................... F-10



ITEM 19 - EXHIBITS

  The following exhibits are filed as part of this Annual Report:

         EXHIBITS  NO.                      EXHIBIT

         1.1++*           Memorandum of Association of Paradigm Geophysical Ltd.

         1.2*****         Amended and Restated Articles of Association of
                          Paradigm Geophysical Ltd.

         2.1*             Form of Warrant Agreement dated as of October 10,
                          1997 between Paradigm Geophysical Ltd. and the Bridge
                          Loan lenders.

         2.2*             Form of Warrant Certificate by Paradigm Geophysical
                          Ltd. in favor of the Bridge Loan lenders.

         2.3***           Registration Rights Agreement, dated March 12, 1999,
                          by and among Paradigm Geophysical Ltd., Jerusalem
                          Venture Partners L.P. and Jerusalem Venture Partners
                          Israel) L.P.

         2.4***           Registration Rights Agreement by and among Paradigm
                          Geophysical Ltd., Shamrock Holdings, Inc., Eastgate
                          Fund L.P., Eastgate International Limited, Mr. Harris
                          Kaplan and Berman Eastgate Growth Fund.


         4.1**            Stock Purchase Agreement, dated as of September 5,
                          1997, as amended September 24, 1997 among Paradigm
                          Geophysical Ltd., Paradigm Geophysical Corp. and
                          GeoScience Corporation.

         4.2*             Key Employee Plan.
<PAGE>
         4.3*              May 1994 Stock Option Plan.

         4.4*              1994 General Stock Option Plan.

         4.5*              1997 Executive Stock Option Plan.

         4.6*              1997 Stock Option Plan for Qualifying Israel
                           Employees.

         4.7*              1997 Stock Option Plan for U.S. Employees.

         4.8***            Amended and Restated Asset Purchase Agreement by and
                           among Geotech Joint Stock Company and Dr. Nikolai L.
                           Baransky, Dr. Evgenii A. Kozlov, Mr. Dimitry V.
                           Sulitsky, Mr. Christopher D. Kim, Paradigm
                           Geophysical (U.K.) Ltd., Paradigm Geophysical Europe
                           Ltd., Paradigm Geophysical Services Ltd. and Paradigm
                           Geophysical Ltd.

         4.9***            Business Sale Agreement, dated March 31, 1999, by and
                           among Mincom Limited, Mincom Inc., Mincom
                           International Pty Limited, Mincom Pty Ltd., Mincom
                           Services Pty Ltd., Mincom Inc. and Paradigm
                           Geophysical Ltd.

         4.10***           Share Purchase Agreement, dated March 12, 1999, by
                           and among Paradigm Geophysical Ltd., Jerusalem
                           Venture Partners L.P. and Jerusalem Venture Partners
                           (Israel) L.P.

         4.11***           Share Purchase Agreement, dated April 14, 1999, by
                           and between Paradigm Geophysical Ltd. and Shamrock
                           Holdings, Inc.

         4.12***           Share Purchase Agreement, dated April 14, 1999,
                           between Paradigm Geophysical Ltd. and Eastgate Fund
                           L.P., Eastgate International Limited, Mr. Harris
                           Kaplan and Berman Eastgate Growth Fund.

         4.13*****         Securities Purchase Agreement by and between
                           Compagnie Generale de Geophysique and Paradigm
                           Geophysical Ltd. and Paradigm Geophysical Corp. with
                           respect to Flagship S.A. and Flagship Geosciences LLC
                           dated October 4,2000.

         4.14****          Share Purchase Agreement dated May 16 2001, by and
                           between Paradigm Geophysical Ltd. and Peter David
                           Raby regarding the purchase of the entire issued
                           share capital of Sysdrill Ltd

         4.15#             Convertible Loan Agreement dated October 10, 2001, by
                           and between Paradigm Geophysical Ltd. and The Israel
                           Mezzanine Fund, L.P., The Israel Mezzanine Fund (in
                           Israel), Limited Partnership and The Jordan (Bermuda)
                           Investment Company Ltd.

         4.16******        Agreement of Merger by and among Paradigm
                           Geotechnology B.V. (formerly Talamantes B.V.),
                           F.P. Acquisition Ltd. and Paradigm Geophysical Ltd.

         8.1#              Subsidiaries of Paradigm Geophysical Ltd.

         10.1#             Consent of Kost Forer and Gabbay.

<PAGE>



         *        Incorporated herein by reference to Paradigm Geophysical
                  Ltd.'s Registration Statement on Form F-1 (File No. 333-7926),
                  filed with the Commission on November 10, 1997.

         **       Incorporated herein by reference to Amendment No. 1 to
                  Paradigm Geophysical Ltd.'s Registration Statement on Form F-1
                  (File No. 333-7926), filed with the Commission on November 21,
                  1997.

         ***      Incorporated herein by reference to Paradigm Geophysical
                  Ltd.'s Annual Report on Form 20-F for the fiscal year ended
                  December 31, 1998.

         ****     Incorporated herein by reference to Paradigm Geophysical
                  Ltd.'s Form 6-K Report for the month of May 16, 2001.

         *****    Incorporated herein by reference to Paradigm Geophysical
                  Ltd.'s Annual Report on Form 20-F for the fiscal year ended
                  December 31, 2000.

         ******   Incorporated herein by reference to Annex A to the proxy
                  statement of Paradigm Geophysical Ltd. set forth as
                  Exhibit 99.1 to Paradigm Geophysical Ltd.'s Form 6-K dated
                  May 31, 2002.

         #        Filed herewith

         ++       English translations from Hebrew original.



                                   SIGNATURES

The registrant certifies that it meets all of the requirements for filing on
Form 20-F and has duly caused and authorized the undersigned to sign this annual
report on its behalf.

                                                       PARADIGM GEOPHYSICAL LTD.

                                                  /s/  Brian Berman
                                                       Chief Financial Officer

Date: July 1, 2002

<PAGE>
                 PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES


                        CONSOLIDATED FINANCIAL STATEMENTS


                             AS OF DECEMBER 31, 2001


                                 IN U.S. DOLLARS




                                      INDEX



                                                                          PAGE
                                                                         -------

REPORT OF INDEPENDENT AUDITORS                                              2

CONSOLIDATED BALANCE SHEETS                                               3 - 4

CONSOLIDATED STATEMENTS OF OPERATIONS                                       5

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY                               6

CONSOLIDATED STATEMENTS OF CASH FLOWS                                     7 - 9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                               10 - 38



                                 - - - - - - - -
<PAGE>
[ERNST & YOUNG LOGO]


                         REPORT OF INDEPENDENT AUDITORS

                             TO THE SHAREHOLDERS OF

                            PARADIGM GEOPHYSICAL LTD.


             We have audited the accompanying consolidated balance sheets of
Paradigm Geophysical Ltd. ("the Company") and its subsidiaries as of December
31, 2000 and 2001, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of a consolidated subsidiary, which statements reflect
approximately 22% of total consolidated revenues for the year ended December 31,
1999. Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to data included for
aforementioned subsidiaries, is based solely on the reports of other auditors.

             We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
the other auditors provide a reasonable basis for our opinion.

             In our opinion, based on our audits and the reports of the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2000 and 2001, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.



Tel-Aviv, Israel                                          KOST FORER & GABBAY
January 29, 2002                                       A Member of Ernst & Young
                                                             International


                                      -2-
<PAGE>
                                  PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                               -----------------
                                                                2000      2001
                                                               -------   -------
<S>                                                            <C>       <C>
       ASSETS

CURRENT ASSETS:
Cash and cash equivalents                                      $ 8,647   $ 9,814
Short-term bank deposit                                             --     1,941
Trade receivables (net of allowance for doubtful accounts of
     $2,950 in 2000 and $2,883 in 2001)                         22,707    28,306
Accrued income                                                   4,077     5,451
Other receivables and prepaid expenses                           4,110     5,686
                                                               -------   -------

Total current assets                                            39,541    51,198
                                                               -------   -------


LONG-TERM TRADE RECEIVABLES                                        221        --
                                                               -------   -------

SEVERANCE PAY FUND                                               1,076     1,525
                                                               -------   -------

PROPERTY AND EQUIPMENT, NET                                     13,318    15,902
                                                               -------   -------

OTHER ASSETS, NET                                               25,605    30,561
                                                               -------   -------

                                                               $79,761   $99,186
                                                               =======   =======
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                      -3-
<PAGE>
                                  PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA

<TABLE>
<CAPTION>
                                                                                       DECEMBER 31,
                                                                                   --------------------
                                                                                     2000        2001
                                                                                   --------    --------
<S>                                                                                <C>         <C>
    LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Short-term bank loans                                                           $  4,528    $  5,500
   Current maturities of long-term bank loans                                         3,112       1,278
   Current maturities of capital lease obligations                                      546         260
   Trade payables                                                                     5,375       3,555
   Other payables and accrued expenses                                               10,601      13,240
   Note payable                                                                          --       6,318
   Deferred revenues                                                                  4,519       3,810
                                                                                   --------    --------

Total current liabilities                                                            28,681      33,961
                                                                                   --------    --------

LONG TERM LIABILITIES:
   Long-term bank loans, net of current maturities                                    1,277       5,099
   Convertible loan                                                                      --       8,000
   Capital lease obligations, net of current maturities                                 206          --
   Accrued severance pay                                                              2,338       2,502
   Other long-term liabilities                                                          790         549
                                                                                   --------    --------

Total long-term liabilities                                                           4,611      16,150
                                                                                   --------    --------


SHAREHOLDERS' EQUITY:
   Share capital:
   Authorized - 18,000,000 Ordinary shares of NIS 0.5 par value and
     2,000,000 Preferred shares of NIS 0.5 par value
     as of December 31, 2000 and 2001
   Issued and outstanding - 0 Preferred shares as of December 31, 2000 and
      2001; 14,691,904 Ordinary shares as of December 31, 2000 and
      14,891,904 Ordinary shares as of December 31, 2001                              2,273       2,297
   Additional paid-in capital                                                        60,954      62,038
   Accumulated other comprehensive loss                                              (1,784)     (2,416)
   Accumulated deficit                                                              (14,974)    (12,844)
                                                                                   --------    --------

                                                                                     46,469      49,075
                                                                                   --------    --------

                                                                                   $ 79,761    $ 99,186
                                                                                   ========    ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                      -4-
<PAGE>
                                  PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA

<TABLE>
<CAPTION>

                                                        YEAR ENDED DECEMBER 31,
                                                    --------------------------------
                                                      1999        2000        2001
                                                    --------    --------    --------
<S>                                                 <C>         <C>         <C>
Revenues:
  Products                                          $ 43,023    $ 46,390    $ 50,765
  Services                                            11,483      16,908      22,001
                                                    --------    --------    --------

Total revenues                                        54,506      63,298      72,766
                                                    --------    --------    --------


Operating expenses:
  Cost of products                                    12,418      10,816      10,592
  Cost of services                                     5,804       6,352       9,793
  Research and development                             9,306      11,215      12,847
  Sales and marketing, general and administrative     20,638      23,518      26,850
  Depreciation                                         3,865       4,746       5,589
  Amortization of intangible assets                    3,064       3,360       3,214
  Non-recurring expenses                               2,705          --          --
  Restructuring charges                                   --          --         540
                                                    --------    --------    --------

Total operating expenses                              57,800      60,007      69,425
                                                    --------    --------    --------


Operating income (loss)                               (3,294)      3,291       3,341
Financial expenses, net                                 (484)       (552)       (642)
                                                    --------    --------    --------

Income (loss) before taxes on income                  (3,778)      2,739       2,699
Taxes on income                                           --         380         569
                                                    --------    --------    --------

Net income (loss)                                   $ (3,778)   $  2,359    $  2,130
                                                    ========    ========    ========

Basic net earnings (loss) per share                 $  (0.31)   $   0.17    $   0.14
                                                    ========    ========    ========

Diluted net earnings (loss) per share               $  (0.31)   $   0.17    $   0.14
                                                    ========    ========    ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                      -5-
<PAGE>
                                  PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA

<TABLE>
<CAPTION>
                                                                                               ACCUMULATED
                                                              ORDINARY SHARES     ADDITIONAL      OTHER
                                                          ---------------------    PAID IN    COMPREHENSIVE  ACCUMULATED
                                                             SHARES      AMOUNT    CAPITAL        LOSS         DEFICIT
                                                          ------------   ------   ----------  -------------  -----------
<S>                                                       <C>            <C>      <C>         <C>            <C>
Balance as of January 1, 1999                               10,514,484   $1,758     $39,236      $  (742)      $(13,555)
Comprehensive loss:
  Net loss                                                          --       --          --           --         (3,778)
  Foreign currency translation adjustments                          --       --          --         (424)            --
  Total comprehensive loss
  Issuance of Ordinary shares, net                           2,017,544      246      10,736           --             --
  Issuance of shares upon exercise of warrants                 479,908       58       1,861           --             --
  Issuance of shares upon exercise of stock options             14,400        2          70           --             --
                                                          ------------   ------     -------      -------       --------

Balance as of December 31, 1999                             13,026,336    2,064      51,903       (1,166)       (17,333)
Comprehensive income:
  Net income                                                        --       --          --           --          2,359
  Foreign currency translation
    adjustments                                                     --       --          --         (618)            --
  Total comprehensive income
  Issuance of shares upon acquisition of Flagship            1,500,000      186       8,889           --             --
  Issuance of shares upon exercise of warrants                 119,782       15          --           --             --
  Issuance of shares upon exercise of stock options, net        45,786        8         162           --             --
                                                          ------------   ------     -------      -------       --------

Balance as of December 31, 2000                             14,691,904    2,273      60,954       (1,784)       (14,974)

Comprehensive income:
  Net income                                                        --       --          --           --          2,130
  Foreign currency translation adjustments                          --       --          --         (632)            --
  Total comprehensive income
  Issuance of shares upon acquisition of Sysdrill              200,000       24       1,084           --             --
                                                          ------------   ------     -------      -------       --------

Balance as of December 31, 2001                             14,891,904   $2,297     $62,038      $(2,416)      $(12,844)
                                                          ============   ======     =======      =======       ========
</TABLE>

<TABLE>
<CAPTION>

                                                              TOTAL
                                                           SHAREHOLDERS'
                                                              EQUITY
                                                           -------------
<S>                                                        <C>
Balance as of January 1, 1999                                $ 26,697
Comprehensive loss:
  Net loss                                                     (3,778)
  Foreign currency translation adjustments                       (424)
                                                             --------
  Total comprehensive loss                                   $ (4,202)
                                                             ========
  Issuance of Ordinary shares, net                           $ 10,982
  Issuance of shares upon exercise of warrants                  1,919
  Issuance of shares upon exercise of stock options                72
                                                             --------

Balance as of December 31, 1999                                35,468
Comprehensive income:
  Net income                                                    2,359
  Foreign currency translation adjustments                       (618)
                                                             --------
  Total comprehensive income                                 $  1,741
                                                             ========
  Issuance of shares upon acquisition of Flagship            $  9,075
  Issuance of shares upon exercise of warrants                     15
  Issuance of shares upon exercise of stock options, net          170
                                                             --------

Balance as of December 31, 2000                                46,469

Comprehensive income:
  Net income                                                    2,130
  Foreign currency translation adjustments                       (632)
                                                             --------
  Total comprehensive income                                 $  1,498
                                                             ========
  Issuance of shares upon acquisition of Sysdrill            $  1,108
                                                             --------

Balance as of December 31, 2001                              $ 49,075
                                                             ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                      -6-
<PAGE>
                                  PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                       ------------------------------------
                                                                         1999          2000          2001
                                                                       --------      --------      --------
<S>                                                                    <C>           <C>           <C>
Cash flows from operating activities:
Net income (loss)                                                      $ (3,778)     $  2,359      $  2,130
Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
    Depreciation and amortization                                         6,929         8,106         8,803
    Impairment of developed technology                                    1,595            --            --
    Decrease (increase) in trade receivables, accrued income
       and long-term trade receivables                                   (8,866)       10,081        (5,677)
    Decrease (increase) in other receivables and prepaid expenses           (98)          441        (1,299)
    Increase (decrease) in deferred income
       taxes, net                                                           203          (171)           --
    Increase (decrease) in trade and other payables and
       accrued expenses                                                   1,795        (4,561)         (364)
    Increase (decrease) in deferred revenues                              1,004        (2,522)         (468)
    Accrued severance pay, net                                              243        (1,083)         (271)
    Other                                                                    84           (22)           --
                                                                       --------      --------      --------
Net cash provided by (used in) operating activities                        (889)       12,628         2,854
                                                                       --------      --------      --------

 Cash flows from investing activities:
Purchase of property and equipment                                       (5,847)       (5,331)       (8,677)
Proceeds from sale of property and equipment                                 --            39           453
Purchase of developed technology                                         (1,175)         (170)         (685)
Purchase of a short-term bank deposit                                        --            --        (1,941)
Payment for acquisition of a consolidated subsidiary, PTM (1)            (8,379)           --            --
Payment for acquisition of a consolidated subsidiary, Flagship (2)           --        (3,980)           --
Payment for acquisition of a consolidated subsidiary, Sysdrill (3)           --            --          (141)
                                                                       --------      --------      --------
Net cash used in investing activities                                   (15,401)       (9,442)      (10,991)
                                                                       --------      --------      --------

Cash flows from financing activities:
Proceeds from short-term bank loans                                       2,000         7,506         4,500
Principal payment of short-term bank loans                               (1,778)       (4,978)       (3,528)
Principal payments of capital lease obligations                            (200)         (424)         (519)
Proceeds from long-term bank loans                                        6,500            --         5,100
Principal payment of long-term bank loans                                  (427)       (2,173)       (3,112)
Issuance of a convertible loan, net of issuance expenses of $615             --            --         7,385
Payment of other lease obligations                                         (200)         (242)         (229)
Issuance of share capital, net                                           10,982            --            --
Proceeds from exercise of warrants and stock options                      1,991           185            --
                                                                       --------      --------      --------
Net cash provided by (used in) financing activities                      18,868          (126)        9,597
                                                                       --------      --------      --------

Effect of exchange rate changes on cash and cash equivalents               (584)          130          (293)
                                                                       --------      --------      --------

Increase in cash and cash equivalents                                     1,994         3,190         1,167
Cash and cash equivalents at the beginning of the year                    3,463         5,457         8,647
                                                                       --------      --------      --------

Cash and cash equivalents at the end of the year                       $  5,457      $  8,647      $  9,814
                                                                       ========      ========      ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                      -7-
<PAGE>
                                  PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                                                                                        YEAR ENDED DECEMBER 31,
                                                                                    ---------------------------------
                                                                                     1999          2000        2001
                                                                                    -------      --------     -------
<S>                                                                                 <C>          <C>          <C>
(1)    Payment for acquisition of a consolidated subsidiary, PTM, estimated
       fair values of assets acquired and liabilities assumed at the date of
       acquisition:
          Working capital deficiency, excluding cash and cash equivalents           $  (672)
          Property and equipment                                                        318
          Acquired technology                                                         5,146
          Assembled work-force                                                          851
          Goodwill                                                                    2,736
                                                                                    -------

                                                                                    $ 8,379
                                                                                    =======
(2)    Payment for acquisition of a consolidated subsidiary, Flagship,
       estimated fair values of assets acquired and liabilities assumed at
       the date of acquisition:
          Working capital deficiency, excluding cash and cash equivalents                        $(1,014)
          Property and equipment                                                                     743
          Acquired technology                                                                      3,430
          Assembled work-force                                                                     1,180
          Customer base                                                                            2,410
          Goodwill                                                                                 7,056
                                                                                                 -------

                                                                                                  13,805
       Less - amount financed by issuance of shares, net                                          (9,075)
       Less - accrued prepaid acquisition expenses                                                  (750)
                                                                                                 -------

                                                                                                 $ 3,980
                                                                                                 =======
(3)    Payment for acquisition of a consolidated subsidiary Sysdrill,
       estimated fair values of assets acquired and liabilities assumed at
       the date of acquisition:
          Working capital, excluding cash and cash equivalents                                                $ 1,477
          Property and equipment                                                                                  140
          Acquired technology                                                                                   2,948
          Goodwill                                                                                              3,249
                                                                                                              -------


                                                                                                                7,814
         Less - amount financed by issuance of shares, net                                                     (1,108)
         Less - accrued prepaid acquisition expenses                                                             (283)
         Less - amount financed by a note payable                                                              (6,282)
                                                                                                              -------

                                                                                                              $   141
                                                                                                              =======
Supplemental disclosure of cash flow activities: Cash paid during the year for:
     Interest                                                                       $    42      $    949     $   745
                                                                                    =======      ========     =======

     Income taxes                                                                   $   379      $     --     $   642
                                                                                    =======      ========     =======
</TABLE>


                                      -8-
<PAGE>
                                  PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                         ------------------------------
                                                                           1999       2000       2001
                                                                         --------   --------   --------
<S>                                                                      <C>        <C>        <C>
Non-cash activities:
   Purchase of leased property and equipment in  capital leases          $  1,376   $     --
                                                                         ========   ========   ========

   Note payable issued in respect of acquisition of Sysdrill             $     --   $     --   $  6,282
                                                                         ========   ========   ========

   Accrued prepaid acquisition expenses associated with the Flagship
     acquisition                                                         $     --   $    750   $     --
                                                                         ========   ========   ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                      -9-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1:- BUSINESS AND ORGANIZATION

         a.       General:

                  Paradigm Geophysical Ltd. ("Paradigm" or the "Company") was
                  incorporated under the laws of Israel. The Company provides
                  Geoscience knowledge solutions for the oil and gas industry,
                  which facilitate the exploration and development of oil and
                  gas reserves. Paradigm provides exploration and production
                  Geoscience software solutions, technical training, data
                  processing, interpretation and reservoir-studies services,
                  adding value to the oil and gas industry's reservoir assets.

                  Paradigm operates worldwide through wholly-owned subsidiaries
                  in the United States, Canada, Venezuela, Argentina, Brazil,
                  the Netherlands, United Kingdom, France, Australia, Indonesia,
                  Scotland and Singapore and through representative offices in
                  Russia, Bahrain and China. These subsidiaries and
                  representative offices coordinate the activities of the
                  Company's direct sales force and its network of representative
                  agents in the Far East, Near East, Pacific Rim, Africa and
                  South America.

         b.       Acquisition of Sysdrill:

                  On May 15, 2001, the Company acquired all the outstanding
                  capital stock of Sysdrill Ltd ("Sysdrill"), a Scottish based
                  company. Sysdrill's solutions provide well planning and
                  drilling engineering products. The total consideration of the
                  acquisition was $8,533,000 (including $283,000 of costs
                  related to the acquisition), which was financed by an issuance
                  of 200,000 Ordinary shares of the Company valued at
                  $1,108,000, $860,000 paid in cash and additional $6,282,000
                  through an issuance of a note, which shall be paid in British
                  Pound by May 15, 2002 and will bear six months LIBOR interest
                  (see Note 8d).

                  The transaction has been accounted for using the purchase
                  method of accounting, and accordingly, the purchase price has
                  been allocated to the assets acquired and liabilities assumed
                  based upon their fair values. The excess of the purchase price
                  over the fair value of the tangible assets acquired and
                  liabilities assumed has been allocated to identifiable
                  intangible assets including acquired technology and goodwill,
                  as follows (U.S. dollars in thousands):

<TABLE>
<S>                                              <C>
                         Acquired technology     $2,948
                         Goodwill                 3,249
                                                 ------

                         Total                   $6,197
                                                 ======
</TABLE>

                  The acquired technology and goodwill are being amortized over
                  their expected useful lives, which is estimated at ten years
                  for the acquired technology and twenty years for the goodwill
                  (see Note 2g).

                  The financial statements of Sysdrill were consolidated with
                  the accounts of the Company, commencing May 15, 2001.


                                      -10-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1:- BUSINESS AND ORGANIZATION (CONT.)

                  The following represents the unaudited pro-forma results of
                  operations for the years ended December 31, 2000 and 2001,
                  assuming that the Sysdrill acquisition had been consummated as
                  of January 1, 2000 and January 1, 2001, respectively:

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                     ------------------------
                                                        2000          2001
                                                     ----------    ----------
                                                           IN THOUSANDS,
                                                      EXCEPT PER SHARE DATA
<S>                                                  <C>           <C>
                  Revenues                           $   65,739    $   73,896
                                                     ==========    ==========

                  Net income                         $    2,248    $    2,293
                                                     ==========    ==========

                  Basic net earnings per share       $     0.16    $     0.15
                                                     ==========    ==========

                  Diluted net earnings per share     $     0.16    $     0.15
                                                     ==========    ==========
</TABLE>

         c.       Acquisition of Flagship:

                  On October 4, 2000, the Company acquired all assets and
                  assumed all liabilities of Flagship S.A., a France based
                  company, and Flagship LLC, a U.S. based company (together
                  "Flagship"), wholly owned subsidiaries of Compagnie Generale
                  de Geophysique ("CGG"). Flagship products provide structural
                  geological interpretation and reservoir characterization. The
                  total consideration of the acquisition was $14,219,000
                  (including $1,055,000 of costs related to the acquisition),
                  which was financed by an issuance of 1,500,000 Ordinary shares
                  of the Company valued at $9,075,000 (net of $89,000 issuance
                  expenses) and $5,055,000 in cash (of which $4,305,000 was paid
                  and $750,000 was recorded as accrued expenses as of December
                  31, 2000).

                  The transaction has been accounted for using the purchase
                  method of accounting, and accordingly, the purchase price has
                  been allocated to the assets acquired and liabilities assumed
                  based upon their fair values. The excess of the purchase price
                  over the fair value of the tangible assets acquired and
                  liabilities assumed has been allocated to identifiable
                  intangible assets including acquired technology, assembled
                  work-force, customer base and goodwill, as follows (in
                  thousands):

<TABLE>
<S>                                              <C>
                        Acquired technology      $ 3,430
                        Assembled work-force       1,180
                        Customer base              2,410
                        Goodwill                   7,056
                                                 -------

                        Total                    $14,076
                                                 =======
</TABLE>

                  The acquired assembled work-force and the acquired technology
                  are being amortized over their expected useful lives, which is
                  estimated at ten years for the acquired technology and
                  customer base and twenty years for the goodwill (see Note 2g).


                                      -11-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1:- BUSINESS AND ORGANIZATION (CONT.)

                  The financial statements of Flagship were consolidated with
                  the accounts of the Company, commencing October 4, 2000.

                  The following represents the unaudited pro-forma results of
                  operations for the years ended December 31, 1999 and 2000,
                  assuming that the Flagship acquisition had been consummated as
                  of January 1, 1999 and January 1, 2000, respectively:

<TABLE>
<CAPTION>
                                                      DECEMBER 31,
                                               ----------------------------
                                                  1999             2000
                                               -----------      -----------
                                                      IN THOUSANDS,
                                                 EXCEPT PER SHARE DATA
<S>                                            <C>              <C>
     Revenues                                  $    72,514      $    75,033
                                               ===========      ===========

     Net income (loss)                         $    (5,359)     $       457
                                               ===========      ===========

     Basic net earnings (loss) per share       $     (0.39)     $      0.03
                                               ===========      ===========

     Diluted net earnings (loss) per share     $     (0.39)     $      0.03
                                               ===========      ===========
</TABLE>

         d.       Acquisition of PTM:

                  On March 31, 1999, Paradigm acquired the net assets of the
                  Petroleum Technology Division of Mincom Limited ("PTM"), an
                  Australian entity for $8,379,000 in cash, including $317,000
                  acquisition costs. PTM's is the developer of the Geolog
                  product, which is an information software tool for log
                  analysis and petrophysics.

                  The acquisition has been accounted for using the purchase
                  method of accounting, and accordingly, the purchase price has
                  been allocated to the assets acquired and liabilities assumed,
                  based upon their fair values. The excess of the purchase price
                  over the fair value of the tangible assets acquired and
                  liabilities assumed has been allocated to identifiable
                  intangible assets including acquired technology, assembled
                  work-force and goodwill, as follows (in thousands):

<TABLE>
<S>                                              <C>
                        Acquired technology      $5,146
                        Assembled work-force        851
                        Goodwill                  2,736
                                                 ------

                                                 $8,733
                                                 ======
</TABLE>

                  The acquired assembled work-force and the acquired technology
                  are being amortized over their expected useful lives, which is
                  estimated at ten years, goodwill is being amortized over a
                  twenty years period. In prior years, goodwill has been
                  amortized over a ten years period (see Notes 2g and 6c).


                                      -12-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 1:- BUSINESS AND ORGANIZATION (CONT.)

                  The financial statements of PTM were consolidated with the
                  accounts of the Company, commencing March 31, 1999.

                  The following are pro-forma unaudited results of operations
                  for the year ended December 31, 1999, assuming that the PTM
                  acquisition had been consummated as of January 1, 1999:

<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                                         1999
                                               ------------------------
                                               IN THOUSANDS, EXCEPT PER
                                                      SHARE DATA
<S>                                            <C>
                   Revenues                           $   56,105
                                                      ==========

                   Net loss                           $   (3,867)
                                                      ==========

                   Basic net loss per share           $    (0.32)
                                                      ==========

                   Diluted net loss per share         $    (0.32)
                                                      ==========
</TABLE>

         e.       Restructuring costs

                  During December 2001, the Company recorded restructuring
                  charges of approximately $540,000, which were accrued as a
                  short-term liability as of December 31, 2001. The
                  restructuring costs consist of employee termination benefits
                  associated with involuntary terminations of approximately 20
                  employees in France and the United States and accounted for in
                  accordance with EITF 94-3, "Liability Recognition for Certain
                  Employee Termination Benefits and Other Costs to Exit an
                  Activity (Including Certain Costs Incurred in a
                  Restructuring)" ("EITF 94-3") and SAB 100, "Restructuring and
                  Impairment Charges" ("SAB 100"). The terminations resulted
                  from the Company's strategy to reduce costs and restore
                  profitability.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

         The consolidated financial statements have been prepared in accordance
         with accounting principles generally accepted in the United States
         ("U.S. GAAP").

         a.       Use of estimates:

                  The preparation of financial statements in conformity with
                  generally accepted accounting principles requires management
                  to make estimates and assumptions that affect the amounts
                  reported in the financial statements and accompanying notes.
                  Actual results could differ from those estimates.


                                      -13-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

         b.       Financial statements in U.S. dollars:

                  A majority of the Company's revenues is generated in U.S.
                  dollars ("dollar"). In addition, a substantial portion of its
                  costs is incurred in dollars. Since the dollar is the primary
                  currency in the economic environment in which the Company
                  operates, the dollar is its functional and reporting currency.
                  Accordingly, monetary accounts maintained in currencies other
                  than the dollar are remeasured into U.S. dollars in accordance
                  with Statement of Financial Accounting Standards No. 52,
                  "Foreign Currency Translation" ("SFAS No. 52"). All
                  transactions gains and losses from remeasurement of monetary
                  balance sheet items are reflected in the consolidated
                  statements of operations as financial income or expenses, as
                  appropriate.

                  Total foreign currency translation net income (expenses)
                  included in financial income (expenses), net amounted to
                  $(6,000), $(53,000) and $83,000 for the years ended December
                  31, 1999, 2000 and 2001, respectively.

                  The functional and reporting currency of certain subsidiaries
                  has been determined to be their local currency. For those
                  subsidiaries assets and liabilities are translated at year-end
                  exchange rate and statement of operations items are translated
                  at the average rates prevailing during the year. These
                  translation adjustments are recorded as accumulated other
                  comprehensive income (loss), in the statement of changes in
                  shareholders' equity.

         c.       Principles of consolidation:

                  The consolidated financial statements include the accounts of
                  the Company and its wholly-owned subsidiaries. Intercompany
                  balances and transactions have been eliminated upon
                  consolidation.

         d.       Cash equivalents:

                  Cash equivalents are short-term highly liquid investments that
                  are readily convertible to cash with original maturities of
                  three months or less.

         e.       Short-term bank deposits:

                  Bank deposits with maturities of more than three months but
                  less than one year are included in short-term bank deposits.
                  Such bank deposits are stated at cost.

         f.       Property and Equipment:

                  Property and equipment are stated at cost, net of accumulated
                  depreciation. Depreciation is calculated by the straight-line
                  method over the estimated useful lives of the assets at the
                  following annual rates:

<TABLE>
<CAPTION>
                                                                  %
                                                      --------------------------
<S>                                                   <C>
                  Computers and peripheral equipment           16 - 33
                  Office furniture and equipment                6 - 15
                  Motor vehicles                                  15
                  Leasehold improvements              over the term of the lease
</TABLE>


                                      -14-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                  The Company and its subsidiaries periodically assess the
                  recoverability of the carrying amount of property and
                  equipment and provide for any possible impairment loss based
                  upon the difference between the carrying amount and fair value
                  of such assets in accordance with Statement of Financial
                  Accounting Standard No. 121 "Accounting for the Impairment of
                  Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
                  ("SFAS No. 121"). As of December 31, 2001, no impairment
                  losses have been identified.

         g.       Other assets:

                  Other assets are stated at cost less accumulated amortization.
                  Amortization is computed using the straight-line method over
                  their expected useful lives, as follows:

<TABLE>
<CAPTION>
                                                       YEARS
                                                       -----
<S>                                                    <C>
                  Acquired technology                  10
                  Assembled work-force                 5-10
                  Customer base                        20
                  Goodwill                             20
                  Issuance costs of convertible loan   3-5 (over the period from issuance to maturity)
                  Other                                5
</TABLE>

                  The carrying value of intangible assets is periodically
                  reviewed by management, based on the expected future
                  undiscounted operating cash flows over the remaining
                  amortization period. If this review indicates that the
                  intangible assets will not be recoverable, the carrying value
                  of the intangible assets is reduced to estimated fair value.
                  In 1999, following the PTM acquisition such impairment was
                  indicated, and the Company recognized an impairment loss in
                  the amount of $1,595,000 related to developed technology. In
                  2000 and 2001 the Company did not recognize any impairment
                  loss in relation to intangible assets.

         h.       Revenue recognition:

                  The Company and its subsidiaries generate revenues mainly from
                  licensing the rights to use their software products, from
                  consulting services and from sales of professional services of
                  seismic data processing, interpretation and reservoir-studies
                  services. The Company and its subsidiaries also generate
                  revenues from maintenance and technical support, training,
                  installation and hardware sales. The Company and its
                  subsidiaries sell their products primarily through their
                  direct sales force.


                                      -15-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                  The Company and its subsidiaries implement Statement of
                  Position 97-2, "Software Revenue Recognition", SOP 97-2 as
                  amended. Revenues from software arrangements are recognized
                  upon delivery of the product, when collection is probable, the
                  product fee is otherwise fixed or determinable, persuasive
                  evidence of an arrangement exists, collectibility is probable
                  and no further obligation remains. SOP 97-2 requires revenue
                  earned on software arrangements involving multiple elements to
                  be allocated to each element based on the relative fair value
                  of the elements. The Company has also adopted "Modification of
                  SOP 97-2, Software Revenue Recognition with Respect to Certain
                  Transactions," SOP 98-9, for all transactions entered into
                  after January 1, 2000. The Company's Vendor Specific Objective
                  Evidence ("VSOE") used to allocate the sales price to
                  maintenance, support, technical training and installation is
                  based on the price charges when these elements are sold
                  separately. SOP 98-9 requires that revenue be recognized under
                  the "residual method" when (1) VSOE of fair value exists for
                  all undelivered elements and no VSOE exists for the delivered
                  elements, and (2) all revenue recognition criteria of SOP
                  97-2, as amended, are satisfied. Under the residual method any
                  discount in the arrangement is allocated to the delivered
                  element. The Company and its subsidiaries do not grant a right
                  of return to their customers.

                  SOP 97-2 specifies that extended payment terms in a software
                  licensing arrangement may indicate that the software license
                  fees are not deemed to be fixed or determinable. In addition,
                  if payment of a significant portion of the software license
                  fees is not due until more than twelve months after delivery,
                  the software license fees should be presumed not to be fixed
                  or determinable, and thus should be recognized as the payments
                  become due. However, SOP 97-2 specifies that if the Company
                  has a standard business practice of using extended payment
                  terms in software licensing arrangements and has a history of
                  successfully collecting the software license fees under the
                  original terms of the software licensing arrangement without
                  making concessions, the Company overcomes the presumption that
                  the software license fees are not fixed or determinable. Thus,
                  revenues should be recognized when all other SOP 97-2 revenue
                  recognition criteria are met. The Company has concluded that
                  for certain software arrangements with extended payment terms,
                  the "fixed or determinable" presumption has been overcome and
                  software license fees have been recognized upon meeting the
                  remaining SOP 97-2 revenue recognition criteria.

                  Arrangements that include installation services are evaluated
                  to determine whether those services are essential to the
                  functionality of other elements of the arrangement. When
                  services are considered essential, the entire revenue under
                  the arrangement is recognized using the contract accounting
                  under the percentage of completion method. When services are
                  not considered essential, the service revenue is recognized
                  when the services are performed.

                  Maintenance and support revenue included is deferred and
                  recognized on a straight-line basis over the term of the
                  maintenance and support agreement.

                  Revenues from technical training and installation and from
                  consulting services are recognized at the time they are
                  rendered.

                  Revenues from hardware sales are recognized in accordance with
                  Staff Accounting Bulletin No. 101 "Revenue Recognition in
                  Financial Statements" ("SAB No. 101"), when shipment has
                  occurred, persuasive evidence of an arrangement exists, the
                  vendor's fee is fixed or determinable, no further obligation
                  remains and collectibility is probable.


                                      -16-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                  Revenues from seismic data processing, interpretation,
                  reservoir-studies services and significant customization of
                  software are recognized based on "Accounting for Performance
                  of Construction Type and Certain Production Type Contracts",
                  ("SOP 81-1"), using contract accounting on a percentage of
                  completion method. The percentage of completion for software
                  licenses arrangements that require significant customization
                  is determined based on the relationship of actual costs
                  incurred to total costs estimated to be incurred over the
                  duration of the contract. The percentage of completion for
                  seismic data processing, interpretation and reservoir-studies
                  services is determined based on the amount of data interpreted
                  or processed to the total amount of data to be interpreted or
                  processed. A provision for estimated losses on uncompleted
                  contracts is recorded in the period in which such losses are
                  first identified, in the amount of the estimated loss on the
                  entire contract. As of December 31, 2001, no provisions for
                  losses have been recorded.

                  Deferred revenue includes unearned amounts received under
                  maintenance and support contracts, and amounts received from
                  customers but not yet recognized as revenues.

         i.       Research and development costs:

                  Research and development costs incurred in the process of
                  developing product improvements or new products, are generally
                  charged to expenses as incurred.

                  Statement of Financial Accounting Standards No. 86 "Accounting
                  for the Costs of Computer Software to be Sold, Leased or
                  Otherwise Marketed, ("SFAS No. 86") requires capitalization of
                  certain software development costs subsequent to the
                  establishment of technological feasibility. Based on the
                  Company and its subsidiaries product development process,
                  technological feasibility is established upon completion of a
                  working model. Costs incurred by the Company and its
                  subsidiaries between completion of the working model and the
                  point at which the product is ready for general release which
                  are insignificant, have been capitalized.

                  Capitalized software costs are amortized by the greater of the
                  amount computed using the: (i) ratio that current gross
                  revenues from sales of the software to the total of current
                  and anticipated future gross revenues from sales of that
                  software, or (ii) the straight-line method over the estimated
                  useful life of the product (not to exceed three years). The
                  Company assesses the recoverability of this intangible asset
                  on a regular basis by determining whether the amortization of
                  the asset over its remaining life can be recovered through
                  undiscounted future operating cash flows from the specific
                  software product sold.

         j.       Income taxes:

                  The Company and its subsidiaries account for income taxes in
                  accordance with Statement of Financial Accounting Standard No.
                  109, "Accounting for Income Taxes, ("SFAS No. 109"). This
                  Statement prescribes the use of the liability method whereby
                  deferred tax assets and liability account balances are
                  determined based on differences between financial reporting
                  and tax bases of assets and liabilities and are measured using
                  the enacted tax rates and laws that will be in effect when the
                  differences are expected to reverse. The Company and its
                  subsidiaries provide a valuation allowance, if necessary, to
                  reduce deferred tax assets to their estimated realizable
                  value.


                                      -17-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

         k.       Concentrations of credit risks:

                  Financial instruments that potentially subject the Company and
                  its subsidiaries to concentrations of credit risk consist
                  principally of cash and cash equivalents, trade receivables,
                  accrued income and long-term trade receivables.

                  Cash and cash equivalents and a short-term deposit are
                  invested in U.S. dollars with major banks in the United
                  States, France and in Israel. Such investments in the United
                  States may be in excess of insured limits and are not insured
                  in other jurisdictions. Management believes that the financial
                  institutions that hold the Company and its subsidiaries
                  investments are financially sound and, accordingly, minimal
                  credit risk exists with respect to these investments.

                  The Company and its subsidiaries' trade receivables, long-term
                  trade receivables and accrued income are generally derived
                  from sales of products and services rendered to large and
                  solid organizations located primarily in Europe, the Middle
                  East and Asia ("EMEA"), North and South America, and the Far
                  East. The Company and its subsidiaries perform ongoing credit
                  evaluations of its customers. An allowance for doubtful
                  accounts is determined with respect to those amounts that the
                  Company has determined to be doubtful of collection and a
                  general allowance is provided to cover additional potential
                  exposures. As of December 31, 2001, the Company has not
                  incurred significant losses.

         l.       Accounting for stock-based compensation:

                  The Company has elected to follow Accounting Principles Board
                  Opinion No. 25 "Accounting for Stock Issued to Employees"
                  ("APB No. 25") and FASB Interpretation No. 44 "Accounting for
                  Certain Transactions Involving Stock Compensation" ("FIN 44")
                  in accounting for its employee stock option plans. Under APB
                  No. 25, when the exercise price of the Company's share options
                  is less than the market price of the underlying shares on the
                  date of grant, compensation expense is recognized. The pro
                  forma disclosures required by SFAS No. 123 "Accounting for
                  Stock-Based Compensation" ("SFAS No. 123") are provided in
                  Note 10g.

                  The Company applies SFAS No. 123 and EITF 96-18 "Accounting
                  for Equity Instruments that are Issued to Other than Employees
                  for Acquiring, or in Conjunction with Selling, Goods or
                  Services" ("EITF No. 96-18") with respect to warrants and
                  options issued to non-employees. SFAS No. 123 requires use of
                  an option valuation model to measure the fair value of the
                  options at the grant date.

         m.       Severance pay:

                  The Company's liability for severance pay for its Israeli
                  employees, is calculated pursuant to Israeli severance pay law
                  based on the most recent salary of the employees multiplied by
                  the number of years of employment, as of the balance sheet
                  date. Israeli employees are entitled to one month's salary for
                  each year of employment or a portion thereof. The Company's
                  liability for all of these employees, is fully provided by
                  monthly deposits with severance pay funds, insurance policies
                  and by an accrual.


                                      -18-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                  The deposited funds include profits accumulated up to the
                  balance sheet date. The deposited funds may be withdrawn only
                  upon the fulfillment of the Company's obligation pursuant to
                  Israeli severance pay law and labor agreements. The value of
                  the deposited funds is based on the cash surrendered value of
                  these policies, and includes immaterial profits.

         n.       Fair value of financial instruments:

                  The following methods and assumptions were used by the Company
                  and its subsidiaries in estimating their fair value
                  disclosures for financial instruments:

                  The carrying amounts of cash and cash equivalents, short-term
                  deposits, trade receivables, short-term bank loans, trade
                  payables and note payable approximate their fair value due to
                  the short-term maturity of such instruments.

                  Long-term trade receivables, long-term bank loans, long-term
                  lease obligations and convertible loan are estimated by
                  discounting the future cash flows using current interest rates
                  for borrowings and lending of similar terms and maturities.
                  The carrying amount of the long-term trade receivables,
                  long-term bank loans, long-term lease obligations and
                  convertible loan approximates their fair value.

         o.       Derivatives and hedging:

                  The Company accounts for derivatives and hedging based on
                  Financial Accounting Standards Board Statement No. 133,
                  "Accounting for Derivative Instruments and Hedging Activities"
                  as amended ("SFAS No. 133"). SFAS No. 133 requires companies
                  to recognize all of its derivative instruments on the balance
                  sheet at fair value. The accounting for changes in the fair
                  value of a derivative instrument depends on whether it has
                  been designated and qualifies as part of a hedging
                  relationship and further, on the type of hedging relationship.
                  For those derivative instruments that are designated and
                  qualify as hedging instruments, a company must designate the
                  hedging instrument, based upon the exposure being hedged, as a
                  fair value hedge, cash flow hedge or a hedge of a net
                  investment in a foreign operation.

                  For derivative instruments that are designated and qualify as
                  a fair value hedge, the gain or loss on the derivative
                  instrument as well as the offsetting loss or gain on the
                  hedged item attributable to the hedged risk are recognized in
                  the same line item associated with the hedged item in current
                  earnings during the period of the change in fair values.

                  The Company entered into forward exchange contract to minimize
                  the short term impact of foreign currency fluctuation on the
                  note payable denominated in British Pound (see Note 8d). This
                  is highly correlated to the hedge item and is designated as,
                  and considered effective as hedge of the underlying liability.
                  Gains and losses on this contract are included in net
                  financial expenses, and off set foreign exchange gains and
                  losses from the revaluation of the note payable denominated in
                  British Pound.


                                      -19-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                  The Company entered into additional forward exchange contracts
                  to hedge certain transactions denominated in foreign
                  currencies. The purpose of the Company's foreign currency
                  hedging activities is to protect the Company from risk that
                  the eventual dollar cash flows from the sale of products to
                  international customers will be adversely affected by changes
                  in the exchange rates. The Company's forward contracts did not
                  qualify as hedging instruments and the changes in the forward
                  fair value are reflected in the statement of operations as
                  financial income or expense.

         p.       Advertising expenses:

                  Advertising expenses are charged to the statements of
                  operations as incurred. Advertising expenses for the years
                  ended December 31, 1999, 2000 and 2001 were $587,000, $536,000
                  and $171,000, respectively.

         q.       Basic and diluted net earnings (loss) per share:

                  Basic net earnings (loss) per share are computed based on the
                  weighted average number of Ordinary shares outstanding during
                  each year. Diluted net earnings per share is computed based on
                  the weighted average number of Ordinary shares outstanding
                  during each year, plus dilutive potential Ordinary shares
                  considered outstanding during the year, in accordance with
                  Statement of Financial Accounting Standards No. 128, "Earnings
                  Per Share". ("SFAS No. 128").

                  The total weighted average number of shares related to
                  outstanding options and warrants excluded from the calculation
                  of diluted net earnings (loss) per share, because these
                  securities are anti-dilutive, was 46,000, 1,230,590 and
                  1,834,808 for the years ended December 31, 1999, 2000 and
                  2001, respectively

         r.       Impact of recently issued accounting standards:

                  In June 2001, the Financial Accounting Standards Board issued
                  Statement of Financial Accounting Standards No. 141, Business
                  Combinations and No. 142, Goodwill and other Intangible
                  Assets. ("SFAS No. 141" and "SFAS No. 142"). SFAS No. 141
                  requires that the purchase method of accounting be used for
                  all business combinations initiated after June 30, 2001.

                  SFAS No. 141 also includes guidance on the initial recognition
                  and measurement of goodwill and other intangible assets
                  arising from business combination completed after June 30,
                  2001. SFAS No. 142 prohibits the amortization of goodwill and
                  intangible assets with indefinite useful lives. SFAS No. 142
                  requires that these assets be reviewed for impairment at least
                  annually. Intangible assets with finite lives will continue to
                  be amortized over their estimated useful lives.


                                      -20-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                  The Company will apply Statement No. 142 beginning in January
                  1, 2002. The Company will test the goodwill for impairment
                  using the two-step process prescribed in SFAS No. 142. The
                  first step is a screen for potential impairment, while the
                  second step measures the amount of the impairment, if any. The
                  Company expects to perform the first of the required
                  impairment tests of goodwill and identified lived intangible
                  assets as of January 1, 2002 in the first half of 2002. Any
                  impairment charge resulting from these transitional impairment
                  tests will be reflected as cumulative effect of a change in
                  accounting principle in the first half of 2002. Application of
                  the non-amortization of the SFAS is expected to result in an
                  increase in net income of approximately $1,453,000 ($0.1 per
                  year). The Company will reclassify an assembled workforce
                  intangible asset with an unamortized balance of $1,957,000 to
                  goodwill at the date of adoption.

                  In August 2001, the Financial Accounting Standards Board
                  issued Statement of Financial Accounting Standard No. 144,
                  "Accounting for the Impairment or Disposal of Long-Lived
                  Assets" ("SFAS No.144"), which addresses financial accounting
                  and reporting for the impairment or disposal of long-lived
                  assets and superseded SFAS No. 121, "Accounting for the
                  Impairment of Long-Lived Assets and for Long-Lived Assets to
                  be Disposed Of", and the accounting and reporting provisions
                  of APB Opinion No. 30, "Reporting the Results of Operations
                  for a Disposal of a Segment of a Business". SFAS No. 144 is
                  effective for fiscal years beginning after December 15, 2001,
                  with earlier application encouraged.

                  The Company expects to adopt SFAS No. 144 as of January 1,
                  2002 and it has not determined the effect, if any, the
                  adoption of SFAS No. 144 will have on the Company's financial
                  position and results of operations.

         s.       Reclassification:

                  Certain prior years amounts have been reclassified to conform
                  to the current year's presentation.

NOTE 3: SHORT-TERM BANK DEPOSIT

                  Short-term bank deposit is maintained with a bank as security
                  for the note payable (see Note 8a). The deposit bears an
                  annual interest of 3.75% and is linked to the British Pound.


                                      -21-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 4:- OTHER RECEIVABLES AND PREPAID EXPENSES

<TABLE>
<CAPTION>
                                                DECEMBER 31,
                                          -------------------------
                                           2000               2001
                                          ------             ------
                                          U.S. DOLLARS IN THOUSANDS
                                          -------------------------
<S>                                       <C>                <C>
                Government authorities    $1,481             $1,741
                Prepaid expenses           1,350              1,608
                Other (1)                  1,279              2,337
                                          ------             ------

                                          $4,110             $5,686
                                          ======             ======
</TABLE>

         (1)      Includes two loans to the Company's officer, amounted to
                  $110,000, linked to the Israeli Consumer Price Index, with
                  interest at the rate of 2% per annum until May 31, 2000 and 4%
                  per annum from June 1, 2000. These loans were originally
                  repayable on December 31, 2000. Repayment has been extended to
                  December 31, 2002.

NOTE 5:- PROPERTY AND EQUIPMENT, NET

         a.       Comprised as follows:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                        -------------------------
                                                         2000               2001
                                                        -------           -------
                                                        U.S. DOLLARS IN THOUSANDS
                                                        -------------------------
<S>                                                     <C>               <C>
                  Cost:
                    Computers and peripheral equipment  $26,180           $27,877
                    Office furniture and equipment        2,604             3,365
                    Motor vehicles                           48               139
                    Leasehold improvements                3,301             6,240
                                                        -------           -------
                                                         32,133            37,621

                  Accumulated depreciation               18,815            21,719
                                                        -------           -------

                  Depreciated cost                      $13,318           $15,902
                                                        =======           =======
</TABLE>

         b.       Effective October 1, 2001, the Company changed the estimated
                  useful life of some of its computer equipment from mainly 4
                  years to 6 years. The effect of this change of estimate on the
                  net income and the net earning per share for the year ended
                  December 31, 2001, has been immaterial.

         c.       The equipment acquired under capital lease in accordance with
                  Statement of Financial Accounting Standards No. 13,
                  "Accounting for Leases" ("SFAS No. 13"), in the amount of
                  $1,300,000 is included in property and equipment. Depreciation
                  expense relating to this equipment was approximately $115,000,
                  $275,000 and $381,000 for the years ended December 31, 1999,
                  2000 and 2001, respectively (see also Note 12c).

         d.       As for charges, see Note 12e.


                                      -22-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 6: - OTHER ASSETS, NET

         a.       Comprised as follows:

<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                                 -------------------------
                                                                    2000           2001
                                                                   -------        -------
                                                                 U.S. DOLLARS IN THOUSANDS
                                                                 -------------------------
<S>                                                              <C>              <C>
Acquired technology (net of accumulated amortization
   of $3,724,000 in 2000 and $6,154,000 in 2001)                   $11,171        $12,123
Assembled work-force (net of accumulated amortization
   of $1,012,000 in 2000 and $1,463,000 in 2001)                     2,408          1,957
Customer base (net of accumulated amortization of $30,000 in
   2000 and $151,000 in 2001)                                        2,380          2,259
Goodwill (net of accumulated amortization of $992,000 in 2000
   and $1,641,000 in 2001)                                           9,499         12,985
Issuance costs of convertible loan (net of accumulated
   amortization of $0 in 2000 and $18,000 in 2001 (see Note 9)          --            597
Other (net of accumulated amortization of $1,499,000 in 2000
   and $1,650,000 in 2001)                                             147            640
                                                                   -------        -------

                                                                   $25,605        $30,561
                                                                   =======        =======
</TABLE>

         b.       Effective April 1, 2001, the Company changed the estimated
                  useful life of the remaining acquire technology, workforce and
                  goodwill acquired in connection with Canada acquisition and
                  certain other acquisitions from 5 to 10 years. The effect of
                  change of estimate on the net income and net earnings per
                  share for the year ended December 31, 2001, is an increase of
                  approximately $975,000 and $0.07, respectively.

                  The expected effect of this change of estimate for the
                  following eight years is an increase of approximately $1.3
                  million and $0.09 on the net income and on the net earnings
                  per share per annum, respectively.

         c.       Effective October 1, 2000, the Company changed the estimated
                  useful life of the remaining goodwill acquired in connection
                  with the PTM acquisition from 10 to 20 years. The effect of
                  change of estimate on the net income and net earnings per
                  share for the year ended December 31, 2000, has been
                  immaterial.



                                      -23-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 7:- OTHER PAYABLES AND ACCRUED EXPENSES

<TABLE>
<CAPTION>
                                                      DECEMBER 31,
                                                -------------------------
                                                 2000              2001
                                                -------           -------
                                                U.S. DOLLARS IN THOUSANDS
                                                -------------------------
<S>                                             <C>               <C>
        Accrued expenses                        $ 2,493           $ 3,975
        Employees and payroll accruals            2,585             3,428
        Royalties                                 1,473             1,682
        Employees termination expense               136               540
        Income taxes and other taxes              2,093             2,545
        Other                                     1,821             1,070
                                                -------           -------

                                                $10,601           $13,240
                                                =======           =======
</TABLE>

NOTE 8:- FINANCING ARRANGEMENTS

         a.       The Company has available unsecured revolving credit line
                  facilities for borrowings of up to a total of approximately $
                  22 million as of December 31, 2001, which are available until
                  August to November, 2002. Additionally, the Company is
                  required to maintain certain covenants according to which, (1)
                  its shareholders' equity will not be less than 40% of its
                  total assets and (2) the net profit excluding one time
                  expenses will be positive on an annual basis. Borrowings under
                  these agreements bear interest at rates LIBOR for three to six
                  months, plus 1%-1.5%. The Company had an unused credit
                  facility in the amount of approximately $10 million as of
                  December 31, 2001. A portion of the Company's short-term bank
                  loans require that the Company pledges cash and places
                  floating charge as collateral for its borrowings (see Note
                  12e).

         b.       Short-term bank loans consist of loans under the above
                  discussed facility, linked to the US dollar. The interest rate
                  on these borrowings is the London Inter Bank Offer Rate
                  ("LIBOR") for three to six months, plus 1%. The weighted
                  average interest rate as of December 31, 2000 and 2001, was
                  approximately 7.5% and 4.5% respectively.

         c.       Long-term bank loans under the above discussed facility,
                  represent other bank loans which are linked to the U.S.
                  dollar. The interest rate on these borrowings is the LIBOR for
                  three months, plus 1%-1.5%.

                         Aggregate maturities of long-term loans:
<TABLE>
<CAPTION>
                                                      DECEMBER 31,
                                                -------------------------
                                                  2000            2001
                                                 ------          ------
                                                U.S. DOLLARS IN THOUSANDS
                                                -------------------------
<S>                                             <C>              <C>
        First year (current maturities)          $3,112          $1,278
        Second year                               1,277           1,300
        Third year                                   --           3,799
                                                 ------          ------

                                                 $4,389          $6,377
                                                 ======          ======
</TABLE>


                                      -24-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 8:- FINANCING ARRANGEMENTS (CONT.)

         d.       In May 2001, the Company issued a note payable amounting
                  $6,282,000, in respect of the acquisition of Sysdrill, to the
                  previous owner of Sysdrill ("the lender"). The note shall be
                  paid in British Pound by May 15, 2002 and bears six months
                  LIBOR interest. The lender shall be entitled, by given 90 day
                  notice, to require a redemption of up to one million British
                  Pound (see Note 1b).

NOTE 9:- CONVERTIBLE LOAN

         On October 11, 2001, the Company entered into an agreement with The
         Israel Mezzanine Fund, L.P., The Israel Mezzanine Fund (In Israel),
         Limited Partnership and The Jordan (Bermuda) Investment Company Ltd.
         (collectively "FIMI") pursuant to which the Company would issue FIMI $8
         million convertible debentures ("Convertible loan"), with the option to
         increase to $11 million under certain conditions. Annual interest rate
         is three months LIBOR minus 1% payable quarterly. The outstanding loan
         principal amount shall be repaid in three equal annual payments
         commencing October 2004.

         The loan shall be convertible into Ordinary shares by FIMI at any time
         at $7.5 per share ("Conversion Price").

         The Conversion Price shall be subject to adjustment in the event that
         the average closing prices of the Company's Ordinary shares, sixty
         trading days immediately preceding the second and the third
         anniversaries of the agreement ("Market Price") is lower than $7.5 per
         share. The Conversion Price shall be adjusted to the Market Price,
         provided that it shall not be lower than $3.26 per share. In the event
         that the Market Price shall be equal to or lower than $3.26 per share,
         the conversion price shall be $3.26 per share.

         In the event that the average closing prices of the Company's Ordinary
         shares, sixty trading days immediately preceding a conversion date
         ("Conversion Closing Price") is equal to or higher than $20 but lower
         than $30, the adjusted Conversion Price, shall be $9 per share.
         Further, in the event that the Conversion Closing Price is equal to or
         higher than $30, the adjusted Conversion Price, shall be $12. As of
         December 31, 2001, no conversion of the loan took place.

         The outstanding convertible loan amount shall be repaid in three equal
         annual payments commencing on the third anniversary of the agreement
         closing date; provided, however, that prior to each payment date, FIMI,
         at its sole discretion, may elect, by giving an irrevocable written
         notice to the Company, to have any portion of the principal deferred
         and repaid on the fifth anniversary of the agreement closing date. The
         parties agreed to certain covenants, such that as long as the loan has
         not been repaid, the Company's shareholders' equity will not be less
         than (i) its shareholders' equity as of June 30, 2001 and (ii) 40% of
         its total assets.

         Upon the closing of a merger or consolidation of the Company, or a sale
         of securities of the Company, which results in shareholders, prior to
         the transaction, owning less than 51% of the surviving entity, FIMI has
         the right to require that the Company repay the Convertible loan. In
         addition, the Company is required to repay the Convertible loan upon
         the acquisition of 90% or more of the securities of the Company by a
         third party.


                                      -25-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 9:- CONVERTIBLE LOAN (CONT.)

         As of December 31, 2001, no beneficial conversion feature value was
         required in respect of the convertible loan, in accordance with
         Emerging Issues Task Force ("EITF") 98-5 "Accounting for Convertible
         Securities with Beneficial Conversion Features or Contingently
         Adjustable Conversion Ratios" and EITF 00-27 "Application of Issue No.
         98-5 to Certain Convertible Instruments".

NOTE 10:- SHAREHOLDERS' EQUITY

         a.       Ordinary shares:

                  Ordinary shares confer upon their holders voting rights, the
                  right to receive cash dividends, and the right to a share in
                  excess assets upon liquidation of the Company.

                       As for charges, see Note 12(e)(1).

         b.       Preferred shares:

                  All the issued and outstanding Preferred shares were
                  automatically converted into Ordinary shares at the time of
                  the Company's Initial Public Offering ("IPO"), which took
                  place in 1998. Since then, the Ordinary shares have been
                  traded on NASDAQ in the U.S. In February 2001, under the
                  provisions of the Tel-Aviv Stock exchange regulations for dual
                  listings, the Company's shares commence trading on the
                  Tel-Aviv Stock exchange.

         c.       In May 2001, the Company issued 200,000 Ordinary shares in
                  connection with the acquisition of Sysdrill (see Note 1b).

         d.       In October 2000, the Company issued 1,500,000 Ordinary shares
                  to CGG as part of the consideration in regarding to the
                  Flagship acquisition (see Note 1c).

         e.       In April and May 1999, the Company completed through a private
                  placement, a share issuance of 2,017,544 Ordinary shares to
                  new and existing investors, and raised approximately $11
                  million.

         f.       Stock options:

                  Under the Company's 1994 and 1997 Stock Option Plans ("the
                  Plans"), options may be granted to employees, officers,
                  directors and consultants who provide services to the Company
                  or any of its subsidiaries. Pursuant to the Plans, a total of
                  2,300,000 Ordinary shares of the Company are reserved for
                  issuance. Options granted under the 1994 and 1997 Plans, if
                  unexercised, expire ten and eight years from the date of
                  grant, respectively. The exercise price of these options may
                  not be less than 100% of the market price of the share at the
                  date of grant. Options granted under the Plans are generally
                  exercisable in installments over the vesting period which is
                  generally four years. Options, which are canceled or forfeited
                  before expiration become available for future grants. All
                  options were granted with an exercise price equal to the fair
                  market value at the date of grant. Total amount of options
                  available for future grants as of December 31, 2001 amounted
                  to 391,000.


                                      -26-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 10:- SHAREHOLDERS' EQUITY (CONT.)

                  The following is a summary of the options granted among the
                  various Plans.

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                            ---------------------------------------------------------------------------------------
                                       1999                          2000                          2001
                            --------------------------     --------------------------    --------------------------
                                             WEIGHTED                       WEIGHTED                      WEIGHTED
                                              AVERAGE                        AVERAGE                       AVERAGE
                                             EXERCISE                       EXERCISE                      EXERCISE
                              NUMBER           PRICE         NUMBER           PRICE        NUMBER           PRICE
                            ----------      ----------     ----------      ----------    ----------      ----------
<S>                         <C>             <C>            <C>             <C>           <C>             <C>
Outstanding at the
  beginning of the year      1,592,616      $     5.65      1,603,216      $     5.67     1,845,156      $     6.01
  Granted                      121,500      $        7        598,350      $        7       101,000      $     3.88
  Canceled or forfeited        (96,500)     $        7       (310,624)     $     6.49       (98,314)     $      6.9
  Exercised                    (14,400)     $        5        (45,786)     $     3.84            --      $       --
                            ----------      ----------     ----------      ----------    ----------      ----------

Outstanding at the
  end of the year            1,603,216      $     5.67      1,845,156      $     6.01     1,847,842      $     5.85
                            ==========      ==========     ==========      ==========    ==========      ==========
 Exercisable at the
  end of the year            1,013,064      $     5.18      1,079,435      $     5.31     1,236,108      $     5.53
                            ==========      ==========     ==========      ==========    ==========      ==========
</TABLE>

                  The options outstanding as of December 31, 2001, have been
                  separated into ranges of exercise price as follows:

<TABLE>
<CAPTION>
                                                                                 WEIGHTED
                    OPTIONS          WEIGHTED                    OPTIONS         AVERAGE
                  OUTSTANDING         AVERAGE      WEIGHTED    EXERCISABLE       EXERCISE
   RANGE OF          AS OF           REMAINING      AVERAGE       AS OF          PRICE OF
   EXERCISE       DECEMBER 31,      CONTRACTUAL    EXERCISE    DECEMBER 31,      OPTIONS
    PRICE             2001         LIFE (YEARS)      PRICE         2001        EXERCISABLE
--------------    ------------     ------------    --------    ------------    -----------
<S>               <C>              <C>             <C>         <C>             <C>
$ 0.59               63,336            0.33         $ 0.59         63,336         $ 0.59
$ 2.5 - $ 3.67      174,190            4.03         $ 3.07         89,190         $  2.5
$ 4 - $ 6           473,026            3.15         $ 4.64        457,026         $  4.8
$ 7               1,137,290            5.67         $    7        626,556         $    7
                  ---------                         ------      ---------         ------

                  1,847,842                         $ 5.85      1,236,108         $ 5.53
                  =========                         ======      =========         ======
</TABLE>

         g.       Pro-forma information regarding net income (loss) and net
                  earnings (loss) per share is required by SFAS No. 123, and has
                  been determined as if the Company had accounted for its
                  employee stock options under the fair value method of that
                  Statement. The fair value for these options was estimated at
                  the grant date using a Black and Scholes option pricing model
                  with the following weighted-average assumptions for each of
                  the three years in the period ended December 31, 1999, 2000
                  and 2001, respectively: risk-free interest rates of 6%, 6% and
                  2%-5% for the years ended December 31, 1999, 2000 and 2001,
                  respectively; dividend yields of 0% for each year; a
                  volatility factor of the expected market price of the
                  Company's Ordinary shares of 0.567, 0.621 and 0.547 for the
                  years ended December 31, 1999, 2000 and 2001, respectively and
                  a weighted-average expected life of the option of eight years
                  for each year. For pro forma purposes, deferred compensation
                  is being amortized over the vesting period.

                  The weighted average fair value of the options at their dates
                  of grant in 1999, 2000 and 2001 was $4.38, $4.82 and $2.51,
                  respectively.


                                      -27-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 10:- SHAREHOLDERS' EQUITY (CONT.)

                  Pro-forma information under SFAS No. 123 (in thousands, except
                  per share data):

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                 --------------------------------
                                                   1999        2000       2001
                                                 ---------   ---------  ---------
<S>                                              <C>         <C>        <C>
Net income (loss) as reported                    $  (3,778)  $   2,359  $   2,130
                                                 =========   =========  =========
Pro-forma net income (loss)                      $  (5,035)  $     744  $     957
                                                 =========   =========  =========
Pro-forma basic net earnings (loss) per share    $   (0.41)  $    0.06  $    0.06
                                                 =========   =========  =========
Pro-forma diluted net earnings (loss) per share  $   (0.41)  $    0.06  $    0.06
                                                 =========   =========  =========
</TABLE>

         h.       Warrants:

                  In 1994, the Company issued 539,244 warrants to purchase
                  Ordinary shares of the Company to various shareholders, in
                  connection with their loan guarantees to the Company. These
                  warrants were exercisable over five years, and terminated on
                  July 21, 1999, at an exercise price of the lower of either:
                  (i) 80% of the price of the last private placement, or (ii)
                  80% of the IPO price of the Company's shares. In the year
                  ended December 31, 1999, 479,908 warrants were exercised at an
                  exercise price of $4 per share and as of December 31, 1999,
                  all of the warrants were exercised.

                  In October 1997, the Company issued 720,000 warrants in
                  connection with bridge loans received in relation with the
                  acquisition of CogneSeis Development Inc. ("CogneSeis"), at an
                  exercise price of $6.00 per Ordinary share. These warrants are
                  exercisable over seven years. The fair value of these warrants
                  was estimated using a Black and Scholes option pricing model
                  with the following weighted-average assumptions: risk-free
                  interest rate of 6%; dividend yields of 0%; a volatility
                  factor of the expected market price of the Company's Ordinary
                  shares of 0.285; and a weighted-average expected life of the
                  warrants of one year; The fair value of these warrants in the
                  amount of $600,000 was amortized as additional interest
                  expense in 1997 and 1998, amounting to $125,000 and $475,000,
                  respectively. In April 2000, 360,000 warrants were exercised
                  to 119,782 of the Company's Ordinary shares at an exercise
                  price equal to the par value of NIS 0.5, due to a cashless
                  exercise mechanism. As of December 31, 2001, 363,000 warrants
                  are exercisable.

                  In 1999, as compensation for services provided to the Company
                  in connection with the share issuance (see Note 10e),
                  investment bankers received 250,000 warrants exercisable
                  during a three year period at an exercise price of $5.70 per
                  Ordinary share. As of December 31, 2001, 250,000 warrants are
                  exercisable. These warrants will expire on May 15, 2002.

         i.       Dividends:

                  Dividends, if any, will be paid in NIS. Dividends paid to
                  shareholders outside Israel may be converted to U.S. dollars
                  on the basis of the exchange rate prevailing at the date of
                  the conversion. The Company does not intend to pay cash
                  dividends in the foreseeable future.


                                      -28-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 11:- INCOME TAXES

         a.       Israeli income tax:

                  The Company's production facilities in Israel have been
                  granted an "Approved Enterprise" status for four investment
                  programs approved in 1988, 1993, 1996 and 1999 by the Israeli
                  Government under the Law for the Encouragement of Capital
                  Investments, 1959. The main benefit arising from such status
                  is the reduction in tax rates on income derived from "Approved
                  Enterprise". Consequently, the Company is entitled to two to
                  four years of tax exempt and three to five years of reduced
                  tax rate (10% - 25%).

                  Additionally, the Company is a "foreign investors' company",
                  as defined by that law and, as such, is entitled to additional
                  reduction of the tax to 10% - 25% (based on the percentage of
                  foreign ownership in each taxable year) and extension of above
                  3-5 years of the benefit period.

                  As the Company has no taxable income, the benefit periods have
                  not yet commenced for all programs.

                  The Company has completed implementation of three investment
                  programs and currently implements the fourth investment
                  program.

                  The period of tax benefits, detailed above, is subject to
                  limit of 12 years from the commencement of production, or 14
                  years from the approval date, whichever is earlier. Given the
                  above-mentioned conditions, under the various investment
                  programs, the period of benefits for the production facilities
                  will terminate in the years from 2002 thorough 2013.

                  The entitlement to the above benefits is conditional upon the
                  Company's fulfilling the conditions stipulated by the above
                  law, regulations published thereunder and the instruments of
                  approval for the specific investments in "Approved
                  Enterprises". In the event of failure to comply with these
                  conditions, the benefits may be canceled and the Company may
                  be required to refund the amount of the benefits, in whole or
                  in part, including interest. As of December 31, 2001, the
                  Company is in compliance with all the conditions required by
                  law.

                  The tax-exempt income attributable to the "Approved
                  Enterprise" can be distributed to shareholders without
                  subjecting the Company to taxes only upon the complete
                  liquidation of the Company. If these retained tax-exempt
                  profits are distributed in a manner other than in the complete
                  liquidation of the Company they would be taxed at the
                  corporate tax rate applicable to such profits as if the
                  Company had not elected the alternative system of benefits,
                  currently between 10% - 25% for an "Approved Enterprise".

                  As of December 31, 2001, the accumulated deficit of the
                  Company does not include any tax-exempt profits earned by the
                  Company's "Approved Enterprise".

                  Income from sources other than "Approved Enterprise" is taxed
                  at the regular rate of 36%.

                  By right of this law, the Company is entitled to claim
                  accelerated depreciation on equipment used in the "Approved
                  Enterprise" during five tax years.


                                      -29-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 11:- INCOME TAXES (CONT.)

                  Results for tax purposes are measured in terms of earnings in
                  NIS after certain adjustments for increases in the Israeli
                  Consumer Price Index ("CPI"). As explained in Note 2b, the
                  financial statements are measured in U.S. dollars. The
                  difference between the annual change in the Israeli CPI and in
                  the NIS/dollar exchange rate causes a further difference
                  between taxable income and the income before taxes shown in
                  the financial statements. In accordance with paragraph 9(f) of
                  SFAS No. 109, the Company has not provided deferred income
                  taxes on the difference between the functional currency and
                  the tax bases of assets and liabilities.

                  The Company is an "Industrial Company", as defined by the Law
                  for the Encouragement of Industry (Taxes), 1969 and, as such,
                  is entitled to certain tax benefits, mainly accelerated
                  depreciation of machinery and equipment, as prescribed by
                  regulations published under the Inflationary Adjustments Law,
                  the right to claim public issuance expenses and amortization
                  of other intangible property rights as a deduction for tax
                  purposes.

         b.       Deferred income taxes:

                  Deferred income taxes reflect the net tax effects of temporary
                  differences between the carrying amounts of assets and
                  liabilities for financial reporting purposes and the amounts
                  used for income tax purposes. Significant components of the
                  Company and its subsidiaries deferred tax liabilities and
                  assets are as follows:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                             -------------------------
                                                              2000              2001
                                                             -------           -------
                                                             U.S. DOLLARS IN THOUSANDS
                                                             -------------------------
<S>                                                          <C>               <C>
Deferred income tax assets:
  Operating loss carryforward                                $ 1,200           $   946
  Other                                                          300               187
                                                             -------           -------

  Net deferred income tax asset before valuation allowance     1,500             1,133
  Valuation allowance                                          (1500)           (1,133)
                                                             -------           -------

  Net deferred income tax asset                              $    --           $    --
                                                             =======           =======
</TABLE>

                  The Company and its subsidiaries have provided valuation
                  allowances in respect of deferred tax assets resulting from
                  tax loss carryforwards and other differences.

                  Management currently believes that since the Company and its
                  subsidiaries have a history of losses it is more likely than
                  not that the deferred tax regarding the loss carryforwards and
                  other temporary differences will not be realized in the
                  foreseeable future.


                                      -30-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 11:- INCOME TAXES (CONT.)

         c.       Net operating losses carryforwards:

                  The Company has accumulated losses for tax purposes as of
                  December 31, 2001, in the amount of approximately $1 million,
                  which may be carried forward and offset against taxable income
                  in the future for an indefinite period.

                  Through December 31, 2001, the Company has accumulated losses
                  for tax purposes in the amounts of approximately $3.5 million
                  related to certain subsidiaries.

         d.       Reconciliation of the theoretical tax expense (benefit) to the
                  actual tax expense (benefit):

                  A reconciliation of the theoretical tax expense, assuming all
                  income is taxed at the statutory rate applicable to income of
                  the Company, and the actual tax expense are as follows:

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                                -------------------------
                                                  1999     2000    2001
                                                 -------   -----   -----
                                                U.S. DOLLARS IN THOUSANDS
                                                -------------------------
<S>                                             <C>        <C>     <C>
       Theoretical tax (benefit) computed
             at the statutory rate of 36%        $(1,360)  $ 986   $ 972
          Increase (decrease) in income
             taxes resulting from:
             Carryforward losses for which a
              valuation allowance was provided        --    (500)   (254)
            Losses for which benefits
              are not recognized                   2,878      --      --
             Prior year income tax benefit          (258)     --      --
             Other                                (1,260)   (106)   (149)
                                                 -------   -----   -----

         Taxes on income                         $    --   $ 380   $ 569
                                                 =======   =====   =====
</TABLE>

         e.       Income taxes consist of the following:

<TABLE>
<CAPTION>
                                   YEAR ENDED DECEMBER 31,
                                 --------------------------
                                 1999       2000       2001
                                 -----      -----      ----
                                 U.S. DOLLARS IN THOUSANDS
                                 --------------------------
<S>                              <C>        <C>        <C>
                  Current        $ 725      $ 552      $569
                  Deferred        (467)      (172)       --
                  Prior year      (258)        --        --
                                 -----      -----      ----

                                 $  --      $ 380      $569
                                 =====      =====      ====

                  Domestic       $  --      $ 123      $ 44
                  Foreign           --        257       525
                                 -----      -----      ----

                                 $  --      $ 380      $569
                                 =====      =====      ====
</TABLE>


                                      -31-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 11:- INCOME TAXES (CONT.)

         f.       Income (loss) before income taxes from continued operation
                  consists of the following :

<TABLE>
<CAPTION>
                                   YEAR ENDED DECEMBER 31,
                               ------------------------------
                                1999         2000       2001
                               -------      ------     ------
                                 U.S. DOLLARS IN THOUSANDS
                               ------------------------------
<S>                            <C>          <C>        <C>
                  Domestic     $(3,465)     $  874     $1,400
                  Foreign         (313)      1,865      1,299
                               -------      ------     ------

                               $(3,778)     $2,739     $2,699
                               =======      ======     ======
</TABLE>

NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES

         a.       Royalty obligation to the Office of the Chief Scientist
                  ("OCS") of the Government of Israel:

                  Under the Company's research and development agreements with
                  the OCS and pursuant to applicable laws, the Company is
                  required to pay royalties at the rate of 3% of sales of
                  products developed with funds provided by the Office of the
                  Chief Scientist, up to an amount equal to 100% - 150% of the
                  Office of the Chief Scientist's research and development
                  grants (dollar-linked) related to such projects. The Company
                  is obligated to repay the Government for the grants received
                  only to the extent that there are sales of the funded product.
                  The Company did not receive grants for the years ended
                  December 31, 1999, 2000 and 2001.

                  The Company has paid or accrued royalties in the amounts of
                  $100,000, $100,000 and $236,000 for the years ended December
                  31, 1999, 2000 and 2001, respectively, relating to the
                  repayment of such grants.

                  As of December 31, 2001, the Company had a contingent
                  obligation to pay royalties in the amount of approximately
                  $303,000.

         b.       Royalty obligation to the Marketing Fund of the Government of
                  Israel:

                  The Israeli Government, through the Fund for the Encouragement
                  of Marketing Activities, awarded the Company grants for
                  participation in foreign marketing expenses. The Company is
                  committed to pay royalties at the rate of 3% of the increase
                  in foreign sales. Total royalties are not to exceed the
                  amounts of grants received by the Company (dollar-linked). The
                  Company did not receive grants for the years ended December
                  31, 1999, 2000 and 2001.

                  As of December 31, 2001, the Company had a contingent
                  obligation to pay royalties in the amount of approximately
                  $391,000.


                                      -32-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

         c.       Leases:

                  The Company and its subsidiaries rent their offices under
                  various operating lease agreements, which expire on various
                  dates. The rental fees are partly linked to the dollar and
                  partly to the Israeli Consumer Price Index.

                  In August 1999, the Company entered into a three years lease
                  agreement to acquire computer equipment, which has been
                  recorded as a capital lease in accordance with SFAS No. 13

                  Future minimum rental commitments under non-cancelable
                  operating and capital leases as of December 31, 2001, are as
                  follows:

<TABLE>
<CAPTION>
                                                OPERATING          CAPITAL
     YEAR ENDED DECEMBER 31,                      LEASES           LEASES
                                                 --------          -------
                                                 U.S. DOLLARS IN THOUSANDS
                                                 -------------------------
<S>  <C>                                         <C>               <C>
     2002                                        $  2,883          $   325
     2003                                           3,363                -
     2004                                           3,343                -
     2005                                           3,056                -
     2006 and thereafter                            8,736                -
                                                 --------          -------

     Total minimum lease payments                $ 21,381              325
                                                 ========

     Less - amount representing  interest                              (65)
                                                                   -------

     Present value of capital lease obligation                     $   260
                                                                   =======
</TABLE>

                  Total rent expenses for the years ended December 31, 1999,
                  2000 and 2001, amounted to $2,020,000, $2,930,000 and
                  $3,601,000, respectively.


                                      -33-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

         d.       Legal:

                  On December 11, 1997, the Company filed a lawsuit for a
                  declaratory judgment to determine whether it has any
                  obligation to Geophysical Micro Computer Application
                  (international) Ltd.("GMA") under a letter of intent (the
                  "letter of intent"). Under the terms of the letter of intent,
                  the company and GMA contemplated a transaction in which GMA
                  would purchase certain computer software programs and related
                  products ("SeisX") from the Company, provided that the Company
                  acquired the SeisX assets from a third party. On May 5, 1998,
                  GMA filed a counterclaim for breach of contract, claiming that
                  the letter of intent required the Company to sell SeisX to
                  GMA. GMA sought compensatory, injunctive and declaratory
                  relief. On September 11, 1998, the trial court granted summary
                  judgment in favor of the Company and declared that the Company
                  has no obligation to sell the SeisX assets or related products
                  to GMA, and that GMA lost its counterclaim. On December 7,
                  1998, GMA filed the an appeal. As for subsequent events see
                  Note 15c.

         e.       Charges:

                  1.       The Company has a floating charge on all of its
                           assets and on its outstanding share capital, with
                           respect to its short-term and long-term bank loans,
                           and credit lines in favor of two individual banks and
                           to FIMI.

                  2.       All financed equipment is pledged in favor of the
                           related financial institution.

                  3.       The Company has pledged $1.9 million of its short
                           term bank deposit in favor of one of its Banks as
                           collateral for the note payable repayment (see Note
                           8d).

NOTE 13:- SEGMENTS, CUSTOMERS AND GEOGRAPHICS INFORMATION

         a.       Operating data:

                  In the year 2000, the Company began to evaluate its business
                  as two separate operating segments.

                  1.       Products - consist of software products, software
                           licenses that require significant customization,
                           maintenance and support, training and installation.

                  2.       Services - consist of professional services of
                           seismic data processing, interpretation, and
                           reservoir-studies services.


                                      -34-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 13:- SEGMENTS, CUSTOMERS AND GEOGRAPHICS INFORMATION (CONT.)

                  The information evaluated by the Company's decision makers in
                  deciding how to allocate resources to these segments are total
                  revenues, cost of revenues, depreciation of property and
                  equipment, segment profit and segments property and equipment
                  as presented in the consolidated statements of operations and
                  balance sheets.

                  In prior years, the Company operated and reported in its
                  management internal reporting in a single segment - providing
                  of software licenses, seismic data processing and
                  interpretation services.

                  Prior years have been restated in order to reflect the new
                  internal reporting form.

                  The accounting policy of the segments is in accordance with
                  the requirements of Statement of Financial Accounting
                  Standards No. 131 Disclosure about Segments of an Enterprise
                  and Related Information", ("SFAS No. 131").

                  Segments revenues, cost of revenues, depreciation, assets and
                  other data are as follows:

<TABLE>
<CAPTION>
                                      YEAR ENDED DECEMBER 31, 2001
                            ---------------------------------------------------
                            PRODUCTS    SERVICES  RECONCILIATION   CONSOLIDATED
                            --------    --------  --------------   ------------
                                        U.S. DOLLARS IN THOUSANDS
                            ---------------------------------------------------
<S>                         <C>         <C>       <C>              <C>
       Revenues             $50,765     $22,001       $    --        $72,766
       Cost of revenues      10,592       9,793            --         20,385
       Depreciation             718       2,151         2,720          5,589
                            -------     -------       -------        -------

       Segment profit       $39,455     $10,057       $(2,720)       $46,792
                            =======     =======       =======        =======
</TABLE>

<TABLE>
<CAPTION>
                                      YEAR ENDED DECEMBER 31, 2000
                            ---------------------------------------------------
                            PRODUCTS    SERVICES  RECONCILIATION   CONSOLIDATED
                            --------    --------  --------------   ------------
                                        U.S. DOLLARS IN THOUSANDS
                            ---------------------------------------------------
<S>                         <C>         <C>       <C>              <C>
       Revenues             $46,390     $16,908       $    --        $63,298
       Cost of revenues      10,816       6,352            --         17,168
       Depreciation             609       1,827         2,310          4,746
                            -------     -------       -------        -------

       Segment profit       $34,965     $ 8,729       $(2,310)       $41,384
                            =======     =======       =======        =======
</TABLE>

<TABLE>
<CAPTION>
                                      YEAR ENDED DECEMBER 31, 1999
                            ---------------------------------------------------
                            PRODUCTS    SERVICES  RECONCILIATION   CONSOLIDATED
                            --------    --------  --------------   ------------
                                        U.S. DOLLARS IN THOUSANDS
                            ---------------------------------------------------
<S>                         <C>         <C>       <C>              <C>
       Revenues             $43,023     $11,483       $    --        $54,506
       Cost of revenues      12,418       5,804            --         18,222
       Depreciation             448       1,395         2,022          3,865
                            -------     -------       -------        -------

       Segment profit       $30,157     $ 4,284       $(2,022)       $32,419
                            =======     =======       =======        =======
</TABLE>


                                      -35-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 13:- SEGMENTS, CUSTOMERS AND GEOGRAPHICS INFORMATION (CONT.)

                  Segments assets, net are as follows:

<TABLE>
<CAPTION>
                                               DECEMBER 31,
                                     -------------------------------
                                      1999        2000        2001
                                     -------     -------     -------
                                       U.S. DOLLARS IN THOUSANDS
                                     -------------------------------
<S>                                  <C>         <C>         <C>
            Products                 $ 2,264     $ 2,622     $ 1,101
            Services                   6,692       8,520       7,826
            Other                      3,051       2,176       6,975
                                     -------     -------     -------

            Total segment assets     $12,007     $13,318     $15,902
                                     =======     =======     =======
</TABLE>

         b.       Geographic operational information:


                  Revenues attributed to countries based on the location of the
                  end customers are as follows:

<TABLE>
<CAPTION>
                                          YEAR ENDED DECEMBER 31,
                                      -------------------------------
                                       1999        2000        2001
                                      -------     -------     -------
                                         U.S. DOLLARS IN THOUSANDS
                                      -------------------------------
<S>                                   <C>         <C>         <C>
          North and South America     $24,219     $32,104     $33,531
          EMEA                         14,604      19,240      25,121
          Far East                     15,683      11,954      14,114
                                      -------     -------     -------

                                      $54,506     $63,298     $72,766
                                      =======     =======     =======
</TABLE>

                  Long-lived assets are as follows:

<TABLE>
<CAPTION>
                                                DECEMBER 31,
                                      -------------------------------
                                       1999        2000        2001
                                      -------     -------     -------
                                         U.S. DOLLARS IN THOUSANDS
                                      -------------------------------
<S>                                   <C>         <C>         <C>
          North and South America     $ 7,932     $ 7,232     $ 8,951
          EMEA                          1,704      17,270      17,103
          Far East                      1,074       1,029       2,133
          Israel                       16,016      13,392      18,276
                                      -------     -------     -------

                                      $26,726     $38,923     $46,463
                                      =======     =======     =======
</TABLE>

         c.       Major customers:

                  The Company had one major customer, which accounted for
                  approximately 0%, 12% and 0% of the Company's revenues, for
                  the years ended December 31, 1999, 2000 and 2001,
                  respectively.


                                      -36-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 14:- SELECTED STATEMENTS OF OPERATIONS DATA

         a.       Non-recurring expenses:

<TABLE>
<CAPTION>
                                                                YEAR ENDED
                                                               DECEMBER 31,
                                                                   1999
                                                              ---------------
                                                              U.S. DOLLARS IN
                                                                 THOUSANDS
                                                              ---------------
<S>                                                           <C>
                   Lease termination costs                       $   763
                   Impairment of developed technology              1,595
                   Other                                             347
                                                                 -------

                                                                 $ 2,705
                                                                 =======
</TABLE>

         b.       The following table sets forth the reconciliation of basic and
                  diluted net earnings (loss) per share:

<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                             ----------------------------------
                                               1999         2000         2001
                                             --------      -------      -------
                                                  U.S. DOLLARS IN THOUSANDS
                                             ----------------------------------
<S>                                          <C>           <C>          <C>
Numerator:

Net earnings (loss) for basic net earnings
(loss) per share                             $ (3,778)     $ 2,359      $ 2,130
                                             ========      =======      =======
Numerator for diluted net earnings (loss)
   per share -
  Net earning (loss) available to
   shareholders of Ordinary shares           $ (3,778)     $ 2,359      $ 2,162
                                             ========      =======      =======

Denominator (in thousands):
Weighted average number of Ordinary
   shares (denominator for basic net
   earnings (loss) per share)                  12,205       13,504       14,817
                                             --------      -------      -------
Effect of securities:
   Employee stock options                      *)  --          225          149
   Warrants issued to third parties            *)  --           60       *)  --
   Convertible loan                                --           --          158
                                             --------      -------      -------

Dilutive potential of Ordinary shares          *)  --          285          307
                                             --------      -------      -------
Denominator for diluted net earnings
   (loss) per share -                          12,205       13,789       15,124
                                             ========      =======      =======
</TABLE>

*) Anti-dilutive.


                                      -37-
<PAGE>
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 15:- SUBSEQUENT EVENTS (UNAUDITED)

         a.       The Company has been approached by and is currently in the
                  final stages of negotiation with a private investment firm
                  regarding the acquisition of the entire share capital of
                  Company by way of merger, for consideration of $5.15 per
                  share. The parties have not yet signed an agreement. The
                  Company expects such an agreement to be signed in the near
                  future. The closing of the transaction contemplated by the
                  agreement, if signed, is subject to shareholders approval and
                  other customary closing conditions. There can be no assurance
                  that the transaction will be completed.

         b.       On April 24, 2002, Leumi &.Co. Investment House filed a claim
                  in the Tel Aviv Magistrates court against the Company and
                  Eldad Weiss, the Company's Chairman and Chief Executive
                  Officer, claiming a finders fee in connection with the FIMI
                  Convertible note transaction (see Note 9) in a total amount of
                  approximately $250,000. The Company and Mr. Weiss have not yet
                  filed a Statement of Defense. This legal proceeding is in a
                  preliminary stage and the Company and its legal counselors can
                  not predict its outcome.

         c.       On May 9, 2002, in connection with GMA case (see Note 12d),
                  the Texas Supreme Court denied appeals by the Company from a
                  Texas appellate court decision reversing and remanding for
                  further proceedings a trial court decision in September 1998,
                  under the terms of a Letter of Intent with GMA. The case will
                  be returned to the Dallas County District Court for further
                  proceedings. The Company believes that the outcome of the
                  above claim will not have an adverse effect on the Company's
                  consolidated financial statements.

         d.       On April 9, 2002, Dr. Cesar A. Egas-Teran filed a lawsuit
                  against Mr. Cesar Yepes, Paradigm's Geophysical  de Venezuela
                  S.A. and Paradigm's Geophysical B.V. ("the Venezuelan and
                  Netherlands subsidiaries"), registered agent in Ecuador, and
                  Mr. Alberto Jaramillo-De Howitt, the Venezuelan and
                  Netherlands subsidiaries' former registered agent in Ecuador,
                  both individually and as representatives in Ecuador of the
                  Venezuelan and Netherlands subsidiaries', and against the
                  Venezuelan and Netherlands subsidiaries', in the Ecuador civil
                  courts, requesting that the judge order payment to Dr.
                  Egas-Teran of $727,000 in commissions which Mr. Egas-Teran
                  claims are allegedly owing to him in connection with contracts
                  awarded to the Venezuelan and Netherlands subsidiaries' in
                  Ecuador, plus interest and legal expenses. In addition, the
                  plaintiff asked that the judge order that this amount be
                  retained by Petroproduccion, the Venezuelan and Netherlands
                  subsidiaries' customer in Ecuador, from monies owned to the
                  Venezuelan and the Netherlands subsidiaries'. The Company
                  believes that there is no basis for commissions between either
                  Paradigm Geophysical de Venezuela S.A. or Paradigm Geophysical
                  B.V and the plaintiff. On April 12, 2002, the judge confirmed
                  retention of the amount by Petroproduccion and ordered the
                  defendants to be subpoenaed for trial. Mr. Yepes has informed
                  the Company that he only became aware of this lawsuit on June
                  12, 2002 and, therefore, he did not inform the Company of this
                  action, including, the order requiring retention of funds by
                  Petroproduccion, until June 12, 2002. The Company is not in
                  contact with Mr. Jaramillo-De Howitt. The Company is currently
                  examining the claims against it and has not yet filed a
                  Statement of Defense. At this time, the Company and its legal
                  counsel cannot predict the outcome of this lawsuit.

                           - - - - - - - - - - - - -


                                      -38-
<PAGE>

                                 EXHIBIT INDEX

EXHIBIT NO.                         EXHIBIT                            PAGE

4.15           Convertible Loan Agreement dated October 10, 2001
               between Paradigm Geophysical Ltd. and The Israel
               Mezzanine Fund, L.P., The Israel Mezzanine Fund
               (in Israel), Limited Partnership and The Jordan
               (Bermuda) Investment Company Ltd.

8.1            Subsidiaries of Paradigm Geophysical Ltd.

10.1           Consent of Kost Forer and Gabbay.
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SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 20-F

[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934

                                       OR

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

                   For the fiscal year ended December 31, 2001
                                       OR

[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

             For the transition period from __________ to __________

                         Commission file number 0-29538

                            PARADIGM GEOPHYSICAL LTD.

    (Exact name of Registrant as specified in its charter and translation of
                        Registrant's name into English)

                                     ISRAEL

                 (Jurisdiction of incorporation or organization)

   GAV-YAM CENTER NO. 3, 9 SHENKAR ST., P.O. BOX 2061, HERZLIA B 46120 ISRAEL
                     (Address of principal executive office)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

                                      NONE

                                (Title of Class)

Securities registered or to be registered pursuant to Section 12(g) of the Act.

ORDINARY SHARES, NOMINAL VALUE NIS 0.5 PER SHARE
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act

NONE

(Title of Class)

Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:

As of December 31, 2001, the Registrant had outstanding 14,891,902 Ordinary
Shares, nominal value NIS 0.5 per share.

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2)has been subject to such filing
requirements for the past 90 days.

                  [X]  Yes           [ ]   No

Indicate by check mark which financial statement item the Registrant has elected
to follow:

                  [ ]Item 17      [X]   Item 18
PART I

         Unless the context otherwise requires, all references in this annual
report to "Paradigm," "we," "our" and "us" refer to Paradigm Geophysical Ltd.
and its consolidated subsidiaries. References to "dollars" or $ are to United
States dollars.

                               RECENT DEVELOPMENTS

         On May 22, 2002, we announced a definitive merger agreement pursuant to
which we would be acquired by Paradigm Geotechnology B.V.(formerly Talamantes
B.V.) in a merger transaction. Paradigm Geotechnology B.V., or Paradigm BV, was
formed to invest in energy related technology and service firms and, as of the
merger, will be indirectly owned by a non-U.S. limited partnership being
organized by affiliates of Fox Paine & Company, LLC, a San Francisco-based
private equity firm. Under the terms of the merger agreement, each of our
outstanding ordinary shares, nominal value NIS 0.5 per share, other than those
shares then held by us, our subsidiaries, Paradigm BV and Paradigm BV's
subsidiaries, will be converted automatically into the right to receive $5.15 in
cash, without interest. In addition, each unexercised option (other than
warrants) to purchase our shares then outstanding, all of which have vested as a
result of the merger, will be canceled in exchange for a cash payment equal to
the excess, if any, of $5.15 over the exercise price of such option, multiplied
by the number of shares subject to such option, less any applicable withholding
taxes. If the proposed transaction is consummated, we will cease to be a
publicly traded company.

         On June 13, 2002, the holders of 98.2% of our shares present (in person
or by proxy) at a Special Meeting of Shareholders voted in favor of the merger
agreement, the merger and the other transactions contemplated thereby.

         The proposed merger remains subject to the satisfaction or waiver of a
number of conditions, including:

         -   the absence of any legal order prohibiting or restraining the
             merger;

         -   receipt of certain governmental consents, and the expiration
             of the 70-day statutory waiting period under the Israeli
             Companies Law, which will expire on or about August 1, 2002;

         -   absence of the occurrence of any event since May 21, 2002 that
             would reasonably be likely to have a Material Adverse Effect
             (as defined in the merger agreement) on Paradigm;

         -   the performance of each party's obligations under the merger
             agreement and the accuracy of each party's representations and
             warranties contained in the merger agreement; and

         -   other closing conditions specified in the merger agreement.

         A description of the material terms of the merger and the other
transactions contemplated by the merger agreement, as well as a complete copy of
the merger agreement, is contained in our proxy statement dated May 31, 2002,
which has been filed with the Securities and Exchange Commission as Exhibit 99.1
to our Form 6-K dated May 31, 2002.

ITEM 1.        IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2.        OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.        KEY INFORMATION

A.  SELECTED FINANCIAL DATA

         We have derived the selected consolidated income statement data and the
consolidated balance sheet data presented below as of and for the years ended
December 31, 1997, 1998, 1999, 2000 and 2001 from our audited consolidated
financial statements. Our historical consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States and are presented in dollars.
The information presented below is qualified by our audited
consolidated financial statements and notes set forth in Item 18 of this annual
report. You should read the selected financial data in conjunction with our
consolidated financial statements and notes thereto and Item 5. "Operating and
Financial Review and Prospects."

CONSOLIDATED INCOME STATEMENT DATA
1997         1998           1999          2000          2001
                                                              ----         ----           ----          ----          ----
                                                                          (IN THOUSANDS EXCEPT PER SHARE DATA)
REVENUES:

   Products                                                 $ 19,979      $ 38,074      $ 43,023      $ 46,390       $ 50,765
   Services                                                    4,886         7,288        11,483        16,908         22,001
                                                            --------      --------      --------      --------       --------
 TOTAL REVENUES                                             $ 24,865      $ 45,362      $ 54,506      $ 63,298       $ 72,766
                                                            --------      --------      --------      --------       --------
 YEAR -TO- YEAR % CHANGE                                       114.3%         82.4%         20.2%         16.1%          14.9%

OPERATING EXPENSES:

   Cost of products                                            5,070         8,559        12,418        10,816         10,592
   Cost of services                                            1,849         3,107         5,804         6,352          9,793
   Research and development                                    4,728         7,660         9,306        11,215         12,847
   Selling and marketing, general and administrative           9,744        15,822        20,638        23,518         26,850
   Depreciation                                                2,012         2,298         3,865         4,746          5,589
   Amortization of intangible assets                           1,185         2,347         3,064         3,360          3,214
   Non recurring charges                                      10,676            --         2,705            --             --
   Restructuring charges                                          --            --            --            --            540
                                                            --------      --------      --------      --------       --------
      TOTAL OPERATING EXPENSES                              $ 35,264      $ 39,793      $ 57,800      $ 60,007       $ 69,425
                                                            --------      --------      --------      --------       --------

  OPERATING INCOME (LOSS)                                    (10,399)        5,569        (3,294)        3,291          3,341
   Financial expenses, net                                      (446)         (661)         (484)         (552)          (642)
                                                            --------      --------      --------      --------       --------
  INCOME (LOSS) BEFORE TAXES ON INCOME                       (10,845)        4,908        (3,778)        2,739          2,699
   Taxes on income                                                --           356            --           380            569
                                                            --------      --------      --------      --------       --------
  NET INCOME(LOSS)                                          $(10,845)     $  4,552      $ (3,778)     $  2,359       $  2,130
                                                            --------      --------      --------      --------       --------

    BASIC NET EARNINGS (LOSS)  PER SHARE                    $  (4.66)     $   0.66      $  (0.31)     $   0.17       $   0.14
    NUMBER OF SHARES USED IN COMPUTATION OF BASIC
    EARNINGS(LOSS) PER SHARE                                   2,328         6,850        12,205        13,504         14,817

    DILUTED NET EARNINGS(LOSS) PER SHARE                    $  (4.66)     $   0.49      $  (0.31)     $   0.17       $   0.14
    NUMBER OF SHARES USED IN COMPUTATION OF  DILUTED
    EARNINGS(LOSS) PER SHARE                                   2,328         9,306        12,205        13,789         15,124
SELECTED CONSOLIDATED  BALANCE SHEET DATA
AS OF DECEMBER 31
                                                                                  ------------------
                                                                1997           1998          1999          2000          2001
                                                               ------         ------        ------         ------      ------
                                                                                     (IN THOUSANDS)
CASH AND CASH  EQUIVALENTS                                   $8,229         $3,463        $5,457         $8,647      $9,814
  SHORT-TERM BANK DEPOSIT                                          $0             $0            $0             $0      $1,941
  WORKING CAPITAL(DEFICIENCY)                                  ($692)         $9,154       $15,346        $10,860     $17,237
  TOTAL ASSETS                                                $47,883        $46,135       $66,165        $79,761     $99,186
  CURRENT DEBT                                                 $1,288         $2,228        $5,073         $8,186      $7,038
  NOTE PAYABLE                                                 $9,500             $0            $0             $0      $6,318
  BRIDGE LOAN  PAYABLE                                        $12,000             $0            $0             $0          $0
  LONG TERM DEBTS(EXCLUDING CURRENT MATURITIES)                  $483            $39        $4,665         $1,483      $5,099
  CONVERTIBLE LOAN                                                 $0             $0            $0             $0      $8,000
  TOTAL  SHAREHOLDERS'  EQUITY                                 $2,640        $26,697       $35,468        $46,469     $49,075

CASH FLOW  DATA

  CASH  PROVIDED BY (USED IN) OPERATING ACTIVITIES             $1,633       ($1,773)      ($1,089)        $12,628      $2,854
  CASH  PROVIDED BY (USED IN) INVESTING ACTIVITIES          ($11,594)       ($4,516)     ($15,401)       ($9,442)   ($10,991)
  CASH  PROVIDED BY (USED IN) FINANCING ACTIVITIES            $11,077         $1,674       $19,068         ($126)      $9,597
B.       CAPITALIZATION AND INDEBTEDNESS

         Not applicable

C.       REASONS FOR THE OFFER AND USE OF PROCEEDS

         Not applicable

D.       RISK FACTORS

         We believe that the occurrence of any or some combination of the
following factors could have a material adverse effect on our business,
financial condition and results of operations.

GLOBAL ECONOMIC AND MARKET CONDITIONS, PARTICULARLY THOSE THAT IMPACT THE OIL
SERVICES INDUSTRY, MAY REDUCE DEMAND FOR OUR PRODUCTS AND SERVICES AND ADVERSELY
AFFECT OUR BUSINESS

         Developments in the oil services industry, such as the impact of
general global economic conditions, volatility of the oil price, instability in
demand for oil and oil products and continuing industry consolidation, has
materially affected our customers and could continue to materially affect our
existing or potential customers. The impact of these conditions on the oil
services industry has reduced demand for our products and services, and the
revenue growth rates that we have achieved in recent years. As a result, we may
be unable to effectively market and sell our products and services.

         The September 11, 2001 terrorist attacks on the United States and the
declared objective to fight global terrorism have had, and we expect will
continue for some time to have, a negative effect on the global economy. These
events and any similar acts of violence or war may negatively affect the oil
services industry, our revenue and our profitability and could also result in a
disruption of our business or the businesses of our customers.

IF THE PROPOSED MERGER IS NOT CONSUMMATED, OUR RESULTS OF OPERATIONS AND
FINANCIAL CONDITION WILL BE MATERIALLY ADVERSELY AFFECTED.

         We have incurred substantial legal, accounting and other costs in
connection with the proposed merger. Additionally, our senior management has
expended significant time and attention on the merger which has diverted their
time and attention away from our day-to-day operations. If the proposed merger
is not consummated, our results of operations and financial condition for the
six-month and nine-month periods ending June 30, 2002, and September 30, 2002,
respectively, and for the fiscal year ending December 31, 2002, will be
materially adversely affected. Additionally, in the event the proposed merger is
not consummated for certain reasons, we will be obligated to pay to Paradigm
B.V. a termination fee of $3.0 million plus up to $1.5 million of the documented
out-of-pocket expenses incurred by Paradigm B.V. and its affiliates in
connection with the merger agreement and the transactions contemplated thereby.
Such payment, if required, would materially adversely affect our results of
operations and financial condition.

IF ACTUAL EXPENDITURES BY OUR CUSTOMERS VARY FROM THEIR ANTICIPATED
EXPENDITURES, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAY BE
MATERIALLY ADVERSELY AFFECTED.

         Our business and operations are substantially dependent upon the
condition of the global oil and gas industry. The oil and gas industry is highly
cyclical and has been subject to significant economic fluctuations at various
times as a result of numerous factors affecting the supply of and demand for oil
and natural gas, including the level of capital expenditures of the oil and gas
industry, the level of drilling activity, the level of production activity,
market prices of oil and gas, worldwide economic conditions,
interest rates and the cost of capital, environmental regulations, tax policies,
the political stability and political risk exposure in some of the oil producing
countries, political requirements of national governments, coordination by the
Organization of Petroleum Exporting Countries or, OPEC, market behavior of oil
producers who are not members of OPEC, cost of producing oil and natural gas,
and technological advances.

         The budgets of our customers, who are principally oil and gas
exploration and production companies and companies that provide data processing
services to these companies, vary with the state of each customer's financial
condition, the opportunities identified by it for the use of its resources, and
its expectations of future short- and medium-term financial performance. While
surveys are published that are indicative of expected budget expenditures of oil
and gas exploration and production companies over the course of the budget year,
there is a significant variance in actual expenditures by individual companies,
sub-segments of the oil and gas industry and the industry as a whole.

         In addition, fluctuations in the international price of oil, and
regional gas prices, may also affect the budgeted capital expenditures of our
customers. Consequently, there may be significant variations by our customers in
adjusting their level of expenditure to correspond to the short- and medium-term
outlook of the impact of international oil prices and/or regional gas prices on
their performance.

         If actual expenditures by our customers vary from their anticipated
expenditures, whether as a result of fluctuations in the international price of
oil, or otherwise, our business, results of operations and financial condition
may be materially adversely affected.

IF WE ARE UNABLE TO COMPETE EFFECTIVELY IN THE MARKETPLACE, WE MAY SUFFER A
DECREASE IN MARKET SHARE, REVENUES AND PROFITABILITY.

         Competition in our industry is intense and we expect competition to
increase. Some of our competitors are divisions or subsidiaries of companies
that have greater financial and other resources, greater name and brand
recognition, and more extensive and diversified operations than we do. We also
face competition from a number of smaller companies that provide products that
serve niche portions of our markets and from smaller service bureaus providing
seismic data processing and reservoir analysis services. Finally, many oil
exploration companies have their own in-house capabilities for seismic data
processing and analysis. Some of these in-house service groups are customers for
both our software solutions and our data processing services, as a supplement
for their internal capacity.

         Current and potential competitors have established, and may establish
in the future, cooperative relationships among themselves or with third parties
to increase their ability to address the needs of prospective customers.
Accordingly, new competitors or alliances among competitors may emerge and
acquire market share. As a result, our competitors may be able to adapt to new
or emerging technologies and changes in customer requirements, and our larger
competitors may be able to devote greater resources to the promotion and sale of
their products. We cannot guarantee that we will be able to compete effectively
against current or future competitors or that competitive pressures will not
harm our financial results.

OUR SUCCESS DEPENDS ON OUR ABILITY TO CONTINUALLY ENHANCE AND MARKET
TECHNOLOGICALLY SOPHISTICATED PRODUCTS AND SERVICES.

         We believe that our future success will largely depend upon our ability
to continue to enhance our existing products and services and to successfully
develop, market and introduce new products and services to meet the requirements
of our customers. We are currently devoting significant resources to refining
and expanding the range of products and services offered by us to our customers.

         We cannot assure you that we will be successful in developing and
marketing new solutions that respond adequately to technological change. Our
present or future products and services may not satisfy
the evolving needs of the oil and gas industry. In addition, if we are unable to
anticipate or respond adequately to the demands of our customers, due to
resource, technological or other constraints, our business and results of
operations could be materially adversely affected.

WE MAY SEEK TO EXPAND OUR BUSINESS THROUGH ACQUISITIONS THAT COULD RESULT IN
DIVERSION OF RESOURCES AND ADDITIONAL EXPENSES, WHICH COULD DISRUPT OUR BUSINESS
AND HARM OUR FINANCIAL CONDITION.

         We have pursued, and may continue to pursue, acquisitions of business,
products, technologies and service providers, or the establishment of joint
venture arrangements, that could expand our business. For example, in April
2001, we acquired the GeoScene(R) product line from Oilfield Systems Limited. In
addition, in May 2001, we acquired Sysdrill(R) Limited, a provider of software
solutions for drilling engineering and well operations.

         The negotiation of potential acquisitions or joint ventures and the
integration of an acquired or jointly developed business, technology, product or
services offering could cause diversion of management's attention from the
day-to-day operation of our business. Future acquisitions could result in:

      -   potentially dilutive issuances of equity securities;

      -   the incurrence of debt and contingent liabilities;

      -   amortization of acquired technologies and other intangibles;

      -   research and development write-offs;

      -   restructuring costs; and

      -   other acquisition-related expenses.

         We may also acquire other companies where we believe that we can
acquire new products or services or otherwise enhance our market position or
strategic strengths. However, there can be no assurance that suitable
acquisition candidates can be found, that potential acquisitions can be
consummated on terms favorable to us or that the acquisitions made will
significantly enhance our products or strengthen our competitive position.

         Acquired businesses or joint ventures may not be successfully
integrated with our operations or with our technology. In addition, we may not
receive the intended benefits of the acquisition or joint venture. Potential
acquisitions or joint ventures may not materialize. Due diligence expenses and
expenses involved in negotiations would have a negative impact on our operating
results. Potential acquisitions or joint ventures that ultimately are not
consummated could have a long term negative impact as we may be unable to obtain
products, technologies or services that are necessary to achieve our strategic
growth objectives.

IF WE FAIL TO ATTRACT AND RETAIN SKILLED EMPLOYEES, WE WILL NOT BE ABLE TO
IMPLEMENT OUR BUSINESS STRATEGY OR OPERATE OUR BUSINESS EFFECTIVELY.

         Our business requires highly qualified personnel for research and
development, sales and marketing, software programming, technical customer
support, seismic data processing and analysis services, and reservoir studies.
Our success depends in large part on our ability to attract, train, motivate and
retain highly skilled scientists and technology professionals, including
geologists, geophysicists, petrophysicists, drilling and reservoir engineers,
mathematicians and software programmers. Qualified personnel in these areas are
in demand and are likely to remain a limited resource for the foreseeable
future.

         Our ability to expand our business is dependent upon our success in
recruiting such personnel and our ability to manage and coordinate our worldwide
development program, customer support and services delivery. We may be unable to
continue to attract and retain the skilled employees we require and any
inability to do so could adversely impact our ability to manage and complete our
existing projects and to compete for new customer contracts. In addition, the
resources required to attract and retain such personnel
may adversely affect our operating margins. The failure to attract and retain
qualified personnel may have a material adverse effect on our business, results
of operations and financial condition.

         Our success also depends, to a certain extent, upon the continued
active participation of a relatively small group of senior management personnel
who have been with us, or with the companies we have acquired, for many years.
The loss of the services of some or all of these employees could have a material
adverse effect on our business.

DUE TO THE FIXED NATURE OF CERTAIN OF OUR COSTS, ANY SIGNIFICANT DECLINE IN OUR
REVENUES COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL CONDITION.

     Our revenues and operating results may vary from quarter to quarter,
     including as a result of the following:

       -  the size, timing and efficient execution of significant
          service projects;

       -  the size and timing of orders for software products;

       -  increased competition;

       -  timing of software product releases;

       -  delays in execution and acceptance of significant service
          projects by customers;

       -  changes in expenses;

       -  changes in our strategy;

       -  personnel changes;

       -  foreign currency exchange rates;

       -  factors impacting oil and gas industry expenditure decisions;

       -  risks of regional military conflict, threats and acts of
          domestic and international terror, and civil unrest;

       -  changes in clients' budgeted and/or spending decisions; and

       -  country, region specific and general economic and political risk
          factors.

         Due to the relatively fixed nature of certain of our costs, a decline
of revenue in any period would result in lower profitability for that period.

BECAUSE SUBSTANTIALLY ALL OF OUR REVENUES ARE GENERATED INTERNATIONALLY, OUR
RESULTS OF OPERATIONS COULD SUFFER IF WE ARE UNABLE TO MANAGE INTERNATIONAL
OPERATIONS EFFECTIVELY.

         During 2001, approximately 55% of our revenues were generated from
customers in North America, Europe, the Middle East and Africa with the balance
derived from customers in the former Soviet Union, the Asia-Pacific region,
China and Latin America. Our strategy is to continue to broaden our existing
customer base in the different regions in which we operate and to expand into
new international markets as the opportunities arise. The expansion of our
operations and entry into new markets, primarily in emerging economies, will
require significant management attention and financial resources, and will
entail an increased relative exposure to political and commercial risk (as
discussed below). We currently maintain development facilities in Israel, the
United States, Australia, Russia, France, the United Kingdom and Canada, and we
have sales and operations offices and service centers in North America, Europe,
the former Soviet Union, the Middle East, Africa, Latin America, China and the
Asia-Pacific region.

         In addition, conducting our business increasingly with, and expanding
our operating locations into emerging markets subjects us to certain risks
including:

       -  legal and cultural differences in the conduct of business;

       -  infringement of intellectual property rights and copyrights;

       -  longer payment cycles than is customary in developed economies;

       -  increased risk of collection;

       -  burdens that may be imposed by tariffs and other trade barriers;
-  staffing and managing international foreign operations;

       -  burden of compliance with laws and regulations of a wide variety of
          countries ;

       -  immigration regulations that limit our ability to deploy our
          employees;

       -  economic collapse or instability;

       -  political instability; and

       -  potentially adverse tax consequences.

         One or more of these factors could have a material adverse effect on
our international operations.

FLUCTUATIONS IN EXCHANGE RATES MAY ADVERSELY AFFECT OUR BUSINESS.

         Although most of our revenues are denominated in dollars, a significant
portion of our operating costs are incurred outside the United States. As a
result, fluctuations in exchange rates between the currencies in which these
costs are incurred and the U.S. dollar may have a material adverse effect on our
results of operations and financial condition. The cost of our operations in the
different countries in which we operate, as expressed in U.S. dollars, could be
adversely affected by the extent to which any increase in the operating costs in
the local currency of those countries is not offset (or is offset with a time
delay) by a devaluation of the currencies in those countries in relation to the
U.S. dollar. As a result of this differential, from time to time we experience
increases in the costs of our operations in the countries in which we operate,
as expressed in U.S. dollars, which have had and could have in the future a
material adverse effect on our results of operations and financial condition.

         The cost of our operations in Israel, as expressed in dollars, could be
adversely affected by the extent to which any increase in the rate of inflation
in Israel is not offset (or is offset with a time delay) by a devaluation of the
Israeli currency in relation to the dollar.

         Where we believe it appropriate we limit these exposures by entering
into specific hedging transactions. However, hedging transactions may not enable
us to avoid exchange-related losses, and our business may be harmed by exchange
rate fluctuations.

         The imposition of exchange or price controls or other restrictions on
the conversion of foreign currencies could also have a material adverse effect
on our business, results of operations and financial condition.

IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY OR BECOME
SUBJECT TO A CLAIM OF INFRINGEMENT, OUR BUSINESS MAY BE MATERIALLY ADVERSELY
AFFECTED.

         Our success and ability to compete depends substantially upon our
internally developed and acquired technologies. Any misappropriation of our
technology could seriously harm our business. We regard a substantial portion of
our software products and systems as proprietary and rely on a combination of
statutory and common law copyright, trademark and trade secret laws, customer
licensing agreements, employee and third party non-disclosure agreements and
other methods to protect our proprietary rights.

          Our software is licensed for use and is not sold, thereby enabling us
to protect our intellectual property in that software through the use of license
manager mechanisms to prevent or inhibit unauthorized use. These mechanisms can
be violated by sophisticated users. Our license agreement for the software
includes clauses that protect our intellectual property rights. Further, we
generally enter into confidentiality agreements with our employees, consultants,
and our software and systems development partners, and limit access to and
distribution of proprietary information.
Despite our efforts to protect our intellectual property rights,
unauthorized parties may attempt to bypass our license manager, copy or
otherwise obtain our software or technology or develop software with the same
functionality. We cannot be certain that the steps we have taken will prevent
misappropriation, particularly in those foreign countries where the laws may not
protect our intellectual property to the same extent as the laws of the United
States. If we have to resort to legal proceedings to enforce our intellectual
property rights, the proceedings may be burdensome and expensive and may involve
a high degree of risk. These events could seriously harm our business.

         Although we have not received any notices from third parties alleging
infringement claims, third parties could claim that our current or future
products or technology infringe their proprietary rights. Any such claim of
infringement by a third party could cause us to incur substantial costs
defending against the claim, even if the claim is invalid, and could distract
our management from our business. Furthermore, a party making such a claim could
secure a judgment that requires us to pay substantial damages. A judgment could
also include an injunction or court order that could prevent us from selling the
software product concerned. Any of these events could seriously harm our
business.

WE CURRENTLY PARTICIPATE IN OR ARE ENTITLED TO RECEIVE TAX BENEFITS FROM
GOVERNMENT PROGRAMS. THESE PROGRAMS REQUIRE US TO MEET CERTAIN CONDITIONS AND
THESE PROGRAMS AND BENEFITS MAY BE TERMINATED OR REDUCED IN THE FUTURE.

         We are entitled to receive benefits from certain Israeli government
investment incentive programs and tax benefits. For example, we are entitled to
receive tax benefits under Israeli law for capital investments that are
designated as "Approved Enterprises." To maintain our eligibility for these
programs and tax benefits, we must continue to meet certain conditions. If we
fail to comply with these conditions, the tax benefits received could be
cancelled and/or we could be required to refund tax benefits already received.
Additionally, some of these programs and the related tax benefits are available
to us for a limited number of years, and these benefits expire from time to
time.

         Any of the following could have a material effect on our business,
     financial condition and result of operations:

       -  some programs in which we participate may be discontinued;

       -  we may be unable to meet the requirements in order to continue to
          qualify for some programs;

       -  these programs and tax benefits may be unavailable in the future,
          either at all, or at their current levels;

       -  upon expiration of a particular benefit, we may not be eligible to
          participate in a new program or qualify for a new tax benefit that
          would offset the loss of the expiring tax benefit; and

       -  we may be required to refund previously accredited tax benefits
          received if we are found to be in violation of the stipulated
          conditions.

         For more information, see Item 10. "Additional Information - Taxation".

FROM TIME TO TIME, OUR SOFTWARE MAY CONTAIN UNDETECTED ERRORS, PRODUCT DEFECTS
OR SOFTWARE ERRORS. THIS MAY CAUSE US TO EXPERIENCE A DECREASE IN MARKET
ACCEPTANCE AND USE OF OUR SOFTWARE PRODUCTS AND WE MAY BE SUBJECT TO WARRANTY
CLAIMS AND OTHER LIABILITY.

         Our software products are highly complex and may, from time to time,
contain design defects or software errors that may be difficult to detect and
correct. This may cause delays in software product releases or damage customer
satisfaction and may have a material adverse effect on our business, results of
operations and financial condition.

         Since our products are generally used by our customers to perform
important business functions, design defects, software errors, misuse of our
products, incorrect data from external sources or other potential problems
within or out of our control may arise from the use of our products, and may
result in financial or other damages to our customers. Our failure or inability
to meet a customer's expectations in
providing products or performing data processing and interpretation projects
using our products may result in the termination of our relationship with that
customer or could give rise to claims against us. Although we have agreements
with our customers that contain provisions designed to limit our exposure to
potential claims and liabilities arising from the type of problems described,
these provisions may not fully or effectively protect us against such claims in
all cases. Claims and liabilities arising from customer issues could damage our
reputation, resulting in loss of existing or future customers or loss of or
delay in revenue. These events may adversely affect our business, results of
operations and financial condition.

WE MAY BE ADVERSELY AFFECTED BY POLITICAL AND ECONOMIC CONDITIONS IN ISRAEL, ITS
ADJACENT TERRITORIES AND COUNTRIES, AND IN THE MIDDLE EAST GENERALLY.

         We are organized under the laws of the State of Israel. As of December
31, 2001, approximately 17% of our total staff, our principal research and
development facility and our principal executive offices were located in Israel.
Our operations, financial condition and results of operations are directly
influenced by economic, political and military conditions in and affecting
Israel.

         Terrorist attacks in Israel and the hostilities between the State of
Israel and the Palestinians increased during the past year and have intensified
in the past several months. The future of peace efforts between Israel and its
neighbors remains uncertain and the peace process between Israel and the
Palestinian Authority has seriously deteriorated due to increased violence
between Israel and Palestinians. We cannot predict the effect on the region or
us of the increase in the degree of violence between Israel and the Palestinians
or of any individual act of violence. Some of our officers and employees in
Israel are obligated to perform annual military reserve duty. In the event of a
military conflict, including the ongoing conflict with the Palestinians, these
persons could be required to serve in the military for extended periods of time.
This could disrupt our operations and harm our business. Furthermore, several
countries restrict doing business with Israel and Israeli companies, and
additional companies may restrict doing business with Israel and Israeli
companies, as a result of the recent increase in hostilities. Some of the
companies that are significant suppliers of hydrocarbon products are located in
countries that may participate in boycotts of products and service of Israeli
origin. This may also seriously harm our operating results, financial condition
and the expansion of our business.

OUR SHARE PRICE HAS FLUCTUATED AND COULD CONTINUE TO FLUCTUATE SIGNIFICANTLY.

         The market for our ordinary shares, as well as the prices of shares of
other oilfield services companies and technology companies, has been volatile. A
number of factors, many of which are beyond our control, may cause the market
price of our ordinary shares to fluctuate significantly, such as:

       -  fluctuations in our quarterly revenues and earnings and those of our
          publicly held competitors;

       -  shortfalls in our operating results from the levels forecast by
          securities analysts and from the levels we announce from time to time
          as guidance to the investment community;

       -  public announcements concerning us or our competitors;

       -  changes in pricing policies by us or our competitors;

       -  market conditions in our industry; and

       -  the general state of the publicly traded securities market.

         We have no control over any of these matters and any of them may
adversely affect our business internationally. In addition, trading in shares of
companies listed on the Nasdaq National Market in general and trading in shares
of technology companies in particular has been subject to extreme price and
volume fluctuations that in some cases have been unrelated or disproportionate
to operating performance. These broad market and industry factors may depress
our share price, regardless of our actual operating results.
IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US, OUR OFFICERS AND
DIRECTORS AND OUR ISRAELI AUDITORS OR TO ASSERT U.S. SECURITIES LAW CLAIMS IN
ISRAEL.

         Service of process upon our directors and officers and our Israeli
auditors may be difficult to effect in the United States because almost all
these parties reside outside the United States and a substantial portion of our
assets and the assets of these persons are located outside the United States.
Any judgment obtained in the United States against such parties may be
unenforceable outside the United States.

         It is not clear whether civil liabilities under the Securities Act and
the Securities Exchange Act can be enforced in Israel. However, subject to time
limitations, Israeli courts may enforce a U.S. judgment in a civil matter, if:

       -  the application for enforcement was filed within five years after the
          judgment;

       -  adequate service of process has been effected and the defendant has
          had a reasonable opportunity to be heard;

       -  the judgment and its enforcement are not contrary to the law, public
          policy, security or sovereignty of the State of Israel;

       -  the judgment was rendered by a court of competent jurisdiction, in
          compliance with due process and the rules of private international law
          prevailing in Israel;

       -  the judgment was not obtained by fraudulent means and does not
          conflict with any other valid judgment in the same matter between the
          same parties;

       -  no action between the same parties in the same matter is pending in
          any Israeli court at the time the lawsuit is instituted in a U.S.
          court; and

       -  the U.S. courts are not prohibited from enforcing judgments of the
          Israeli courts.

PROVISIONS OF ISRAELI LAW MAY DELAY, PREVENT OR MAKE MORE DIFFICULT AN
ACQUISITION OF OUR COMPANY, WHICH COULD DEPRESS OUR SHARE PRICE.

         Provisions of our Articles of Association restricting business
combinations with interested shareholders and provisions of Israeli law may
delay, prevent or make difficult an acquisition of our company, which could
prevent a change of control and therefore depress the price of our stock.
Israeli corporate law regulates mergers and acquisitions of shares through
tender offers in certain circumstances, requires special approvals for
transactions involving significant shareholders and regulates other matters that
may be relevant to these types of transactions. For further details see Item 10
"Anti-Takeover Provisions; Mergers and Acquisitions under Israeli Law."

         In addition, Israeli tax law treats certain acquisitions, particularly
stock-for-stock swaps between an Israeli company and a foreign company, less
favorably than United States tax law. Israeli tax law may, for instance, subject
a shareholder who exchanges his company shares for shares in a foreign
corporation to immediate taxation.
ITEM 4.         INFORMATION ON THE COMPANY

A.       HISTORY AND DEVELOPMENT OF THE COMPANY

         Paradigm Geophysical Ltd. was incorporated and registered in Israel in
1987 under the laws of the state of Israel as a company with limited liability,
under the name G.T. Graphic Technology Ltd. We changed our name to Paradigm
Geophysical Ltd. in October 1993.

         Our principal executive offices are located at Shenkar St. 9, Gav Yam
Center No.3, Herzlia 46120, Israel and our telephone number is + 972-9-9709300.

         Our agent in the United States is Paradigm Geophysical Corp. and its
principal offices are located at Two Memorial Plaza, 820 Gessner, Houston, TX
77024.

         Our business is conducted through subsidiaries and representative
offices in several locations worldwide and aims to provide technical information
solutions, including software products and product-driven services to companies
involved in the exploration and production of oil and gas and to oilfield
service companies.

DEVELOPMENTS SINCE JANUARY 1, 2001

         In May 2001, we acquired Sysdrill Limited, a Scottish company, for a
cash consideration and ordinary shares of Paradigm in the aggregate amount of
$8.5 million. Its primary operations are located in Aberdeen, Scotland. Sysdrill
is one of the leading software and service providers of drilling engineering and
well operations solutions. The cash portion of the Sysdrill transaction was
financed mainly through a note payable to the Sysdrill proprietor which was
redeemed in May 2002.

         Aside from the capital utilized for the above acquisitions, our
principal capital expenditures in 2001 were for computer and peripheral
equipment. These purchases totaled $8.7 million in 2001 and resulted in a
significant expansion in computer capacity for our geophysical services
operations worldwide.

         During the fourth quarter of 2001, we commenced a resource
rationalization and restructuring program, focused primarily on the
consolidation of our operations (acquired through the Flagship acquisition) in
Pau, France, rather than continuing full operations in both Paris, France and in
Pau. In addition, certain service operations which were not providing adequate
profitability were closed and others were expanded. We have also strengthened
operational management in the United States, in our Europe, Africa and Middle
East regional offices, and in our Canadian operations. We recorded a
restructuring charge of approximately $0.5 million in the fourth quarter of 2001
and approximately $0.8 million in the first quarter of 2002 in connection with
this program.

DEVELOPMENTS SINCE JANUARY 1, 2002

         On May 22, 2002, we announced a definitive merger agreement pursuant to
which we would be acquired by Paradigm B.V. in a merger transaction. Paradigm
B.V., a company formed to invest in energy related technology and service firms,
will be indirectly owned as of the merger by a non-U.S. limited partnership
being organized by Fox Paine & Company, LLC, a San Francisco-based private
equity firm. If the proposed merger is consummated, we will cease to be a
publicly traded company.

         On June 13, 2002, the holders of 98.2% of our shares present (in person
or by proxy) at a Special Meeting of Shareholders voted in favor of the merger
agreement, the merger and the transactions contemplated thereby.

         The proposed merger transaction remains subject to the satisfaction or
waiver of a number of conditions, including:
-  the absence of any legal order prohibiting or restraining the merger;

       -  receipt of certain governmental consents, and the expiration of the
          70-day statutory waiting period under the Israeli Companies Law, which
          will expire on or about August 1, 2002;

       -  absence of the occurrence of any event since May 21, 2002 that would
          reasonably be likely to have a Material Adverse Effect (as defined in
          the merger agreement) on us;

       -  the performance of each party's obligations under the merger agreement
          and the accuracy of each party's representations and warranties
          contained in the merger agreement; and

       -  other closing conditions specified in the merger agreement.

        For more information, see Part I. - "Recent Developments."

B.       BUSINESS OVERVIEW

         We provide technical information solutions for the oil and gas industry
worldwide consisting of software solutions and services to companies involved in
the exploration and production of oil and gas and to oilfield service companies.

         We provide integrated, scientifically advanced productivity solutions,
technical services, data processing services and reservoir studies services for
reservoir description. Our products include:

       -  SOFTWARE SOLUTIONS - Software products and add-on packs, designed to
          accommodate a customer's technical workflows, for analysis of
          hydrocarbon prospects.

       -  TECHNICAL SERVICES - On-site support, post contract support and
          technical training designed to complement our software solutions in
          order to maximize the added-value of the customer investment in our
          software solutions.

       -  DATA PROCESSING SERVICES - Advanced seismic data processing based on
          our software solutions and our seismic data analysis experts.

       -  RESERVOIR STUDIES - Advanced reservoir characterization and integrated
          studies based on our software solutions using our interpretation and
          reservoir characterization experts.

         We operate a global network of sales, users' support and services with
21 offices in 18 countries, serving all major oil-and gas-producing provinces in
the world.

THE OIL AND GAS INDUSTRY BACKGROUND

         Our business and operations are substantially dependent upon the
condition of the global oil and gas industry. The oil and gas industry is highly
cyclical and has been subject to significant economic fluctuations at various
times as a result of numerous factors affecting the supply of and demand for oil
and natural gas, including the level of capital expenditures of the oil and gas
industry, the level of drilling activity, the level of production activity,
market prices of oil and gas, worldwide economic conditions, interest rates and
the cost of capital, environmental regulations, tax policies, the political
stability and political risk exposure in some of the oil producing countries,
political requirements of national governments, coordination by members of OPEC,
political requirements of national governments, market behavior of oil producers
who are not members of OPEC, cost of producing oil and natural gas and
technological advances.

         Crude oil prices remained relatively stable for the first nine months
of 2001, although well below the high prices of 2000. The softening and
increased volatility of oil prices following September 11, 2001 resulted in an
average oil price in the last quarter of 2001 significantly below the 2001 oil
price assumptions of oil companies generally. By the end of 2001, oil prices
were at about 60% of the 2000 peak prices. U.S. natural gas prices also faced a
steady decline from the high levels of 2000, declining by the end of
2001 to about 50% of the price at the commencement of 2001. The oil and gas
prices, and the events of September 11, 2001, materially affected the capital
budget execution of the major international oil companies, and those operating
primarily within the U.S. and Canada.

         Due to the steady oil price in the first nine months of 2001, rig
counts rose in the U.S. and capital spending in the U.S. and Canada were
reported in the capital spending surveys of the oil companies to be greater than
originally budgeted, with resources moved from international (outside of North
America) investment into North America. Following the events of September 11,
2001, capital spending was reported to have ceased in most projects, continuing
selectively in some on-going projects and a handful of new initiatives.

THE OIL AND GAS EXPLORATION SECTOR - EVENTS IN 2002 TO  DATE

         Since the beginning of 2002, oil and gas prices have risen steadily.
The political uncertainty resulting from continuing Middle East hostilities has
impacted oil prices. Rig counts in the U.S. have continued to decline while
international rig counts have risen.

OUR PRODUCTS

         In line with the technological advances in the geoscience knowledge
industry and a changing focus in the use of high-end geoscience solutions for
hydrocarbon exploration and production, in 2001 we further enhanced our
solutions based on our existing product modules and the product modules we
acquired in recent acquisitions.

          - MORE PETROPHYSICS AND GEOLOGY: We have enhanced our product suite
through further integration, and the addition of new tool-sets, such as the
geological solutions from the Flagship and Geoscene acquisitions, and the new
petrophysical and geological modules from Chevron and TotalFinaElf.

          - MORE KNOWLEDGE FROM EXISTING DATA: We have further advanced the
concept of "interoperability" -- a computer science development that permits our
solutions to use all the corporate prospect data bases in whatever format they
exist and without the need to reformat or undertake large "data management"
efforts.

          - NEW WORKFLOWS: We have combined our software modules into
industry-standard cost-effective workflows. While these are offered as the seven
primary industry-standard workflows, our integrated software is structured such
that any combination of modules can be tailor-made for workflows specific to the
analysis needs for each prospect. We released our "PG2" suite of software to the
industry in early September 2001. This release is a significant technological
advance to provide fully integrated workflows for a range of seismic data
processing methodologies. We announced that our "PG3" suite would be released in
the second half of 2002. This is planned to integrate seismic data processing,
petrophysics and geology, with visualization.

          - EXPANDED GLOBAL SERVICE CAPACITY: We have expanded our global
service capacity with additional super computer power in Houston and expanded
computing capacity and staff in Asia Pacific, Russia and Latin America, to meet
the demand for out-sourced seismic data processing.

         - RESERVOIR STUDIES: We have expanded our service offering to include
reservoir studies -- the search for the smaller reservoirs within the larger
producing fields.

         We currently offer the following software workflow solutions:
- SEISMIC DATA PROCESSING & IMAGING SOLUTIONS for customers that are
using our products for production seismic data processing. This solution
integrates Focus(R) and Geodepth(R) Power(TM) and Probe(TM) products.

          - SEISMIC DATA ANALYSIS AND QUALITY CONTROL SOLUTIONS based on
Geodepth(R), Power(TM), Probe(TM), Vanguard(TM) and Earthstudy(TM) as standalone
and integrated workflows including industry standard techniques, such as
interpretive AVO (amplitude velocity offset) analysis, seismic modeling and
velocity analysis.

         - PROSPECT GENERATION INTERPRETATION SOLUTIONS for customers that are
using our interpretation products for rapid, production-oriented generation of
prospects. This solution combines our latest visual data management and large
volume roaming with the new Reservoir Navigator(R), SeisX(TM) and Voxelgeo(R),
for prospect generation, with workflows from Stratimagic(R) for seismic facies
classification, and Geoscene(R) for geological interpretation.

          - RESERVOIR EVALUATION INTERPRETATION SOLUTIONS for customers that are
using our products for quantitative interpretation and delineation of the
reservoir framework. This uses the capabilities of Reservoir Navigator(R),
Voxelgeo(R), SeisFacies(TM), Nexmodel(TM) and Geosec(TM) workflows.

          - RESERVOIR CHARACTERIZATION & SIMULATION SOLUTIONS for customers that
are using our products for analysis and modeling of reservoir properties using
seismic data inversion, petrophysical analysis and rock physics in our
Vanguard(TM), GeoLog(R), Stratimagic(R) and Voxelgeo(R) based workflows.

         - PETROPHYSICAL ANALYSIS & ROCK PHYSICS SOLUTIONS for customers that
are using our products for analysis and modeling of rock properties based on
Geolog(R), for formation evaluation and petrophysical analysis.

          - WELL PLANNING & DRILLING SOLUTIONS for customers that are using our
products for well planning, drilling design and monitoring. We have integrated
our geological and geophysical solutions with Sysdrill's engineering solutions.
The introduction of the Sysdrill product line and DirectorGeo(R) move our
solutions further downstream into the well operations area and provide a
critical link between drilling engineering, well planning and the geosciences.

         We offer the following service solutions:

         - Our service centers worldwide offer the skills and knowledge of
specialist and experienced geoscientists in partnership with our customers
expert teams, together with super computing resources utilizing our software
solutions.

         - SEISMIC DATA IMAGING SERVICES - for customers that require production
seismic data processing services we offer delivery of large-scale seismic data
imaging projects.

         - RESERVOIR STUDIES SERVICES - for customers that require integrated
reservoir studies services we offer quality delivery of large-scale integrated
studies and reservoir characterization and simulation projects.

POST-CONTRACT CUSTOMER SUPPORT

         We employ geoscientists and computer scientists to provide installation
and user training, online support, on-call problem prevention and resolution and
on-site troubleshooting. On-line product support enables customers to download
product enhancement and support packs and product documentation and to submit
technical support incident reports or questions to the customer support group.
We have initiated on-line discussion forums. A typical software license
agreement provides the customer's first year of support in conjunction with the
initial purchase of the software license. Most of our customers have entered
into
post-contract maintenance and support agreements, which entitles them to receive
product updates as well as the professional and technical support described
above. These agreements are renewable annually.

MARKETING AND SALES

         We market and sell our products and services to the oil and gas
industry, primarily through local sales offices, and to a lesser extent, sales
agents and representatives in a small number of markets in which we do not have
a regional or local sales presence. Our local offices are staffed with a sales
force, technical experts and operating managers. Our sales and marketing
strategy is to maintain and enhance our local presence in the markets in which
we operate by acquiring significant in-house professional expertise on the local
geology and hydrocarbon conditions, and commercial knowledge of the local
markets.

          We engage in a variety of marketing activities, including:

       -  conducting high level educational workshops and seminars in several
          locations worldwide to demonstrate the application of our products and
          to upgrade the end users skills and efficiency in the use of our
          products;

       -  participating in regional trade shows showcasing our technology at
          customized demonstration booths;

       -  encouraging our technical staff to present papers at technical
          conferences;

       -  participating in all major industry events worldwide; and

       -  advertising on a regular basis in trade and technical magazines.

RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES ETC.

         We believe that significant investment in research and development is
essential to maintaining our technological expertise in the market for
geoscience knowledge solutions for the oil and gas industry, and to our strategy
of being a leading provider of innovative geoscience software products and
services.

         Net research and development expenses were $9.3 million, $11.2 million
and $12.9 million in 1999, 2000 and 2001, representing between 17%-18% of annual
revenues.

         We have launched six major new products between October 1997, when we
acquired CogniSeis Development Inc., and the end of 2001. The products include
Probe, Vanguard, GeoSec3D, DirectorGeo (a new product within the Sysdrill family
of solutions), Volume Navigator, and the "Common Reflection Angle Migration"
system for advanced seismic data processing. The latter three products were
provided to the industry during 2001 as beta-site products.

         Our products and modules are enhanced and upgraded on an ongoing basis
to provide new analysis features and, in some cases, re-engineered, to keep pace
with advances in computer operating systems, data base systems, computer
graphics and changes in hardware. We have introduced "interoperability" within
our systems platform which is planned to be a common element for all our
products. Interoperability enables our software to access our clients' technical
data bases irrespective of the format of any specific data-set, and without the
need for data conversion or reformatting prior to use with our software.

         Each of our acquisitions has added new technologies and products to our
existing range of products and solutions. We have invested in the full
integration of these products into the overall Paradigm solutions offering.

         Our research and development efforts are focused both on the immediate
competitiveness of our current solutions and products and on expected leading
edge requirements and competitiveness over the next several years. We believe
that our product development sights must be set far ahead not only to anticipate
industry requirements, but to also ensure that today's products remain viable
over the long run, thereby providing continuing added value to our customers.
Research and development continues to be managed as an integrated
global team with seven centers in Israel, Houston, Pau, Aberdeen, Moscow,
Calgary and Brisbane. Each center has its areas of specialization and expertise
while product commercialization, integration and delivery are the responsibility
of the research and development group in Israel.

         In the fourth quarter of 2001 and the first quarter of 2002, we
streamlined our research and development department following the release of
PG2. At the end of May 2002, the research and development staff numbered 150
persons worldwide, compared to 137 at the end of 2000, after taking into account
the addition of 11 research and development personnel from the acquisitions of
Geoscence and Sysdrill Limited.

INTELLECTUAL PROPERTY

         We believe that our patents, trademarks and other intellectual property
rights are an important factor in maintaining our technological advantage,
although no one patent is considered essential to our success. Typically, we
seek to protect our intellectual technology in all jurisdictions where we
believe that the cost of such protection is warranted. While we have patented
certain key technologies, we have not patented all of our proprietary technology
even where we regard such technology as patentable. We also protect our
intellectual property and trade secrets through confidentiality agreements with
staff and customers. We have licensed certain technology from third parties,
including software or modules which are incorporated into Paradigm-developed
software or which we use in our service centers. The intellectual property
rights of the vendors are protected by appropriate license agreements.

CUSTOMERS AND COMPETITION

         Our installed base of customers consists of approximately 550 customers
and about 3,750 multi-user licenses, representing a full range of the high-end
users in the industry worldwide. We are not dependant on any single customer
and, in 2001, only one customer represented over 5% of our total revenues
(approximately 5.2%).

         In certain aspects of our activities we are both a supplier and a
competitor with our peer group in the oilfield service companies.

         The oilfield service industry is led by three conglomerates,
Schlumberger, Halliburton and Baker Hughes, each of which provides
vertically-integrated oilfield services including in various mixes, seismic data
acquisition and processing, related software, wire line data gathering and
analysis, drilling, well completion and design and supply of oil field
infrastructure. Schlumberger and Halliburton own and operate geoscience and data
management software divisions with significant installed bases. GeoQuest is a
division of Schlumberger and Landmark Graphics Corporation is a subsidiary of
Halliburton. We compete with these two companies and a number of smaller niche
technology providers providing geoscience software solutions to the oil and gas
industry.

         Seismic data acquisition, processing and analysis are provided by
several large companies, including WesternGeco, a joint-venture of Schlumberger
and BakerHughes, Compagnie Generale Geophysique, a major shareholder in
Paradigm, and the recently announced proposed joint venture between Petroleum
Geo-Services and Veritas DGC Inc. We compete with these companies and a range of
smaller companies in providing seismic data processing services and, to a lesser
extent, in connection with services related to reservoir studies. Some of our
competitors in this field have purchased software licenses from us.
Many oil exploration companies have their own in-house capabilities for
seismic data processing and analysis. Some of these in-house service groups are
customers for both our software solutions, and our data processing services, as
a supplement for their internal capacity.

         We compete with companies that have longer operating histories, larger
customer bases, substantially greater financial, technical, sales, marketing and
other resources, and greater name recognition than us. Current and potential
competitors have established, and may establish in the future, cooperative
relationships among themselves or with third parties to increase their ability
to address the needs of prospective customers. New competitors or alliances
among competitors may emerge and acquire significant market share. As a result,
our competitors may be able to adapt to new or emerging technologies and changes
in customer requirements, and our larger competitors may be able to devote
greater resources to the promotion and sale of their products and services.
There can be no assurance that we will be able to compete successfully with
existing or new competitors. Failure by us to adapt to changing market
conditions and to compete successfully with established or new competitors may
have a material adverse effect on our results of operations and financial
condition.

 GEOGRAPHICAL AND OPERATIONAL DISTRIBUTION OF REVENUES

         Set forth below is a summary of our revenues by category and our total
revenues in the major geographical regions in which we operate.

REVENUES - PRODUCTS  ($ MILLIONS)
2001       2000       1999
                                        --------------------------
North and South America                 20.7      21.3       16.6
Europe, Africa, Middle East             19.7      14.8       11.9
Far East and China                      10.4      10.3       14.5
                                       ---------------------------
TOTAL                                  $50.8     $46.4      $43.0
                                       ===========================
REVENUES - SERVICES ($ MILLIONS)
North and South America                 12.8       10.8       7.7
Europe, Africa, Middle East              5.5        4.4       2.7
Far East and China                       3.7        1.7       1.1
                                       ---------------------------
TOTAL                                  $22.0      $16.9     $11.5
                                       ===========================
REVENUES - TOTAL ($ MILLIONS)
North and South America                 33.5      32.1       24.3
Europe, Africa, Middle East             25.2      19.2       14.6
Far East and China                      14.1       2.0       15.6
                                       ---------------------------
TOTAL                                  $72.8     $63.3      $54.5
                                       ===========================
C.       ORGANIZATIONAL STRUCTURE

         Set forth below is a list of our significant subsidiaries, each of
which is wholly owned:

       -  Paradigm Geophysical Corp., incorporated in the State of Delaware

       -  Paradigm Geophysical (R&D) Corp., incorporated in the State of
          Delaware

       -  Paradigm Geophysical (UK) Limited, incorporated in the United Kingdom

       -  Paradigm Geophysical (Europe) Limited, incorporated in the United
          Kingdom
-  Paradigm Geophysical (Services) Limited, incorporated in the United
          Kingdom

       -  Sysdrill Limited, incorporated in the United Kingdom

       -  Paradigm Geophysical Canada Ltd., incorporated in Canada

       -  Paradigm Geophysical Pty Ltd., incorporated in Australia

       -  PT Paradigm Geophysical (Indonesia), incorporated in Indonesia

       -  Paradigm Geophysical Sdn Bhd., incorporated in Malaysia

       -  Paradigm Geophysical Pte Ltd., incorporated in Singapore

       -  Paradigm Geophysical BV, incorporated in The Netherlands

       -  Paradigm Geophysical de Venezuela, incorporated in Venezuela

       -  Paradigm Geophysical SA, incorporated in Argentina

       -  Paradigm Geophysical do Brasil LTDA, incorporated in Brazil

       -  Paradigm Geophysical Holdings EURL, incorporated in France

       -  Paradigm Geophysical (France) SA, incorporated in France

       -  Paradigm Geophysical (Hungary) Group Financing LLC, incorporated in
          Hungary

       -  Paradigm Geophysical LLC, incorporated in Russia

       -  Paradigm Geophysical (Luxembourg) SARL, incorporated in Luxembourg

       -  Paradigm Geophysical (Nigeria) Limited, incorporated in Nigeria

D.       PROPERTY PLANTS AND EQUIPMENT

         Our headquarters are located in Herzlia, Israel. Set forth below is a
summary of locations of our principal facilities, the facility activities and
their square footage for our continuing operations. All of our facilities are
leased.
Location                             Activities                 Floor area
                                                                             Sq.ft
Herzlia, Israel                Corporate headquarters             33,000
                                                   R&D

          Houston, Texas                      Sales office                  59,000
                                             Service center
                                                   R&D

          Woking, U.K.                        Sales office                  13,000
                                             Service center

          Calgary, Canada                     Sales office                  16,000
                                             Service center
                                                   R&D

          Moscow, Russia                      Sales office                  13,000
                                             Service center
                                                   R&D

          Pau, France                         Sales Office                   5,000
                                                   R&D

          Perth, Australia                    Sales office                   6,500
                                             Service center
Brisbane, Australia                      R&D                       6,000

          Aberdeen, Scotland                  Sales office                   5,000
                                                   R&D
In addition to the above principal facilities, we also lease premises
in Beijing, Jakarta, Kuala Lumpur, Bahrain, Caracas, Buenos Aries, Rio de
Janeiro and Almaty. We also lease premises near Paris which we have recently
vacated following restructuring of our French operations. We are currently
seeking to sublet the vacated premises. We believe that the facilities we
currently occupy are suitable and adequate for our current needs.

ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS

         Statements in this Annual Report concerning our business outlook or
future economic performance; anticipated revenues, expenses or other financial
items; introductions and advancements in development of products, and plans and
objectives related thereto; and statements concerning assumptions made or
expectations as to any future events, conditions, performance or other matters,
and/or statements preceded by, followed by or that include the words "believes,"
"could," "expects," "anticipates," "intends," "projects," or similar
expressions, are "forward-looking statements" as that term is defined under the
United States Federal Securities Laws. Forward-looking statements are subject to
risks, uncertainties and other factors which could cause actual results to
differ materially from those stated in such statements. Factors that could cause
or contribute to such differences include, but are not limited to, those set
forth under "Risk Factors" in this Annual Report as well as those discussed
elsewhere in this Annual Report and in our other filings with the Securities and
Exchange Commission. You are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date of this Annual
Report.

         The following discussion and analysis is based on and should be read in
conjunction with our consolidated financial statements, including the related
notes contained in Item 18.

A.       OPERATING RESULTS

OVERVIEW

         We provide technical information solutions to the leaders of the oil
and gas industry worldwide, offering software solutions and product-driven
services to companies involved in the exploration and production of oil and gas
and to oilfield service companies.

         Our business solution comprises scientifically advanced software
solutions, technical services, data processing services and reservoir studies
services. Our products include:

-        SOFTWARE SOLUTIONS- Software products and add-on packs, designed to
         accommodate a customer's technical workflow for analysis of hydrocarbon
         prospects.

-        TECHNICAL SERVICES - On-site support, post-contract support and
         technical training designed to complement our software solutions in
         order to maximize the added value of the customer investment in our
         software solutions.

-        DATA PROCESSING SERVICES - Advanced seismic data processing based on
         our software and our seismic data analysis experts.

-        RESERVOIR STUDIES SERVICES - Advanced reservoir characterization and
         integrated studies based on our software solutions and utilizing our
         interpretation and reservoir characterization experts.
We operate a global network of sales, users' support and services with
21 offices in 18 countries, serving all major oil-and gas-producing countries in
the world.

MARKET CONDITIONS IN 2001

         Our results in 2001 should be viewed within the context of the
developments and trends in the oil field services sector in which we operate.
This sector is directly affected by the overall macroeconomics of oil and gas
supply and demand, international oil prices and the worldwide and domestic
capital investments by the oil and gas companies.

         Surveys issued near the end of 2000 by industry analysts indicated that
capital spending by oil and gas companies on exploration and production would
increase in early 2001. Increased spending did take place during the first eight
months of 2001 at the levels predicted in the 2000 surveys. However, industry
surveys in late 2001 showed that the geographic distribution of these capital
expenditures differed significantly from earlier expectations and budget plans,
with higher emphasis on investments in North America and Canada than in the
international arena. The events of September 11, 2001 and the subsequent
military operations caused many oil and gas companies to curtail their capital
spending for the remainder of 2001.

         Crude oil prices remained relatively stable for the first nine months
of 2001, although below the highs experienced in 2000, but within the
survey-reported price range assumptions by oil companies generally for their
2001 budgets. The softening and increased volatility of oil prices post
September 11, 2001, resulted in an average oil price in the last quarter of 2001
significantly below the aforementioned survey-reported price range assumptions
for 2001 budgets. By year-end 2001, oil prices were about 60% below 2000 peak
prices. U.S. natural gas prices faced a steady decline from 2000 highs,
declining at the end of 2001 to about 50% of the price at the start of the year.
These oil and gas prices, and the events of September 11, 2001, significantly
impacted the capital budget execution, particularly of the largest of the
international oil companies, and those operating primarily within the U.S. and
Canada.

IMPACT ON PARADIGM

         In the first half of 2001, we experienced demand for products and
services in line with expectations and in line with the overall increases in
industry spending.

         The oil and gas industry's reaction to the events of September 11, 2001
and its aftermath resulted in a significant slowdown of software license
purchases in the second half of 2001, as capital spending within the oil and gas
companies was broadly reduced, if not completely suspended. Demand for our
seismic data analysis and reservoir studies services continued, much as
anticipated.

INDUSTRY TRENDS AND THEIR SIGNIFICANCE FOR FUTURE MARKET DEVELOPMENT

         There remains a shortage of skilled geoscience-knowledge staff to
provide reservoir-related data analysis and interpretation and we continue to
believe that this will create an increased demand for more resource-effective
workflows and for outsourced services by oil and gas companies.

         Within the seismic data processing industry, the trends identified in
1999 and 2000 continued - i.e., to extract more geoscience knowledge from
existing data sets. There is an increasing review and reprocessing of archived
corporate data of hydrocarbon prospects, and the purchase and reprocessing of
library data on hydrocarbon fields. This reprocessing is being done with the
more advanced processing tools now available from data processing service
companies.
Looking forward, we believe that there will be an increase in new
seismic 4D and 4C surveys to enable better-informed decisions on on-going
production, rather than for exploration decisions. Such new survey datasets will
require high-end processing solutions and services, and, therefore, we believe
this trend to utilize seismic data for prospect development and production
decisions may increase the demand for out-sourced services for analysis of the
new 4D and 4C seismic surveys, integrated with well-log and production data for
reservoir studies.

         Recent industry surveys indicate that exploration activity will expand
to areas with complex geological structures and operating environments, such as
sub-salt and ultra deep sea. Exploration and development in these types of
prospects may increase the demand for high value-added software solutions and
out-sourced data analysis services, such as depth inversion and AVO seismic data
processing with volume and structural interpretation solutions, integrated with
petrophysical and geological data and related model building. Our announcement
in September 2001 of our Common Reflection Angle Migration solution, which
enables a target-oriented approach to depth imaging in seismic data analysis,
could become of increasing significance for these new exploration frontiers.

         Drilling , both for exploration and production, in such structures will
require improved well-path and well bore engineering, and examination of
drilling programs in the context of the geology between the surface and the
reservoir and the areas immediately surrounding the hydrocarbon targets. With
the technology acquired from Sysdrill we are now developing software that
integrates geophysics, geology and well engineering.

         For 2002, industry capital expenditure surveys of the oil companies
issued towards the end of 2001, indicate planned budgeted increases for 2002 in
seismic survey and analysis spending, especially outside of North America. This
could translate into increased demand for our services and products later in
2002 and 2003 as the seismic survey data requires more refined analyses.

ACQUISITIONS

ACQUISITION  IN 1999

ACQUISITION OF PTM:

         On March 31, 1999, we acquired the net assets of the Petroleum
Technology Division of Mincom Limited ("PTM"), an Australian entity, for $8.4
million in cash (including $0.3 million in acquisition costs). PTM is the
developer of the Geolog product, which is an information software tool for log
analysis and petrophysics.

         The transaction has been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed, based upon their fair values. The excess of
the purchase price over the fair value of the tangible assets acquired and
liabilities assumed has been allocated to identifiable intangible assets
including acquired technology of $ 5.1 million, assembled work-force of $0.9
million and goodwill of $ 2.7 million.

ACQUISITION IN 2000

THE FLAGSHIP ACQUISITION

         On October 4, 2000, we acquired all the assets and assumed all
liabilities of Flagship S.A., a French based company, and Flagship LLC, a U.S.
based company (together "Flagship"), wholly owned subsidiaries of Compagnie
Generale de Geophysique ("CGG"). Flagship products provide structural
geological interpretation and reservoir characterization. The total
consideration paid by Paradigm in the acquisition was $14.2 million (including
$1.1 million of costs related to the acquisition), which included the issuance
of 1,500,000 of our ordinary shares and a $5.1 million cash payment.

         The transaction has been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based upon their fair values. The excess of the
purchase price over the fair value of the tangible assets acquired and
liabilities assumed has been allocated to identifiable intangible assets
including acquired technology of $3.4 million, assembled work-force of $1.2
million, customer base of $2.4 million and goodwill of $ 7.1 million.

         The Flagship products, Stratimagic(R) and Integral Plus(R), continue to
be supported by Paradigm, and are being integrated into the full suite of
Paradigm's product offerings.

ACQUISITION IN 2001

SYSDRILL ACQUISITION

         On May 15, 2001, we acquired all the outstanding capital stock of
Sysdrill Ltd. ("Sysdrill"), a Scottish based company. Sysdrill's solutions
provide well planning and drilling engineering products. The total consideration
paid by Paradigm in the acquisition was $8.5 million (including $0.3 million of
costs related to the acquisition), which included the issuance of 200,000
ordinary shares valued at $1.1 million, $0.9 million paid in cash and an
additional $6.3 million through the issuance of an interest bearing note,
which was paid in full on May 1, 2002.

         The transaction has been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based upon their fair values. The excess of the
purchase price over the fair value of the tangible assets acquired and
liabilities assumed has been allocated to identifiable intangible assets
including acquired technology of $3.0 million and goodwill of $3.2 million.

         With the acquisition of Sysdrill, we are able to combine our
technologies with those of Sysdrill to offer technical solutions that integrate
geoscience knowledge with drilling and well operations solutions. The first
product combining these technologies was introduced in beta version during 2001,
and will be delivered in commercial versions in 2002.
ANALYSIS AND COMPARISONS OF ANNUAL OPERATING RESULTS

         The following table sets forth for the fiscal years ended December 31,
2001, 2000 and 1999, our consolidated statements of operations reflected as a
percentage of total revenues:
1999           2000            2001
                                              -----          -----          -----
REVENUES:
Products                                    78.9%          73.3%          69.8%
   Services                                    21.1%          26.7%          30.2%
                                              -------------------------------------
                 TOTAL REVENUES               100.0%         100.0%         100.0%
                                              -------------------------------------

OPERATING EXPENSES:

   Cost of products                            22.8%          17.1%          14.6%
   Cost of services                            10.6%          10.0%          13.5%
   Research and development                    17.1%          17.7%          17.7%
   Selling and marketing, general and          37.9%          37.2%          36.9%
      administrative
   Depreciation                                 7.1%           7.5%           7.7%
   Amortization of intangible assets            5.6%           5.3%           4.4%
   Restructuring charges                        0.0%           0.0%           0.7%
   Non recurring expenses                       5.0%           0.0%           0.0%
                                              -------------------------------------
      TOTAL OPERATING EXPENSES                106.1%          94.8%          95.4%
                                              -------------------------------------

  OPERATING INCOME (LOSS)                      (6.0%)          5.2%           4.6%
   Financial expenses, net                     (0.9%)         (0.9%)         (0.9%)
                                              -------------------------------------
  INCOME (LOSS) BEFORE TAXES ON INCOME         (6.9%)          4.3%           3.7%
                                              -------------------------------------
   Taxes on income                              0.0%           0.6%           0.8%
  NET INCOME(LOSS)                             (6.9%)          3.7%           2.9%
                                              -------------------------------------
The results of operations for the year ended December 31, 2001
described in this Annual Report include 12 months of operations of Paradigm,
consolidated with seven and a half months of Sysdrill operations.

         The results for the period ending December 31, 2000, include three
months of post-acquisition operations (October through December) of Flagship.
The results of operations for the year ended December 31, 1999 described in this
Annual Report include 12 months of operations of Paradigm, consolidated with
nine months of post-acquisition operations (April through December) of PTM.

         Our discussion and analysis of our 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. The preparation of these financial statements requires us to make
estimations and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. We evaluate our estimates on an on-going basis, including those
related to revenue recognition, bad debts, goodwill and other intangible assets,
income taxes and legal contingencies. We base our estimates on our historical
experience and various other assumptions that we believe to be reasonable and
which form the basis for our judgment regarding the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.

         We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

Revenue recognition

         We recognize revenue in accordance with Statement of Position 97-2
"Software Revenue Recognition" (SOP 97-2) and the SEC Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements (SAB 101), as amended. SAB
101 requires four basic criteria to be met before revenue can be recognized: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred or
services rendered; (3) the fee is fixed and determinable; and (4) collectibility
is reasonably assured. Determination of criteria (3) and (4) are based on our
judgment regarding the fixed nature of the fee charged for services rendered or
products delivered and the collectibility of those fees. Should changes in
conditions cause us to determine that these criteria are not being met for
certain future transactions, revenue recognized for a reporting period could be
adversely affected.

         Our seismic data processing, interpretation, reservoir-studies and
significant customization of software business derives revenue from fixed price
contracts, which require the accurate estimation of the cost, scope and duration
of each project. Revenue and related cost for these services are recognized on a
percentage of completion basis, using the input and output measure to assess the
percentage completed with revisions to estimates reflected in the period in
which changes become known. If we do not accurately estimate the resources
required and the scope of work to be performed, or we do not manage the project
efficiently in connection with the utilization of resources or satisfy our
contractual obligations to our customers, project margins may be significantly
and negatively effected or we may not make a profit. Any such resulting
reductions in our margins or losses could have a material adverse effect on our
operating results.

Allowance for doubtful accounts and provision for bad debts

         We maintain allowances for doubtful accounts and for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.

Goodwill and other identifiable intangible assets

         Goodwill associated with the excess purchase price over the fair value
of assets acquired and other identifiable intangible assets, such as acquired
technology, assembled workforce, customer base etc., are currently amortized on
the straight-line method over their estimated useful lives.

         These assets are currently reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.

         The Financial Accounting Standards Board issued SFAS 141 and SFAS 142
in June 2001. SFAS 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting and broadens
the criteria for recording intangible assets separate from goodwill. SFAS 142
requires the use of a non-amortization approach to account for purchased
goodwill and certain intangibles. We plan to adopt these pronouncements
effective January 1, 2002. At such time we anticipate that amortization
associated with purchased goodwill will cease.
Income taxes

         We operate within multiple taxing jurisdictions and we are subject to
audit in these jurisdictions. These audits can involve complex issues, which may
require an extended period of time to resolve. In our opinion, adequate
provisions for income taxes have been made for all years.

Legal contingencies

         We are currently involved in certain legal proceedings and claims,
including those discussed in Item 8 of this Annual Report. As discussed in Note
12 and 15 of our consolidated financial statements, as of December 31, 2001, we
have estimated the probable costs for the resolution of these claims in
consultation with outside counsel handling our defense in these matters and such
costs are based upon an analysis of potential results, assuming a combination of
litigation and settlement strategies. We do not believe these proceedings will
have a material adverse effect on our consolidated financial condition. It is
possible, however, that future results of operations for any particular
quarterly or annual period could be materially affected by changes in our
assumptions, of the effectiveness of our strategies, related to these
proceedings.

Impact of acquisitions on comparisons

         We believe that the contribution of Sysdrill, Flagship and PTM products
and operations, and their integration with our activities, cannot be adequately
portrayed in a typical year-by-year discussion. As a consequence, the financial
results described in this annual report for these periods are not directly
comparable.

         Note 1 to our audited financial statements for the year ended December
31, 2001 includes:

  -      the pro-forma unaudited results of operations of Paradigm and Sysdrill
         for the years ended December 31, 2000 and 2001, assuming that the
         Sysdrill acquisition had been completed on January 1 2000 and 2001,
         respectively;

  -      the pro-forma unaudited results of operations of Paradigm and Flagship
         for the years ended December 31, 1999 and 2000, assuming that the
         Flagship acquisition had been completed on January 1 1999 and 2000,
         respectively;

  -      the pro-forma unaudited results of operations of Paradigm and PTM for
         the year ended December 31, 1999, assuming that the Flagship
         acquisition had been completed on January 1 1999.

     Where we have considered it relevant to an understanding of our results of
operations for the years ended December 31, 1999, 2000 and 2001, we have
referred to the consolidated pro forma results.

REVENUES

         "PRODUCT REVENUES" are derived mainly from the sale of software-use
perpetual licenses and period-specific rentals, and related software maintenance
and customer support contracts (including user-training). Maintenance and
support revenues provide a predictable revenue stream, as generally these are
contracts that are renewable annually.

         "SERVICES REVENUES" are derived mainly from providing seismic data
processing and reservoir studies services.

         In choosing to market both products and services, we aim to diversify
revenue sources to try to minimize risk in seasonal and regional downturns.
Service contracts provide visibility during the year due to their multi-month
implementation.
Total revenues in 2001 increased by 15% over 2000 resulting from
increased volume of sales from core products and services and the positive
impact of acquisitions.

         Total revenues in 2000 increased by 16% over 1999. The increase
attributable to increased volume of sales from core products and services is 8%
when comparing pro-forma 2000 (assuming that the Flagship acquisition had not
taken place ) total revenues to pro-forma 1999 total revenues, assuming that the
PTM acquisition had been completed as of January 1 1999.

         In 2001, the relative proportion of revenues derived from services
increased to 30% of total revenues, compared to 27% of total revenue in 2000 and
21% in 1999. The increase over this three-year period is due principally to our
decision to respond to growth in demand for outsourced seismic data processing
services with increased computing capacity and staff capabilities in our
offices.

PRODUCT REVENUES

         This revenue category includes the sale of perpetual licenses for
software usage, annual rentals of software, the annual maintenance and support
charges for this software and the occasional sale of hardware. See Note 2h to
our consolidated financial statements for details of our accounting policy on
revenue recognition of products.

         Product revenues in 2001 increased by 9% over 2000, due to increased
volume of sales from core products and the positive impact of acquisitions. The
Sysdrill business acquired in May 2001 contributed $ 1.1 million of total
product revenues in 2001, which constituted approximately 2.2% of total product
revenues for the year.

         Within the limits of the analysis of pro-forma estimates and assuming
that the Sysdrill acquisition had been completed on January 1, 2000, pro-forma
product revenues in 2001 increased by 6% over 2000.

         We have experienced an increase in demand for new software licenses on
a period-over-same-period basis. However the impact of the September 11 events
resulted in an immediate slowdown in new license purchases, especially in the
North American and European markets, while the larger oil companies reassessed
their capital spending decisions. At that time many software purchase decisions
were postponed into the 2002 budget year. The modest fourth quarter recovery of
software license revenues when compared to the third quarter can be attributed
to year-end budget utilization by some of our customers although in 2001 this
was not as prevalent as in previous years.

         The capital budget surveys for 2002 indicate that the oil companies
plans to increase capital spending internationally, and cut back in North
America. This created expectations by industry analysts that the turnaround in
the international markets would become visible early in 2002. To date, this has
not been observed to the level expected, and analyst expectations have been
modified during the course of the first quarter of 2002, and they now place
recovery into the second half of 2002 and into 2003.

SERVICE REVENUES

         The services revenue category includes seismic data processing and
reservoir studies services. See Note 2h of our consolidated financial statements
for details of our accounting policy on recognition of revenues from services.

         Revenues from services in 2001 increased by 30% over 2000, which was
47% higher than in 1999. In 2001, we continued to see growth in high-end seismic
data processing.

         We continued to expand capacity in our service centers in response to
growing regional demand (see discussion below on Regional Service Revenues
Distribution).
In response to advancing capabilities in the computer cluster
configurations that, in time, could represent a significant savings in computer
hardware costs (at current price relationships between the cluster configuration
and mainframes), we installed and tested our first cluster configuration in the
U.S. in 2001. This configuration was placed into production early in 2002.

REGIONAL DISTRIBUTION OF REVENUES

         The following table presents the geographic distribution of our
revenues.
2001        2000        1999
                                  ----        ----        ----
REVENUES - PRODUCTS

North and South America             41%         46%         39%
Europe, Africa, Middle East         39%         32%         28%
Far East and China                  20%         22%         34%
                                  ------------------------------
    TOTAL                          100%        100%        100%

REVENUES - SERVICES

North and South America             58%         64%         66%
Europe, Africa, Middle East         25%         27%         23%
Far East and China                  17%         10%         10%
                                  ------------------------------
    TOTAL                          100%        100%        100%

REVENUES - TOTAL

North and South America             46%         51%         44%
Europe, Africa, Middle East         35%         30%         27%
Far East and China                  19%         19%         29%
                                  ------------------------------
    TOTAL                          100%        100%        100%
The changes in regional distribution of revenues for the period 1999 to
2001 for our two revenue segments reflects the relative impact of annual changes
in each of the regions general economic situation, the impact of changes in
international prices of oil, merger activity in oil companies and the regionally
different growth in outsourcing demand for services.

          This change in distribution also reflects our deliberate strategy to
expand into the emerging economies' hydrocarbon markets and provide solutions
and services to the national and regional producers of oil and gas worldwide.

         The tables above demonstrates the importance of our global presence as
a significant contributing factor to our revenue growth, as well as the
geographic risk-balancing achieved by maintaining a presence in multiple markets
with a consequent wide customer spread.

         REGIONAL PRODUCTS REVENUE DISTRIBUTION: 2001 regional distribution
changes over 2000 reflect both the growth of our market penetration into the
emerging economies, particularly Russia and Latin America, the increased
activity of the state owned oil companies and some of the international
activities of the major oil companies. It also reflects the slowdown in
exploration and production capital spending by the major oil companies in their
more traditional activities in the lower 48 states in the U.S. (except for
activity in the Gulf of Mexico - see Services discussion below), and in the
North Sea.

         REGIONAL SERVICES REVENUE DISTRIBUTION: Our regional distribution is
primarily influenced by the significantly larger size of the computer
installation in the U.S. than in any other region, and the rapid growth of
demand for services at this center since 1999. With the purchase of the super
computer for the
U.S. operations at the commencement of 1999, our position in that market has
since improved consistently. The U.S. services center has in 2001 processed not
only new seismic data from Gulf of Mexico surveys, but also other U.S. land and
marine seismic data, as well as international hydrocarbon prospects.

         Recovery of energy prices from mid-2000 through 2001 has had a positive
impact on demand for our services, and has contributed to the relative growth in
demand for our services in Latin America, the former Soviet Union, and, in 2001,
in the Asia-Pacific region. As a consequence of this growth in demand outside of
the U.S. market, we have increased our service capacity in these markets, in
line with our strategy of diversifying revenue sources. Looking forward, we
believe that this could result in a reduction in our dependency on the U.S.
market for a high proportion of our service revenues.

OPERATING COSTS

COST OF REVENUES & MARGINS:

COST OF REVENUES
($ millions)                                1999             2000             2001
PRODUCT COSTS                            $  12.4          $  10.8          $  10.6
year-over-year increase (decrease)                            (13%)             (2%)

SERVICE COSTS                            $   5.8          $   6.4          $   9.8
year-over-year increase                                         9%              53%

TOTAL COSTS                              $  18.2          $  17.2          $  20.4
year-over-year increase (decrease)                             (6%)             19%
GROSS MARGINS
($ millions)                                1999             2000             2001
PRODUCT MARGIN                           $  30.6          $  35.6          $  40.2
% margin                                      71%              77%              79%

SERVICE MARGIN                           $   5.7          $  10.6          $  12.2
% margin                                      49%              62%              55%

GROSS MARGIN                             $  36.3          $  46.1          $  52.4
% margin                                      67%              73%              72%
PRODUCT COSTS comprise software production and distribution costs,
personnel costs associated with providing maintenance and support, third party
software royalties, agents commissions, hardware costs for turnkey solutions and
the maintenance of production equipment.

         SERVICE COSTS comprise personnel costs associated with providing
services, cost of materials, the operation and maintenance of equipment, lease
of premises and the cost of utilities.
Depreciation of capital equipment and amortization of product research
and development and acquired technology costs are accounted for as separate line
items in our Statement of Operations.

         The material differences between 2001 and 2000 in connection with the
components of our cost of revenues, and the margins, are attributable to:

     -   PRODUCTS: (i) the lower levels of hardware expenses in 2001 compared to
         2000 ($0.6 million in 2001 compared to $2.4 million in 2000), and (ii)
         an increasing proportion of customer maintenance and support revenues,
         and therefore a higher proportion of associated support costs in total
         cost of product revenues.

     -   SERVICES: The decline in service margins reflects (i) increasing impact
         of service centers outside the U.S., where computers are significantly
         smaller than the supercomputer in use in our U.S. center resulting in
         relatively slower and less efficient data throughput compared to the
         U.S. and relatively less efficient use of personnel, (ii) a significant
         increase in computer capacity and personnel in the Asia Pacific region
         in anticipation of receiving significant projects which commenced only
         in the fourth quarter of 2001, and (iii) a significant increase in
         computer capacity and personnel in our Latin America operation in
         anticipation of receiving significant projects, which commenced only in
         the in the first quarter of 2002 .

         Looking forward we envisage a continuing negative impact on service
operating margins due primarily to :

     -   the expected continuing difficult labor markets, almost worldwide, for
         high caliber geoscience staff that we need in order to expand the
         delivery of our service solutions; and

     -   the opening or expansion of smaller centers that do not have the
         economies of scale of the large U.S. center, and whose relative
         significance in the cost structure mix may increase over time.

           This downward pressure on service operating margins may be offset by
efficiency gains from changes in our software to utilize the expected systems,
computational and data handling efficiencies of the new generation of computers
and new computer configurations (e.g. the use of "cluster configurations") and
the current downward price pressure on the unit cost of new computing hardware.

RESEARCH AND DEVELOPMENT EXPENSES
($ millions)                             1999        2000        2001
RESEARCH AND DEVELOPMENT EXPENSES        $9.3        $11.2    $12.8
As a % of Total Revenue                    17%          18%      18%
year-over-year increase                                 21%      15%

YEAR END RESEARCH AND DEVELOPMENT
STAFF                                      98          137      157
year-over-year increase                                 40%      15%
Research and development expenses consist primarily of salaries and
other related expenses and the operating cost of facilities. In 2001,
expenditures on research and development increased, reflecting primarily the
acquisition of the research and development personnel of Sysdrill .

         In the fourth quarter of 2001 and the first quarter of 2002 we
streamlined our research and development department following the release of
PG2. At the end of May 2002, the research and development staff numbered 150
persons worldwide, seven persons less than at the end of 2001.
Research and development continues to be managed as an integrated
global team with centers in our Israel headquarters, Houston, Pau, Moscow,
Brisbane and Calgary, with the addition this year of Aberdeen, and the closing
of Paris. Each center has its areas of specialization and expertise. The global
research and development function is managed and coordinated at our corporate
headquarters in Israel, which is also responsible for the integration and
commercialization of product releases.

         Competition for high caliber research and development staff is likely
to be a permanent feature of the various labor markets in which we operate. We
continue to face labor market pressures on computer engineering skills and
similar pressures on retaining and recruiting high caliber geoscience research
staff. The present moderation in the labor market (due to the decline of the
high-tech sector, the past layoffs by the major oil companies and current
uncertainties in the energy sector) is expected to be temporary . Those labor
markets that have, up to now, not been impacted by the upward pressures on
salaries and benefit packages we believe will begin to feel this impact as more
companies establish globally distributed research and development centers, and
the demand for high caliber geoscientists increases with the recovery of the
global economy in general and the energy sector in particular.

         We believe that high levels of reinvestment in new product development
remains an essential element of our competitive strategy in order to sustain and
to further improve our market position, with continuing delivery of innovative
technologically advanced solutions. The expected demands of the industry for an
expanded set of solutions, scalable to the range of computing devices from NT
through UNIX and LINUX to supercomputers, also sets the level of our product
development expenditures.

         We continue with our efforts to provide truly integrated software
across all our applications, serviced from a common data base, transparent to
each application. This effort is also a necessary component in our product
acquisition strategy, and ensures that, each newly acquired product will work
with our existing offerings, and on our and other industry standard databases -
referred to as our "interoperability" features. Because of the open-architecture
expected by the industry, we are continuing to expend efforts that permit our
software to work on our competitors' databases, and to interact with our
competitors' software. We also provide our customers with tool-kits that permit
the incorporation of their proprietary workflows and algorithms into our
software.

         Looking forward, excluding consideration of any future acquisitions, we
would expect to continue the levels of research and development expenditures at
similar absolute levels with adjustments for (i) the impact of the restructuring
in the fourth quarter of 2001 and the first quarter of 2002, (ii) competitive
labor market conditions, and (iii) minor expansions in very selected specialized
areas where we consider the need to expand our geoscience or computing
engineering scope. At the same time, we continue to seek efficiencies in the
development and production of software, especially in the area of common
infrastructure and utilities for the integrated solutions suite.

SALES AND MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES
($ millions)                             1999       2000       2001
SALES AND MARKETING, GENERAL AND
ADMINISTRATIVE EXPENSES                 $20.6      $23.5      $26.9
As a % of Total Revenue                    38%        37%        37%
Year-over-year increase                               14%        14%
Sales and marketing, general and administrative expenses consist
primarily of salaries, commissions on sales, advertising, trade shows, outside
professional fees, cost of facilities and other related
expenses. Sales and marketing, general and administrative expenses in 2001
remained at the same proportion of revenues as in 2000, and were slightly lower
as a proportion compared to 1999. This was achieved while integrating
acquisitions that included sales and marketing, general and administrative staff
resources and other costs.

DEPRECIATION  AND AMORTIZATION
($ millions)                            1999        2000             2001
DEPRECIATION                             $3.9        $4.7         $   5.6
As a % of Total Revenue                     7%          7%              8%
year-over-year increase                                23%             18%

AMORTIZATION                             $3.1        $3.4         $   3.2
As a % of Total Revenue                     6%          5%              4%
year-over-year increase(decrease)                      10%             (4%)

TOTAL DEPRECIATION AND
AMORTIZATION                             $6.9        $8.1         $   8.8
As a % of Total Revenue                    13%         13%             12%
year-over-year increase                                17%              9%
Depreciation expense consists of the depreciation of capital equipment
and leasehold improvements . See note 2f of our consolidated financial
statements for details of our accounting policy on depreciation.

         Amortization expense consists of amortization of acquired developed
technology, assembled work force, customer base, capitalized research and
development costs and amortization of goodwill. See note 2g of our consolidated
financial statements for details of our accounting policy on amortization of
acquired developed technology and goodwill, and note 2i for details of our
accounting policy on amortization of capitalized research and development costs.

         The overall decrease in amortization in 2001 resulted from the decrease
in the annual amortization charge following review of the useful life of
acquired technologies. Amortization was increased resulting from the additions
to goodwill and acquired developed technology attributable to the acquisition of
Sysdrill (in May 2001), as well as the full year impact of the amortization
resulting from the acquisition of Flagship in October 2000.

         In the future, if we are successful in acquiring complementary
businesses, accounted for using the purchase method of accounting, further
increases in the amortization expense can be expected due to the addition of
acquired technology.

         Under SFAS 142, effective for fiscal years beginning after December 15,
2001, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in accordance
with the statement. The goodwill portion of the amortization charge was $0.3
million, $0.5 million and $0.7 million in 1999, 2000 and 2001, respectively.
RESTRUCTURING CHARGES

         In the fourth quarter of 2001, we recorded $0.5 million in
restructuring charges, associated primarily with the rationalization of our
operations in France. We expect that the full cost of this restructuring program
will be about $1.6 million. In the first quarter of 2002, we recorded a
restructuring charge of $0.8 million. We expect to complete the restructuring
program in the second quarter of 2002.

FINANCIAL EXPENSES, NET
($ millions)                   1999       2000          2001
FINANCIAL EXPENSES             $0.48      $0.55      $0.64
As a % of Total Revenue            1%         1%         1%
year-over-year increase                      14%        16%
These expenses result from (i) interest expenses from the use of bank
lines of credit and capital lease obligations and interest income on cash
balances, and (ii) bank charges, including commitment fees for lines of bank
credit.

OPERATING INCOME AND NET INCOME
($ millions)                      1999             2000            2001
OPERATING INCOME(LOSS)           $(3.3)            $3.3            $3.3
As a % of Total Revenue             (6%)              5%              5%

NET INCOME(LOSS)                 $(3.8)            $2.4            $2.1
As a % of Total Revenue             (7%)              4%              3%
Our operating income and net income have recovered since 1999. In 2001
our net income was less than that achieved in 2000, primarily due to the
post-September 11 impact on operations, and the restructuring charge in the
fourth quarter of 2001 (continued into 2002 as noted above). Net income before
restructuring charge was $2.7 million in 2001 compared with $ 2.4 million in
2000, where there was no restructuring charge.

 B.     LIQUIDITY, CAPITAL RESOURCES AND FINANCING
($ millions)                          1999            2000             2001
Cash from(used) in operations        $ (0.9)         $12.6           $  2.8
Cash (used) in investments           $(15.4)         $(9.4)          $(10.9)
Cash from(used) in financing         $ 18.9          $(0.1)          $  9.6
Exchange rate impact                 $ (0.6)         $ 0.1           $ (0.3)
                                     -------         -------         -------
Net cash flow                        $  2.0          $ 3.2           $  1.2
Opening cash balance                 $3.5            $5.5            $8.6
                                     ----            ----            ----
Closing cash balance                 $5.5            $8.7            $9.8
                                     ====            ====            ====
CASH FROM OPERATIONS, DAYS SALES OUTSTANDING, OR DSO, AND WORKING CAPITAL

         Our operating activities generated cash in the amount of $2.8 million
in 2001, compared $12.6 million in 2000. This decline over 2000 is due (i) to
the high level of collections in 2000 resulting from the turnkey project income
from which was recognized in 1999 and (ii) a deterioration of the DSOs from 115
days in 2000 to 160 days in 2001.
($ millions)                                1999          2000            2001
Trade receivables                           $21.6         $22.7          $28.3
year-over-year increase(decrease)                             5%            25%

Accrued income                               $9.0          $4.1          $ 5.5
year-over-year increase(decrease)                           (54%)           34%

DSO(at December 31) - number of days          167           115            160
year-over-year increase(decrease)                           (31%)           39%
As at December 31, 2001, our net working capital was $17.2 million (of
which $11.8 was in cash and cash equivalents and short term bank deposits),
compared to working capital of $10.9 million (of which $8.6 million was in cash
and cash equivalents) as at December 31, 2000. This increase in net working
capital is attributable primarily to an increase in cash holdings and accounts
receivable and a decrease in the trade payables and current maturities of long
term debt.
($ millions)                                  1999             2000            2001
Current assets                               $38.5            $39.5           $51.2
Current liabilities                          $23.2            $28.7           $34.0
                                             ----------------------------------------
Net working capital                          $15.3            $10.9           $17.2
                                             ----------------------------------------
year-over-year increase(decrease)                               (29%)            59%

Cash, cash equivalents and short term
deposits                                     $ 5.5            $ 8.6           $11.8

year-over-year increase(decrease)                                56%             37%
DEBT FINANCING

         We finance our operations and capital requirements mainly through
internal cash generated from operations, and bank credit facilities.

         On October 10, 2001, we entered into a convertible loan agreement (the
"Convertible Loan Agreement") with The Israel Mezzanine Fund, L.P., The Israel
Mezzanine Fund (in Israel), Limited Partnership and The Jordan (Bermuda)
Investment Company Ltd. (collectively, "FIMI") pursuant to which we issued FIMI
an aggregate of $8.0 million
principal amount convertible debentures (the "Convertible Loan"), with the
option to purchase an additional $3.0 million on the same terms under certain
conditions. The terms of the Convertible Loan provide for an annual interest
rate of three months LIBOR minus 1% payable quarterly. The Convertible Loan is
convertible into ordinary shares by FIMI at any time at $7.50 per share (the
"Conversion Price").

         In the event that the average closing price of our ordinary shares as
recorded on the Nasdaq over the sixty consecutive trading days immediately
preceding Nov. 7, 2003 (the "2003 Market Price") is lower than $7.50 per share,
the Conversion Price will be adjusted to the 2003 Market Price, provided that
the Conversion Price will not be adjusted to less than $3.26 per share. In the
event that the average closing price of our ordinary shares as recorded on the
Nasdaq over the sixty consecutive trading days immediately preceding Nov. 7,
2004 (the "2004 Market Price") is less than the 2003 Market Price, the
Conversion Price will be adjusted to the 2004 Market Price, provided that the
Conversion Price will not be adjusted to less than $3.26 per share. In the event
that the average closing prices of our ordinary shares as recorded on the Nasdaq
in the sixty consecutive trading days immediately preceding any date on which
convertible debentures, or any portion thereof, are converted into our ordinary
shares (the "Conversion Closing Price") is equal to or higher than $20 but less
than $30, the adjusted Conversion Price in respect of such convertible
debentures so converted shall be $9.00 per share. Further, in the event that the
Conversion Closing Price is equal to or higher than $30, the adjusted Conversion
Price in respect of such convertible debentures so converted shall be $12.00 per
share.

         The outstanding convertible loan amount is repayable in three equal
annual payments commencing on Nov. 7, 2003; provided, however, that prior to
each payment date, FIMI, at its sole discretion, may elect, by giving an
irrevocable written notice to have any portion of the principal deferred and
repaid on the fifth anniversary of the agreement closing date. The agreement
provides for certain covenants, including, that as long as the Convertible Loan
has not been repaid, our shareholders' equity will not be less than (i) our
shareholders' equity as of June 30, 2001 and (ii) 40% of our total assets, as
reflected in certain financial statements.

         Upon the closing of a merger or consolidation or a sale of our
securities which results in our shareholders, prior to the transaction, owning
less than 51% of the surviving entity, FIMI has the right to require that we
repay the Convertible Loan. In addition, we are required to repay the
Convertible Loan upon the acquisition of 90% or more of our securities by a
third party. Consequently, we will repay the Convertible Loan upon the
acquisition of 100% of our ordinary shares by Paradigm B.V. in the proposed
merger, if consummated.

         On May 28, 2002, following the public announcement of the merger, FIMI
notified us that: (a) pursuant to the Convertible Loan Agreement, it was
electing to have the outstanding convertible debentures repaid in full as a
result of the proposed merger, (b) it believes we have been in default under
Section 4(b) of the Convertible Loan Agreement (which contains our obligation
to maintain certain levels of shareholders' equity) since the date the
convertible debentures were issued, and that it believes we continue to be in
such default, (c) as a result of such alleged default, FIMI is demanding
immediate repayment of the outstanding convertible debentures, and (d) FIMI
believes its right to purchase the additional $3.0 million of convertible
debentures will remain in full force and effect notwithstanding repayment of
the outstanding convertible debentures in connection with the merger.

         We have advised FIMI that we reject any claim by FIMI that we are in
default under the Convertible Loan Agreement. We have also advised FIMI that
its right to purchase the additional $3.0 million of convertible debentures will
expire upon repayment of the outstanding convertible debentures, which we
intend to repay at the closing of the merger. Although the continued existence
of a right to purchase additional convertible debentures following repayment
would be a breach of the merger agreement, we do not believe that any such
right will continue to exist or that we are (or will be) in breach of the
merger agreement with respect to the Convertible Loan Agreement.

         On December 31, 2001, short term bank debt, including current
maturities of long term loans, was $6.8 million, and long term loans (including
the Convertible Loan ) was $13.1 million, compared to $7.6 million and $1.3
million, respectively, as at December 31, 2000. As at December 31, 2001, our
aggregate obligations under equipment leases were $0.3 million compared to $0.8
million as at December 31, 2000.

         On March 31, 2002, cash and cash equivalents were $12.3 million, short
term bank debt, including current maturities of long term loans, was $7.3
million, long term bank loans and convertible debentures totaled $12.6 million
and total lease obligations were $0.4 million.

         In 2001, we increased our bank credit facilities for short-term and
long-term borrowings from an unsecured bank facility of about $20.0 million to a
secured bank facility of $22.0 million, of which an aggregate amount of $ 11.9
million was utilized as at December 31, 2001. The current interest rate on these
borrowings is the London Inter Bank Offer Rate ("LIBOR") for three to six
months, plus 1.0% to 1.5% . As security for the banks' credit facilities, we
have registered a floating charge on all of our assets in favor of the banks.
Additionally, we are required to maintain certain covenants according to which,
(i) our shareholders' equity will not be less than 40% of our total assets, and
(ii) our net profit excluding one time expenses will be positive on an annual
basis.

         Part of the purchase price of Sysdrill was financed with a twelve month
note payable with a due date of May 1, 2002. This note was repaid in May 2002
partly with cash generated from operations, and the balance from the available
medium term bank credit lines.
USES OF AVAILABLE CASH RESOURCES

         We used cash in investing activities of $ $15.4 million in 1999, $9.4
million in 2000, and $10.9 million in 2001. Our principal investing activities
were the purchase of computer hardware, and the acquisitions made by us in 1999,
2000 and 2001, including the PTM, Flagship and, in 2001, the Sysdrill
acquisition (the latter initially funded through a one year note payable).

         In 2001, capital equipment purchases totaled $8.7 million, primarily
for computer resources. Our anticipated capital expenditure budget for 2002 for
ongoing equipment replacement and intrinsic growth needs is estimated at
approximately $6.0 million, of which $1.3. million had been spent as of March
31, 2002 , and a further $1.0 million is committed by the end of June 2002.

         Where appropriate, we have availed ourselves of equipment leasing
facilities for the acquisition of fixed assets and may continue to do so in the
future.

         Our ability to increase our operating income and cash flow is dependent
upon continued capital spending and investment. Looking forward, we believe that
our cash flow from operations, the convertible debenture and our available bank
credit facilities are adequate for any immediate financing requirements arising
from normal operations, working capital and capital expenditures. However, a
more ambitious expansion program for our operations and acquisitions may have to
be financed from external sources either as additional leverage on the balance
sheet or through a range of equity related financing instruments or otherwise.

ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.       Directors and Senior Management

         The following table sets forth certain information regarding our
executive officers and directors as of May 31, 2002.
NAME:                             AGE:                         POSITION:
                 ----                              ---                          --------
Eldad Weiss (2)                                     46            Chairman of the Board and Chief
                                                                  Executive Officer
Yehezkel Marueli                                    48            President and Chief Operating Officer
Brian W. Berman                                     56            Chief Financial Officer
Elie Barr (1)                                       55            Director
Jacob Dunietz (2)                                   46            Director
Michael Geiger (2)                                  64            Director
Thierry LeRoux                                      48            Director
Jay Seid (1)                                        41            Director
General (Res.) Zvi Zamir (1)                        77            External Director
Mary Safrai (1) (2)                                 58            External Director
Jonathan Keller                                     50            Corporate Secretary
(1)      Member of the Audit Committee

(2)      Member of the Compensation Committee
The background of each of our directors and executive officers is as
follows:

ELDAD WEISS has served as our Chief Executive Officer and as a Director since
the commencement of Paradigm's operations in 1988 and as Chairman since July
1999. From July 1992 to July 1993, Mr. Weiss served as the Vice President of
Grant-Tensor Geophysical Corporation, a Houston based geophysical services
company, where he was Senior Vice President in charge of the computer aided
exploration division. From June 1985 until February 1988, Mr. Weiss was employed
in the research and development department of Scitex Corporation Ltd. Mr. Weiss
holds a Bachelors and a Masters degree in Electrical Engineering from Tel Aviv
University.

YEHEZKEL MARUELI has served as our Chief Operating Officer since April 1997 and
as President since January 2000. From November 1995 until December 1996,
Mr. Marueli served as the Vice President of Business Operations at Scitex Europe
S.A., and from January 1991 until November 1995, he served as Scitex Corporation
Ltd.'s Vice President of Corporate Logistics. Mr. Marueli holds a Bachelor
degree in Economics, with honors, from Tel Aviv University.

BRIAN W. BERMAN has served as our Chief Financial Officer since April 1998. From
February 1993 until April 1998, Mr. Berman served in various capacities at the
World Bank, including a position as the head of a strategy and advisory group on
agribusiness investments. Prior to that time, Mr. Berman served as a consultant
for Israeli high technology start-up companies. Mr. Berman holds a Bachelors
degree in Chemistry and Physics and a Masters degree in Chemistry from the
University of Natal in South Africa. In addition, Mr. Berman holds an M.B.A.
from the Columbia University Graduate School of Business in New York.

ELIE BARR has served as a Director since June 1996. Mr. Barr has been a Managing
Partner of Mofet Israel Technology Fund since 1996. Prior to that, Mr. Barr was
a consultant to high-tech companies and certain governmental entities. From 1992
to 1996, Mr. Barr was an Executive Vice President of Teledata Communications
Ltd., a telecommunications company, whose securities were publicly traded on the
Nasdaq National Market and which was subsequently acquired by Agree Reality
Corporation (ADC). Mr. Barr has a Bachelors degree in Economics and Political
Sciences from Tel Aviv University and a Bachelors degree in Philosophy from
Bar-Ilan University.

JACOB DUNIETZ has served as a Director since July 1993 and served as Chairman of
our Board of Directors from July 1993 until July 1999. Mr. Dunietz is the
President of Ai Research and Development in Artificial Intelligence Ltd., an
international privately owned company. Mr. Dunietz is also Chairman of the Board
of Directors of Dunietz Brothers Ltd., a construction and real estate company,
whose securities are publicly traded on the Tel Aviv Stock Exchange, and he also
serves as a member of the Board of Directors of all of its subsidiaries. Until
December 2000, Mr. Dunietz was Chief Executive Officer and a director of Magic
Software Enterprises Ltd., an Israeli software company whose securities are
publicly-traded on the Nasdaq National Market, and a member of the Board of
Directors of BVR Systems Ltd., a holding company, whose securities are publicly
traded on the Nasdaq National Market. Until December 1999, Mr. Dunietz was Chief
Executive Officer and a director of Mashov Computers Ltd. Mr. Dunietz holds a
Bachelors degree in Computer Science from The Technion - Israel Institute of
Technology.

MICHAEL GEIGER has served as a Director since May 1999. Mr. Geiger has been a
senior international consultant to the Shamrock International Group since 1987.
Prior to that, Mr. Geiger served as a consultant to Occidental Petroleum
Corporation for their energy and chemical industry activities in Israel.
Mr. Geiger holds a Bachelors degree in Economics from Tel-Aviv University, of
which he is a Governor, and a Masters degree in Economics from the University of
California in Los Angeles.

THIERRY LE ROUX has served as a Director since November 2000. Mr.Le Roux has
served as Senior Executive Vice-President of Compagnie Generale de Geophysique
("CGG"), a French company, whose securities are publicly quoted on the New York
Stock Exchange and the Paris Stock Exchange, since October 1998. From January
1995 until September 1998, Mr. Le Roux served as Executive Vice-President of
CGG. Mr. Le Roux has served as Chairman and Chief Executive Officer of Sercel
S.A , a French company which is a subsidiary of CGG since June 1995. Mr. Le Roux
currently serves as a director of
Consotium Francais de Localisation S.A., Interactive Network Technologies Inc.
and Tronics Microsystems S.A. From 1996 until 1998, Mr. Le Roux was a director
of Dassault Sercel Navigation Positionnement S.A. From 1995 until 1999, Mr. Le
Roux was a director of Mobiloc S.A.S. Mr. Le Roux holds an Engineering degree
from Ecole Nationale des Ponts et Chaussees, Paris and a Business degree from
Centre de Perfectionnement aux Affaires (CPA), Paris.

JAY SEID has served as a Director since April 1999. Mr. Seid is a Managing
Director of Bachow & Associates Inc. Prior to joining Bachow & Associates Inc.
in December 1992, Mr. Seid was President of Judicate, Inc., a publicly traded
nationwide provider of alternative dispute resolution (mediation and
arbitration) services. Previously, he was an attorney specializing in mergers
and acquisitions at Wolf, Block, Schorr and Solis-Cohen in Philadelphia.
Mr. Seid is a member of the Board of Directors of Berger Holdings, Ltd. Mr. Seid
also serves on the Boards of Directors of several privately-held companies.
Mr. Seid holds a Bachelors degree, Summa Cum Laude, from Rutgers University and
a J.D., with honors, from New York University School of Law.

GENERAL (RES.) ZVI ZAMIR has served as an External Director since November 2000.
Gen.(res.) Zamir is a director of The Israel Corporation, Pardess Industries and
Magor Holdings. Gen.(res.) Zamir is also a director of Oil Refineries Ltd. a
company owned jointly by the government of Israel and The Israel Corporation and
of several private companies and public bodies. Gen.(res.) Zamir holds a
Bachelors degree in Middle East History, Arabic and Geography from the Hebrew
University, Jerusalem.

MARY D. SAFRAI has served as an External Director since November 2000. From 1984
until 1991 and from 1996 until 2000, Ms. Safrai was an advisor in corporate
finance and an analyst of oil exploration and production companies and oil
service companies at Carl H. Phorzheimer & Co. in New York. Ms. Safrai is a
Chartered Financial Analyst, a member, and former officer of the National
Association of Petroleum Analysts, a member of the Oil Analysts of New York and
of the New York Society of Security Analysts where she chaired the energy
committee. Ms. Safrai holds a Master of Business Administration in finance and
economics from New York University, a Masters degree in English Literature from
Boston College, and a Bachelors degree from Syracuse University.

JONATHAN KELLER has served as our Corporate Secretary since January 1994. From
January 1994 until August 1997, Mr. Keller served as our Financial Controller.
Prior to January 1994, Mr. Keller was a self employed Certified Public
Accountant and in this capacity provided financial services to Paradigm.
Mr. Keller is a qualified Israeli Certified Public Accountant and is a Fellow of
the Institute of Chartered Accountants in England and Wales. Mr. Keller holds an
accounting degree from London Guildhall University.

AGREEMENTS FOR NOMINATION OF DIRECTORS

         Pursuant to our agreement with Shamrock Holdings Inc., or Shamrock,
dated March 12, 1999, we undertook that as long as Shamrock holds more than
three and a half percent (3.5%) of our issued and outstanding shares , we will
recommend to our shareholders prior to any general meeting of shareholders at
which directors may be proposed to be elected, to elect a representative of
Shamrock to our Board of Directors and will take all lawful actions to solicit
such election.

         Pursuant to our agreement with Jerusalem Venture Partners, or JVP,
dated March 12, 1999 , we undertook to use our best efforts to ensure that as
long as JVP holds more than three and a half percent (3.5%) of our issued and
outstanding shares , at least one of two members of our Board of Directors who
will be individuals who have expertise in our field of operations , and who are
not employed by us and who have no material economic connection to any of our
shareholders , will be nominated for election by agreement between us and JVP.
As long as JVP holds more than three and a half percent (3.5%) of our issued and
outstanding shares , we will recommend to our shareholders at the annual general
meeting of shareholders to elect Mr. Erel Margalit to our Board of Directors.
JVP no longer holds more than 3.5% of our outstanding ordinary shares. In
December 2000, Mr. Margalit, who served as a director since May 1995, resigned.

         Pursuant to our agreement with Compagnie Generale de Geophysique
("CGG") dated October 4, 2000, as long as CGG and its affiliates hold in the
aggregate more than 5% of our ordinary shares, we undertook to recommend to our
shareholders prior to any general meeting of shareholders, at which
directors may be proposed to be elected, to elect a representative of CGG (the
"CGG Representative") to our board of directors, and to take all lawful
actions to solicit such election provided that:

(i)      the CGG Representative is not directly involved in any business in
         competition with any of our material businesses (defined in the
         agreement as geoscience software and data processing and
         interpretation); and

(ii)     prior to the third anniversary date of the agreement, without the
         approval of our Board of Directors, CGG and its Affiliates have not
         acquired additional ordinary shares causing them to then hold in the
         aggregate in excess of 10.2% of our outstanding ordinary shares.

EXTERNAL AND INDEPENDENT DIRECTORS

         The Israeli Companies Law requires Israeli companies with shares that
have been offered to the public in or outside of Israel to appoint at least two
external directors. No person may be appointed as an external director if the
person or the person's relative, partner, employer or any entity under the
person's control as of the date of appointment as an external director, has or
had, within the two-year period preceding the date of appointment, any
affiliation with the company, any entity controlling the company, or any entity
controlled by or under common control with the company. The term affiliation
includes:

-        an employment relationship;
-        a business or professional relationship maintained on a regular basis;
-        control; and
-        service as an officer holder.

         No person may serve as an external director if the person's position or
other business create, or may create, a conflict of interest with the person's
responsibilities as an external director or may otherwise interfere with the
person's ability to serve as an external director. If, at the time external
directors are to be appointed, all current members of the Board of Directors are
of the same gender, then at least one external director shall be of the other
gender.

         External directors are appointed by a majority vote at a shareholders'
meeting, provided that either:

-        the majority of shares voted at the meeting, including at least
         one-third of the shares held by non-controlling shareholders, voted at
         the meeting, vote in favor of the appointment; or

-        the total number of shares held by non-controlling shareholders voting
         against the election of the director at the meeting does not exceed one
         percent of the aggregate voting rights in the company.

         The initial term of an external director is three years and may be
extended for an additional three years. External directors may be removed only
by the same percentage of shareholders as is required for their election, or by
a court, and then only if the external director ceases to meet the statutory
qualifications for his or her appointment or if he or she violates his or her
fiduciary duty to the company. Each committee of a company's board of directors
must include at least one external director. An external director is entitled to
compensation as provided in the regulations adopted under the Israeli Companies
Law and is otherwise prohibited from receiving any other compensation, directly
or indirectly, in connection with service provided as an external director. Our
shareholders have elected General(res.) Zvi Zamir and Ms. Mary Safrai as
external directors at our annual general meeting in November 2000.

         In addition, the Nasdaq National Market requires us to have at least
three independent directors on our board of directors and to establish an audit
committee, at least a majority of whose members are independent of management.
We have three directors who qualify as independent directors under the Nasdaq
National Market requirements.
B.    COMPENSATION OF DIRECTORS AND OFFICERS

         The following table sets forth all compensation we paid with respect to
all of our directors and executive officers as a group for the year ended
December 31, 2001.
Salaries, fees,       Pension, retirement
                                                           commissions and bonuses   and similar benefits
                                                           -----------------------   -------------------
All directors and executive officers
 as a group consisting of 11 persons ....................  $  817,000                $ 105,000
During the fiscal year ended December 31, 2001, the aggregate
remuneration paid to all persons who served in the capacity of executive officer
or director in 2001 was approximately $922,000. This does not include amounts
expended by us for automobiles made available to our officers, expenses
including business, travel, professional and business association dues and
expenses reimbursed to officers and other fringe benefits commonly reimbursed or
paid by companies in Israel.

        As of May 31, 2002, we had granted options under various 1994 Stock
Option Plans to certain directors and officers to purchase an aggregate of
139,439 ordinary shares at exercise prices ranging from $.59 to $7.00 per share
all of which are fully vested, and under various 1997 Stock Option Plans to
purchase an aggregate of 546,934 ordinary shares at exercise prices ranging from
$5.00 to $7.00 per share, of which 445,324 options are vested. In each case, the
option exercise price was equal to the fair market value of the ordinary shares
on the date of grant, as determined by the Board of Directors.

C.  BOARD PRACTICES

APPROVAL OF RELATED PARTY TRANSACTIONS UNDER ISRAELI LAW

FIDUCIARY DUTIES OF OFFICE HOLDERS

         Israeli Companies Law codifies the fiduciary duties that "office
holders", including directors and executive officers, owe to a company. An
"office holder" as defined in the Israeli Companies Law is a director, general
manager, chief business manager, deputy general manager, vice general manager,
chief business manager, executive vice president, vice president, other manager
directly subordinate to the managing director or any other person assuming the
responsibilities of any of the foregoing positions without regard to such
person's title. An office holder's fiduciary duties consist of a duty of care
and a duty of loyalty. The duty of care requires an office holder to act at a
level of care which a reasonable office holder in the same position would employ
under the same circumstances. This includes the duty to utilize reasonable means
to obtain :

         -    information regarding the appropriateness of a given action
              brought for his approval or performed by him by virtue of his
              position; and

         -    all other information of importance pertaining to the foregoing
              actions.

         The duty of loyalty includes avoiding any conflict of interest
between the office holder's position in the company and his personal affairs,
avoiding any competition with the company, avoiding exploiting any business
opportunity of the company in order to receive personal gain for the office
holder or others, and disclosing to the company any information or documents
relating to the company's affairs which the office holder has received due to
his position as an office holder. Each person listed as a director or executive
officer in the table under " -- E. Beneficial Ownership of Executive Officers
and Directors " below is an office holder.
Under Israeli Companies Law, all arrangements as to compensation of
office holders who are not directors require approval of our Board of Directors,
and the compensation of office holders who are directors must be approved by our
Audit Committee, Board of Directors and shareholders.

DISCLOSURE OF PERSONAL INTEREST OF AN OFFICE HOLDER

         The Israeli Companies Law requires that an office holder promptly
disclose any personal interest that he or she may have and all related material
information known to him or her, in connection with any existing or proposed
transaction by us. In addition, if the transaction is an extraordinary
transaction, that is, a transaction:

-        other than in the ordinary course of business,

-        other than on market terms, or

-        likely to have a material impact on the company's profitability, assets
         or liabilities.

The office holder must also disclose any personal interest held by:

-        the office holder's spouse, siblings, parents, grandparents,
         descendants, spouse's descendants,

-        the spouses of any of the foregoing, or

-        any corporation in which the office holder is a 5% or greater
         shareholder, director or general manager or in which he or she has the
         right to appoint at least one director or the general manager.

         Some transactions, actions and arrangements involving an office holder
(or a third party in which an office holder has an interest) must be approved by
the board of directors or as otherwise provided for in a company's articles of
association, as not being adverse to the company's interest. In some cases, such
a transaction must be approved by the audit committee and by the board of
directors itself (with further shareholder approval required in the case of
extraordinary transactions). An office holder who has a personal interest in a
matter, which is considered at a meeting of the board of directors or the audit
committee, may not be present during the board of directors or audit committee
discussions and may not vote on this matter.

DISCLOSURE OF PERSONAL INTERESTS OF A CONTROLLING SHAREHOLDER

         The Israeli Companies Law also provides that some transactions between
a public company and a controlling shareholder, or transactions in which a
controlling shareholder of the company has a personal interest but which are
between a public company and another entity, require the approval of the board
of directors and of the shareholders. Moreover, an extraordinary transaction
with a controlling shareholder or the terms of compensation of a controlling
shareholder must be approved by the audit committee, the board of directors and
shareholders.

         The shareholder approval for an extraordinary transaction must include
at least one-third of the shareholders who have no personal interest in the
transaction and are present at the meeting. The transaction can be approved by
shareholders without this one-third approval, if the total shareholdings of
those shareholders who have no personal interest and voted against the
transaction do not represent more than one percent of the voting rights in the
company. In addition, a private placement of securities that will increase the
relative holdings of a shareholder that holds 5% or more of the company's
outstanding share capital or that will cause any person to become, as a result
of the issuance, a holder of more than five percent of the company's outstanding
share capital, requires approval by the board of directors and the shareholders
of the company.
However, under the Companies Regulations (Relief From Related Party
Transactions), 5760-2000, promulgated under the Companies Law and amended in
January 2002, certain transactions between a company and its controlling
shareholder(s) do not require shareholder approval.

         In addition, pursuant to the recent amendment to these regulations,
directors' compensation and employment arrangements do not require the approval
of the shareholders if both the audit committee and the board of directors agree
that such arrangements are for the benefit of the company. If the director or
the office holder is a controlling shareholder of the company, then the
employment and compensation arrangements of such director or office holder do
not require the approval of the shareholders provided that certain criteria are
met.

         The above exemptions will not apply if one or more shareholders,
holding at least 1% of the issued and outstanding share capital of the company
or of the company's voting rights, objects to the grant of such relief, provided
that such objection is submitted to the company in writing not later than seven
(7) days from the date of the filing of a report regarding the adoption of such
resolution by the company pursuant to the requirements of the Israeli Securities
Law. If such objection is duly and timely submitted, then the compensation
arrangement of the directors will require shareholders' approval as detailed
above.

         The Israeli Companies Law provides that an acquisition of shares in a
public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% or greater shareholder of the
company. This rule does not apply if there is already another 25% shareholder of
the company. Similarly, the Israeli Companies Law provides that an acquisition
of shares in a public company must be made by means of a tender offer if as a
result of the acquisition the purchaser would become a 45% shareholder of the
company, unless there is a 50% shareholder of the company. Regulations under the
Israeli Companies Law provide that the Israeli Companies Law's tender offer
rules do not apply to a company whose shares are publicly traded outside of
Israel, if pursuant to the applicable foreign securities laws and stock exchange
rules there is a restriction on the acquisition of any level of control of the
company, or if the acquisition of any level of control of the company requires
the purchaser to make a tender offer to the public shareholders.

EXCULPATION OF OFFICE HOLDERS

         The Israeli Companies Law provides that an Israeli company cannot
exculpate an office holder from liability with respect to a breach of his duty
of loyalty, but may exculpate in advance an office holder from his liability to
the company, in whole or in part, with respect to a breach of his duty of care.
Our Articles of Association provide that, subject to any restrictions imposed by
corporate law, we may enter into a contract for the insurance of the liability
of any of our office holders with respect to:

         -    a breach of his duty of care to us or to another person;

         -    a breach of his duty of loyalty to us, provided that the office
              holder acted in good faith and had reasonable cause to assume that
              his act would not prejudice our interests; or

         -    a financial liability imposed upon him in favor of another person
              in respect of an act performed by him in his capacity as an office
              holder.

INDEMNIFICATION OF OFFICE HOLDERS

         We may, under our Articles of Association, indemnify an office holder
against:

         -    a financial liability imposed on him in favor of another person by
              any judgment, including a settlement or an arbitrator's award
              approved by a court in respect of an act performed in his capacity
              as an office holder; and

         -    reasonable litigation expenses, including attorneys' fees,
              expended by such office holder or charged to him by a court, in
              proceedings we institute against him or instituted on our behalf
              or by another
person, or in a criminal charge from which he was acquitted, all in
         respect of an act performed in his capacity as an office holder.

LIMITATIONS ON EXCULPATION AND INDEMNIFICATION

         These provisions are specifically limited in their scope by the Israeli
Companies Law, which provides that a company may not indemnify an office holder,
nor enter into an insurance contract which would provide coverage for any
monetary liability incurred as a result of any of the following:

         -    a breach by the office holder of his duty of loyalty unless the
              office holder acted in good faith and had a reasonable basis to
              believe that the act would not prejudice the company;

         -    a breach by the office holder of his duty of care if such breach
              was done intentionally or in disregard of the circumstances of the
              breach or its consequences;

         -    any act or omission done with the intent to derive an illegal
              personal benefit; or

         -    any fine levied against the office holder as a result of a
              criminal offense.

         Under the Israeli Companies Law, our shareholders may amend our
Articles of Association to include either of the following provisions:

         -    a provision authorizing us to grant in advance an undertaking to
              indemnify an office holder, provided that the undertaking is
              limited to types of events which the board of directors deems to
              be anticipated and limited to an amount determined by the board of
              directors to be reasonable under the circumstances; or

         -    a provision authorizing us to retroactively indemnify an office
              holder.

         In addition, pursuant to the Israeli Companies Law, indemnification of,
and procurement of insurance coverage for, our office holders must be approved
by our Audit Committee and our Board of Directors and, in specified
circumstances, by our shareholders.

         We have indemnified our office holders to the fullest extent permitted
under Israeli Law. In addition, we currently maintain directors and officers
liability insurance for the benefit of our office holders.

ELECTION OF DIRECTORS

         Pursuant to our Articles of Association, our Board of Directors shall
consist of a minimum of two and a maximum of eleven directors and all of our
directors (except for our Chief Executive Officer and external directors as
detailed below) are elected at our annual general meeting of shareholders by a
vote of the holders of a majority of the voting power represented and voting at
such meeting. All the members of our Board of Directors (except the external
directors as detailed below) may be re-elected upon completion of their term of
office. Our Articles of Association provide that, subject to the limitation on
the number of directors, the Board of Directors may appoint another person as a
director, whether to fill a vacancy or to add to their number; any directors so
appointed shall hold office until the next annual general meeting and may be
re-elected. Our Articles of Association also provide that our Chief Executive
Officer shall by virtue of his office always serve as a director and his term of
office shall expire automatically and immediately upon the effective date of the
termination of his employment as Chief Executive Officer. Of the eight directors
currently in office, five were elected by our shareholders at our annual general
meeting of shareholders in December 2001.
EMPLOYMENT AGREEMENTS

      We have not entered into employment or service agreements with directors
other than our Chairman and Chief Executive Officer, Mr. Eldad Weiss, details of
which are provided below.

      We have entered into an employment agreement with Mr. Eldad Weiss for an
initial term of three years commencing in March 1997 which was automatically
renewed after the expiration of the initial term and remains in force unless and
until either party terminates the agreement, by giving the other party twelve
months prior written notice, for any reason and without explanation. Pursuant to
his employment agreement, Mr. Weiss receives an annual base salary and may, at
the discretion of the Board of Directors, receive a bonus based on achieving
annual targets set by the Board of Directors. The employment agreement provides
that if after a change in ownership of Paradigm or a change in Mr. Weiss' title
or office or other specified changes, he may voluntarily terminate his
employment and receive twelve months of base salary and use of company vehicle.
Furthermore, Mr. Weiss has received options to purchase 368,440 of our ordinary
shares. Mr. Weiss's employment agreement also contains confidentiality and
non-competition provisions.

      We entered into an employment agreement with Mr. Hezi Marueli in April
1997 which is terminable by either party upon twelve months prior written
notice. Pursuant to his employment agreement, Mr. Marueli receives an annual
base salary and may, at the discretion of the Board of Directors, receive a
bonus based on achieving annual targets set by the Board of Directors.
Furthermore, Mr. Marueli has received options to purchase 125,000 of our
ordinary shares. Mr. Marueli's employment agreement also contains
confidentiality and non-competition provisions.

      We entered into an employment agreement with Mr. Brian Berman in April
1998 which is terminable by either party upon nine months prior written notice.
Pursuant to his employment agreement, Mr. Berman receives an annual base salary
and may, at the discretion of the Board of Directors, receive a bonus based on
achieving targets set by the Board of Directors. Furthermore, Mr. Berman has
received options to purchase 70,000 of our ordinary shares. Mr. Berman's
employment agreement also contains confidentiality and non-competition
provisions.

      If the employment of all of our executive officers were to terminate under
circumstances requiring the provision of severance benefits (during a "notice
period" or otherwise), we would be obligated to pay them an aggregate of
approximately $1.8 million (of which approximately $0.4 million has been paid by
Paradigm into segregated accounts for the benefit of such executive officers).

AUDIT COMMITTEE

      The Israeli Companies Law provides that public companies must appoint an
audit committee. The responsibilities of the audit committee include identifying
irregularities in the management of a company's business and approving
related-party transactions as required by law. Under the Israeli Companies Law,
an audit committee must consist of at least three members, and include all of
the company's external directors. However, the chairman of the board of
directors, any director employed by the company or providing services to the
company on a regular basis, any controlling shareholder and any relative of a
controlling shareholder may not be a member of the audit committee. An audit
committee may not approve an action or a transaction with a controlling
shareholder, or with an office holder, unless at the time of approval two
external directors are serving as members of the audit committee and at least
one of the external directors was present at the meeting in which an approval
was granted. Our audit committee is currently composed of Messrs. Barr, Said,
Gen.(res.) Zamir and Ms. Safrai. It is currently contemplated that the audit
committee meet at least four times each year.

INTERNAL AUDIT

      The Israeli Companies Law requires the board of directors of a public
company to appoint an internal auditor nominated by the audit committee. A
person who does not satisfy the Israeli Companies Law's independence
requirements may not be appointed as an internal auditor. The role of the
internal
auditor is to examine, among other things, the compliance of the company's
conduct with applicable law and orderly business practice. Our internal auditor
complies with the requirements of the Israeli Companies Law.

     D.       EMPLOYEES.
MAY 31,       DECEMBER 31,      DECEMBER 31,
                                     2002           2001              1999
Research and Development           150             157             137
     Sales and Marketing              83              96             105
      Customer Support                97              96              76
          Services                    86              97              69
Management and Administration         77              78              67
                                     -------------------------------------------
            TOTAL                    493             524             454
                                     -------------------------------------------

   North and South America           161             172             158
 Europe, Africa, Middle East         250             273             219
     Far East and China               82              79              77
                                     -------------------------------------------
            TOTAL                    493             524             454
                                     -------------------------------------------
We have to comply with various labor and immigration laws throughout
the world, including laws and regulations in Argentina, Australia, Brazil,
Canada, China, France, Indonesia, Israel, Kazakhstan, Malaysia, Russia, the
United Kingdom, the United States and Venezuela. To date, compliance with such
laws has not been a material burden for us. If, however, the number of our
employees increases materially over time, our compliance with such regulations
could become more burdensome.

         Our principal operating subsidiaries are not party to any collective
bargaining agreements. However, Paradigm is subject to certain labor-related
statutes and to certain provisions of collective bargaining agreements between
the Histadrut (General Federation of Labor in Israel) and the Coordinating
Bureau of Economic Organizations (including the Industrialists' Association),
which are applicable to our Israeli employees by virtue of expansion orders of
the Israeli Ministry of Labor and Welfare. A significant provision applicable to
all employees in Israel under collective bargaining agreements and expansion
orders is the automatic adjustment of wages in relation to increases in the
consumer price index, or CPI. The amount and frequency of these adjustments are
modified from time to time. We consider our relationship with our employees to
be good and have never experienced a labor dispute, strike or work stoppage. All
employees in France are represented by unions.
E.       SHARE OWNERSHIP

     BENEFICIAL OWNERSHIP OF EXECUTIVE OFFICERS AND DIRECTORS

      As of May 31, 2002, 14,891,902 ordinary shares of Paradigm were issued and
outstanding.

      The following table sets forth, as of May 31, 2002, certain information
with respect to the beneficial ownership of our ordinary shares, by all
directors and officers. Except as otherwise specified the named beneficial owner
has the sole voting and investment power over the shares listed.
NAME                                    NO. OF SHARES(1)      PERCENTAGE      OPTIONS TO PURCHASE
                                                                                    ORDINARY SHARES(2)
Eldad Weiss                                 577,722              3.90%              368,440         (3)
     Yehezkel Marueli                            124,370                *                125,000         (4)
     Brian W. Berman                             47,486                 *                 70,000         (5)
     Elie Barr                                   30,000                 *                 30,000         (6)
     Jacob Dunietz                               68,900                 *                 30,000         (6)
     Michael Geiger                                 -                   *                   -
     Thierry LeRoux                                 -                   *                   -
     Jay Seid                                       -                   *                   -
     General (Res.) Zvi Zamir                    12,000                 *                 12,000         (6)
     Mary Safrai                                 12,000                 *                 12,000         (6)
     Jonathan Keller                             43,933                 *                 38,933         (7)
     All  directors and officers as a            916,411              6.2%               686,373
     group (11 persons)
* The percentage of shares beneficially owned does not exceed 1% of the
  outstanding Paradigm ordinary shares.

(1) Includes options exercisable within 60 days of May 31, 2002.
(2) Includes all options whether vested or unvested.
(3) The exercise price of the options ranges between $4.00 and $7.00 per share
    and the options expire between 2004-2006.
(4) The exercise price of the options ranges between $3.66 and $7.00 per share
    and the options expire between 2005-2006.
(5) The exercise price of the options ranges between $3.66 and $7.00 per share
    and the options expire between 2006-2008.
(6) The exercise price of the options is $4.00 per share and the options expire
    in 2003.
(7) The exercise price of the options ranges between $0.59 and $7.00 per share
    and the options expire between 2004-2006.
Stock Option Plans

         Our 1994 and 1997 Stock Option Plans (the "Plans") provide for the
grant of stock options to our directors, employees (including officers) and
consultants. The purpose of the Plans is to attract and retain qualified
personnel and to motivate such persons by providing them with an equity interest
in Paradigm. Of the 2,300,000 ordinary shares originally available for issuance
under the Plans, options to purchase 1,917,028 ordinary shares have been granted
as of May 31, 2002, of which 1,821,680 are outstanding.

         The Plans are administered by our Board of Directors and its
Compensation Committee which have broad discretion, subject to certain
limitations, to determine the persons entitled to receive options, the terms and
conditions on which the options are granted and the number of shares subject to
each grant. Generally, the option exercise price per ordinary share shall not be
less than the fair market value of each option share at the date of the option
grant, unless otherwise determined by the Board or the Compensation Committee.
The option exercise price is payable in cash, by check or by any other form of
payment that is satisfactory to the Board of Directors or Compensation
Committee.

         Options granted under the Plans are not transferable by the option
holder, other than by will or pursuant to the laws of descent and distribution.
The options expire immediately upon the termination of the option holder's
employment, unless the Board of Directors or the Compensation Committee
authorizes an extension of the exercise term beyond the holder's employees
termination date. In the event of a termination of employment without cause, any
unexpired vested options may be exercised up to 90 days following the date of
termination, but only with respect to the number of shares purchasable at the
time of the option holder's termination of employment. In the event of the
termination of employment as a result of death or disability of the option
holder, any unexpired vested options may be exercisable up to six months from
the date of such termination but only with respect to the number of shares
purchasable at the time of such termination. In the event of the option holder's
retirement, any outstanding options shall, at the discretion of the Board of
Directors or Compensation Committee, accelerate and become immediately
exercisable as of the later of the date of retirement or one year following the
date of the grant.

THE 1994 STOCK OPTION PLANS

         The 1994 Stock Option Plans (the "1994 Plans") consist of three
separate plans. (i) the stock option plan for key employees (the "Key Employee
Plan"), (ii) the May 1994 Stock Option Plan (the "May 1994 Plan"); and the 1994
General Stock Option Plan (the "1994 General Plan"). Options granted under the
May 1994 Plan and 1994 General Plan, if unexercised, expire ten years from the
date of grant.

         Under the Key Employee Plan, we granted options to six of our key
employees to purchase a total of 63,336 Ordinary Shares, exercisable at $.59 per
ordinary share, with the purchase price of the ordinary shares payable in full
against issuance of the ordinary shares. The options issued pursuant to the Key
Employee Plan are vested and became exercisable immediately upon the grant of
such options. As of May 31, 2002, options to purchase a total of 63,336 ordinary
shares were outstanding under the Key Employee Plan.

         Under the May 1994 Plan, we granted options to purchase a total of
226,184 ordinary shares. The option exercise price for 114,678 ordinary shares
is $2.50 per ordinary share, and for 111,506 ordinary shares is $4.00 per
ordinary share. As at May 31, 2002, 200,696 options under the May 1994 Plan were
outstanding. All outstanding options are vested and are currently exercisable.

         Under the 1994 General Plan, we granted options to purchase a total of
60,176 ordinary shares. The option exercise price is $7.00 per ordinary share.
As at May 31, 2002, 48,352 options were outstanding. All outstanding options are
vested and are currently exercisable.

THE 1997 STOCK OPTION PLANS

         Under the 1997 Stock Option Plan for Qualifying Israel Employees, the
1997 Executive Stock Option Plan and the 1997 Stock Option Plan for U.S.
Employees (collectively, the "1997 Plans"), we have
reserved for issuance an aggregate of 1,950,000 ordinary shares. The 1997 Plans
will terminate on January 4, 2005. The majority of options granted under the
1997 Plans vest as to 25% of the options granted after a period of employment
with us or our subsidiaries of 12 consecutive months from the date of the grant.
The remaining 75% of the options granted vest in 12 equal quarterly installments
commencing from the end of the first 12 month vesting period. Options expire
eight years from the date of grant. The shares underlying any options which
expire or are cancelled prior to exercise are subject to future options grants
under the 1997 Plans.

         As of May 31, 2002, options to purchase a total of 1,528,458 ordinary
shares under the 1997 Plans were outstanding at exercise prices ranging from
$3.66 to $7.00 per share. Of these outstanding options, 1,230,371 are vested and
are currently exercisable.

         See Item 1. - "Recent Developments" for a description of the treatment
of Paradigm options in connection with the proposed merger.
ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     A. MAJOR SHAREHOLDERS

         As a result of the concentration of ownership of our ordinary shares,
some shareholders may be able to exercise control over matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions. This control may have the effect of delaying
or preventing a change in control of Paradigm.

         The following table sets forth certain information with respect to the
beneficial ownership of our ordinary shares as of May 31, 2002 by each person
who is known by us to own beneficially more than 5% of our outstanding ordinary
shares. Unless otherwise indicated, the entities identified in this table have
sole voting and investment power with respect to all ordinary shares shown as
beneficially owned by them.
Ordinary Shares,
Name and Address of                                                      Beneficially Owned
                                                                         ------------------
Beneficial Owner                                                  Number(1)                   Percent
----------------                                                  ---------                   -------
Shamrock Holdings Inc.                                          1,649,943(2)                     11.1%
4444 Lakeside Drive
Burbank, California 91510-7774

Mashov Gruss Investments  Ltd.                                  1,569,201(3)                     10.5%
3, Hagalim Boulevard, Herzlia, Israel 46766

Compagnie Generale de Geophysique                               1,500,000(4)                     10.1%
Tour Montparnasse,
33 Ave du Maine, BP 191 75755
Paris, Cedex 15
France

Bachow Investment Partners III L.P.                             1,399,000                         9.4%
3 Bala Plaza East, 5th floor
Bala Cynwyd, PA 19004

Harbourvest Partners,                                             973,300                         6.5%
1, Financial Center(flr.44) Boston MA

Systeia Capital Management                                        912,500                         6.1%
43-47, Avenue de Grand Armee  75116 Paris France
(1)  Includes options and warrants exercisable within 60 days of May 31, 2002.

(2)  As part of a private placement in May 1999, Shamrock Holdings Inc. acquired
     877,193 ordinary shares. Shamrock Holdings of California Inc., acquired a
     further 772,750 ordinary shares on the
open market. Shamrock Holdings Inc. is a controlling person of Shamrock
     Holdings of California. Shamrock Holdings Inc. and Shamrock Holdings of
     California may be deemed to constitute a group within the meaning of Sec.
     13(d)(3) of the Securities Exchange Act of 1934 as amended, with respect to
     the ordinary shares each owns. Accordingly, Shamrock Holdings Inc. may be
     deemed to beneficially own 1,649,943 ordinary shares.

(3)  Includes warrants to acquire 71,435 Paradigm ordinary shares, which will be
     terminated at the closing of the merger pursuant to a voting agreement
     between Mastron and Paradigm BV, if consummated.

(4)  In October 2000, Compagnie Generale de Geophysique received 1,500,000
     ordinary shares as partial consideration for the acquisition of the
     Flagship business.

         As of May 31, 2002, 14,891,902 of our ordinary shares were outstanding,
all of which carry equal voting rights. At such date, there were 10 record
holders of our ordinary shares in the United States who collectively held 73.0%
of our outstanding ordinary shares.

SHAREHOLDERS AGREEMENTS

         For a description of the agreements between the between us and certain
of our shareholders regarding the nomination of directors, see Item 6. -
"Agreement for Nomination of Directors."

REGISTRATION RIGHTS

         Shareholders holding an aggregate of 7,412,370 ordinary shares and
holders of warrants exercisable into an aggregate of up to 362,862 ordinary
shares (collectively, "Registrable Securities"), have certain demand and
incidental registration rights with respect to those shares. The holders of up
to 5,757,688 of the Registrable Securities have the right to demand that
Paradigm effect an aggregate of three registrations, and two demand
registrations on Form F-3, but not more than one during any six month period.
Two groups of shareholders holding an aggregate of up to 877,193 and up to
1,140,351 ordinary shares, respectively, each have two demand registrations or
one registration on Form F-3. Each demand and request on Form F-3 must relate to
the registration of shares in a minimum amount of $3.0 million. Shareholders
holding 1,500,000 ordinary shares and warrants to purchase 250,000 ordinary
shares only have incidental registration rights. Holders of a convertible
debenture under the Convertible Loan Agreement have demand and incidental
registration rights with respect to the shares issuable upon conversion of the
debentures. See Item 5.B. - "Debt Financing" for a full description of the
convertible debenture.

         The demand registration rights are subject to an underwriter's right of
cutback, provided that all shares of shareholders holding other than Registrable
Securities are first excluded from such registration. We have undertaken not to
cause any other registration of securities for our own account to become
effective within 120 days after the effective date of any such demand
registration. Form F-3 registration may be delayed for up to 120 days (and in
some cases 180 days) in the event that we furnish the holders of Registrable
Securities a certificate signed by our President or Chief Executive officer
stating that, in the good faith judgment of the Board of Directors, it would be
seriously detrimental to us or our shareholders for such F-3 registration to be
effected at that time, provided that we may not utilize this right more than
once in any 12 month period. The incidental registration rights are unlimited,
subject to an underwriter's right of cutback, provided that all Registrable
Securities must be included in the registration prior to the shares of any other
holder (with the exception of shares issued by us to the public). All expenses
incurred in connection with such registrations will be borne by us , except that
participating shareholders will be obligated to pay their proportionate share of
the fees, discounts or commissions payable to any underwriter.

VOTING AGREEMENTS

         In connection with the proposed merger transaction, certain of our
shareholders, including our Chairman and Chief Executive Officer, who together
beneficially own
approximately 42% of our outstanding ordinary shares, have entered into voting
agreements with Paradigm B.V. Pursuant to those agreements, those shareholders
voted their ordinary shares in favor of the merger at the June 13, 2002 Special
Meeting. The voting agreements impose certain restrictions on the transfer or
disposition of our ordinary shares by these shareholders and prohibit these
shareholders from taking certain actions, including actions that might
reasonably be expected to result in a takeover proposal or that would challenge
the proposed merger transaction. These voting agreements expire at the earliest
to occur of the termination of the Paradigm B.V. merger, the effectiveness of
our merger with Paradigm B.V., September 30, 2002 and certain other events
specified in the voting agreements. See Part I "Recent Developments" for more
information regarding the proposed merger transaction.

B.       RELATED PARTY TRANSACTIONS

LOANS TO OFFICERS

         We entered into two loan agreements with Mr. Yehezkel Marueli, our
President and Chief Operating Officer, one in March 1999 and the second in July
1999. Under the terms of the agreements, we loaned Mr. Marueli an aggregate
amount of $110,000, linked to the Israeli Consumer Price Index, with interest at
the rate of 2% per annum until May 31, 2000 and 4% per annum from June 1, 2000.
These loans were originally repayable on December 31, 2000, but repayment has
been extended to December 31, 2002.

ITEM 8.  FINANCIAL INFORMATION

 A.      CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

         See Item 18.

         LEGAL PROCEEDINGS

         On December 11, 1997, we filed suit for a declaratory judgment in the
District Court of Dallas County, Texas to determine whether we have any
obligation to Geophysical Micro Computer Application (International) Ltd.("GMA")
under a letter of intent (the "letter of intent"). Under the terms of the letter
of intent, we and GMA contemplated a transaction in which GMA would purchase
certain computer software programs and related products ("SeisX") from us,
provided that we acquired the SeisX assets from a third party. On May 5, 1998,
GMA filed a counterclaim for breach of contract, claiming that the letter of
intent required us to sell SeisX to GMA. GMA sought compensatory, injunctive and
declaratory relief. On September 11, 1998, the trial court granted summary
judgment in our favor and declared that we had no obligation to sell the SeisX
assets or related products to GMA, and that GMA takes nothing on its
counterclaim. On December 7, 1998, GMA filed an appeal against this summary
judgment. Oral arguments were presented before the Court of Appeals in April
2001. On July 30, 2001, the Dallas Court of Appeals reversed and remanded for
further proceedings the trial court decision of September 1998. The Court of
Appeals concluded that factual issues exist which preclude summary judgment in
our favor on our claim and on GMA's counterclaim for breach of contract. On May
9, 2002, the Texas Supreme Court denied our appeals on the Texas appellate court
decision. The case will be returned to the Dallas County District Court for
further proceedings. We believe that the outcome of the above claim will not
have a material adverse effect on our business or on our consolidated financial
condition.

         On December 10 1999, our Canadian subsidiary ("Paradigm Canada") filed
a claim for breach of contract, breach of obligation of confidence, breach of
copyright and trademark infringement, and passing off against Zokero
Incorporated, Edward Van Wieren and Shane Stogrin (the "defendants"). In
addition, Paradigm Canada applied for and obtained an Anton Pillar Order on
seizing certain property from the defendants and preserving it pending a trial
of the action. An expert is reviewing the seized material. The
defendants, Van Wieren and Stogrin, were former employees of Paradigm Canada.
Paradigm Canada maintains that Van Wieren and Stogrin have, through their
company, Zokero, utilized for their own commercial gain, confidential
information and software and source code for software, all of which was
developed by Paradigm Canada and is it's property. Paradigm Canada is seeking
unspecified damages and loss of profits, as well as injunctive relief and
declaratory relief, with respect to the rights to the information and software
in question. The defendants filed their statement of defense on April 15, 2002
and we are in the process of preparing our affidavits of records and preparing
for discovery. We believe that the outcome of the above claim will not have a
material adverse effect on our business or on our consolidated financial
statements.

         On April 24, 2002, Leumi & Co. Investment House filed a claim in the
Tel Aviv Magistrates court against us and against Eldad Weiss, our Chairman and
Chief Executive Officer, claiming a finder's fee in connection with the FIMI
Convertible Loan transaction (see Item 5.B. - "Liquidity, Capital Resources and
Financing") in a total amount of approximately $250,000. We and Mr. Weiss have
not yet filed a Statement of Defense. This legal proceeding is in a preliminary
stage but we and our legal counsel do not expect it to have a material adverse
effect on our financial condition.

         On April 9, 2002, Dr. Cesar A. Egas-Teran filed a lawsuit against Mr.
Cesar Yepes, our registered agent in Ecuador, and Mr. Alberto Jaramillo-De
Howitt, our former registered agent in Ecuador, both individually and as
representatives in Ecuador of our subsidiaries, Paradigm Geophysical de
Venezuela S.A and Paradigm Geophysical B.V. and against these two companies, in
the Ecuador civil courts, requesting that the judge order payment to Dr.
Egas-Teran of $727,000 in commissions which he claims are allegedly owing to him
in connection with contracts awarded to us in Ecuador, plus interest and legal
expenses. In addition, the plaintiff asked that the judge order that this amount
be retained by Petroproduccion, our customer in Ecuador, from monies owed to us.
We believe that there is no basis for commissions between either Paradigm
Geophysical de Venezuela S.A or Paradigm Geophysical B.V and the plaintiff.
On April 12, 2002, the judge confirmed retention of the amount by
Petroproduccion and ordered the defendants to be subpoenaed for trial. Mr. Yepes
has informed us that he only became aware of this lawsuit on June 12, 2002 and,
therefore, he did not inform us of this action, including the order requiring
retention of funds by Petroproduccion, until June 12, 2002. We are not in
contact with Mr. Jaramillo-De Howitt. We are currently examining the claims
against us and have not yet filed a Statement of Defense. At this time, we and
our legal counsel cannot predict the outcome of this lawsuit.

         Other than as set forth above, we are not a party to any other material
legal proceedings.

DIVIDEND POLICY

         To date we have not declared or paid dividends to our shareholders . We
retain our earnings for use in the expansion and operation of the business. The
payment of any future dividends will be based on conditions then existing,
including our earnings, financial condition and capital requirements as well as
other conditions we deem relevant.

         The terms of our existing debt agreements and any additional debt that
may be incurred by us may effectively limit our ability to pay dividends.
ITEM 9.  THE OFFER AND LISTING

         A.       OFFER AND LISTING DETAILS

         Our ordinary shares have been quoted on the Nasdaq National Market
under the symbol "PGEO" since June 15, 1998. Since February 19, 2001, we have
also been quoted on the Tel Aviv Stock Exchange, under the symbol "PGEO", under
the dual-listing legislation enabling companies that are quoted on U.S. markets
to dual-list on the Tel Aviv Stock Exchange with no additional regulatory
requirements.

         The following table sets forth, for the periods indicated, the high and
low sale prices of our ordinary shares as reported on the Nasdaq National
Market.
PERIOD                      HIGH              LOW
                        ------                      ----              ---
FOR 1998                                  $7.375           $4.190
         FOR 1999                                  $7.250           $4.250
         FOR 2000                                 $10.063           $4.250
         FOR 2001                                  $6.730           $3.120

         2000

         First quarter                             $10.06            $4.50
         Second quarter                             $7.81            $5.20
         Third quarter                              $6.88            $5.56
         Fourth quarter                             $7.00            $4.25

         2001

         First quarter                              $6.00            $4.25
         Second quarter                             $6.73            $4.97
         Third quarter                              $6.70            $3.70
         Fourth quarter                             $4.59            $3.12

         December 2001                              $4.43            $3.65

         2002

         First quarter                              $4.06            $2.97
         Second quarter (through May 31)            $5.03            $3.30
         January                                    $4.06            $3.35
         February                                   $3.65            $2.97
         March                                      $3.92            $3.16
         April                                      $4.11            $3.30
         May                                        $5.03            $3.81
B.       PLAN OF DISTRIBUTION

         Not applicable.

C.       MARKETS

         Our ordinary shares have been quoted on the Nasdaq National Market
under the symbol "PGEO" since June 15, 1998. Since February 19, 2001 our
ordinary shares have also been quoted on the Tel Aviv Stock Exchange, under the
symbol "PGEO", under the dual-listing legislation.

D.       SELLING SHAREHOLDERS

         Not applicable.

E.       DILUTION

         Not applicable.

F.       EXPENSES OF THE ISSUE

         Not applicable.

ITEM 10. ADDITIONAL INFORMATION

     A.   SHARE CAPITAL

          Not applicable.

     B.   MEMORANDUM AND ARTICLES OF ASSOCIATION

          1.   OBJECTS AND PURPOSES IN OUR  ARTICLES OF ASSOCIATION

         We were first registered under Israeli law on July 27, 1987 as a
private company, and on November 11, 1997, became a public company. Our
registration number with the Israeli Registrar of Companies is 52-004351-4. Our
objects and purposes are specified in Section 2 of our Memorandum of
Association.

         2.    PROVISIONS REGARDING DIRECTORS

         Pursuant to Article 54(b) of our Articles of Association, a transaction
entered into by us in which one of our directors has a personal interest,
directly or indirectly, will be valid in respect of Paradigm and the given
director only if approved by our Board of Directors and, if such transactions
are "irregular transactions" as defined in the Israeli Companies Law, only if
approved in accordance with the requirements of the Israeli Companies Law.

         An "irregular transaction" pursuant to the Israeli Companies Law is
defined as a transaction which is not in the ordinary course of business, a
transaction which is not under ordinary market conditions or any transaction
which might substantially affect the profitability of a company, its assets and
liabilities.

         The Israeli Companies Law provides that a director who has personal
interest in a given transaction with the a company, brought to the approval of
that company's Board of Directors, shall not be present and vote at that meeting
unless a majority of the directors have a personal interest in the transaction.
Article 55 of our Articles of Association, provides that a director who has a
personal interest in a matter
which is brought for discussion before the Board of Directors may participate in
said discussion, provided that he shall neither vote with respect to nor attend
discussions concerning the approval of the activities or the arrangements. If
said director did vote or attend as aforesaid, the approval given to the
aforesaid activity or arrangements shall be invalid.

         Pursuant to Article 72 of our Articles of Association, at any meeting
of the Board of Directors at which a quorum is present, the board will have the
authority to exercise all or part of the authorities, power of attorney and
discretion invested at such time in the directors or regularly exercised by
them. In respect of a legal quorum at our Board meetings the Israeli Companies
Law provides that, unless determined otherwise by us , a legal quorum at the
Board meetings shall consist of the majority of the Board members. We have not
decided otherwise and therefore, the legal quorum at our Board meetings will
consist of the majority of the Board members.

         Any transaction concerning compensation to a director requires the
approval of both our Board of Directors and the shareholders .

         The Board of Directors may from time to time, in its discretion, cause
us to borrow or secure the payment of any sum or sums of money for the purpose
of Paradigm , and may secure or provide for the repayment of such sum or sums in
such manner, at such times and upon such terms and conditions in all respects as
it sees fit and in particular, by the issuance of bonds, perpetual or redeemable
debentures, debenture stock, or any mortgages, charges or other securities on
the undertaking, or the whole or any part of the property of Paradigm, both
present and future, including units uncalled or called but unpaid capital for
the time being.

         There is no mandatory retirement age for the directors under our
Articles of Association or the Israeli Companies Law.

         There is no requirement concerning the number of shares one individual
must hold in order to qualify him or her as a director under our Articles of
Association or the Israeli Companies Law.

         3. DIVIDENDS AND LIQUIDATION RIGHTS

         Subject to any preferential, deferred, qualified or other rights,
privileges or conditions attached to any special class of shares with regard to
dividends, our profits available for dividend and resolved to be distributed
shall be applied in payment of dividends upon our shares in proportion to the
amount paid up or credited as paid up per the nominal value thereon
respectively. Unless not otherwise specified in the conditions of issuance of
the shares, all dividends with respect to shares which were not fully paid up
within a certain period, for which dividends were paid, shall be paid
proportionally to the amounts paid or credited as paid on the nominal value of
the shares during any portion of the above-mentioned period.

         The Board of Directors may declare a dividend to be paid to the
shareholders according to their rights and interests in the profits, and may fix
the record date for eligibility and the time for payment.

         The directors may from time to time pay to our shareholders on account
of the next forthcoming dividend such interim dividends as, in their judgment,
our position justifies.

         A transfer of shares shall not pass the right to any dividend declared
thereon after such transfer and before the registration of the transfer.

         The Board of Directors may determine that, a dividend may be paid,
wholly or partly, by the distribution of our specific assets or by distribution
of paid-up shares, debentures or debenture stock or any other securities of
Paradigm or of any other companies or in any one or more of such ways in the
manner and to the extent permitted by the Israeli Companies Law.
4.  VOTES OF SHAREHOLDERS

         Except as otherwise provided in our Articles of Association, any
resolution at a General Meeting shall be deemed adopted if approved by the
holders of a majority of our voting rights represented at the meeting in person
or by proxy and voting thereon. In the case of an equality of votes, either on a
show of hands or a poll, the chairman of the meeting shall not be entitled to a
further or casting vote.

         Subject to any rights or restrictions for the time being attached to
any class or classes of shares, every shareholder shall have one vote for each
share of which he is the holder. Votes may be given either personally or by
proxy. A proxy need not be a shareholder of Paradigm.

         5.  MODIFICATION OF CLASS RIGHTS

         If, at any time, the share capital is divided into different classes of
shares, the rights attached to any class (unless otherwise provided by the terms
of issuance of the shares of that class) may be varied with the consent in
writing of the holders of all the issued shares of that class, or with the
sanction of a majority vote at a meeting of the shareholders passed at a
separate meeting of the holders of the shares of the class. The provisions of
the Articles of Association relating to General Meetings shall apply, mutatis
mutandis, to every such separate General Meeting. Any holder of shares of the
class present in person or by proxy may demand a secret poll.

         Unless otherwise provided by the conditions of issuance, the
enlargement of an existing class of shares, or the issuance of additional shares
thereof, shall not be deemed to modify or abrogate the rights attached to the
previously issued shares of such class or of any other class.

         6   GENERAL MEETINGS

         General Meetings shall be held at least once in every calendar year at
such time, not being more than fifteen months after the holding of the last
preceding General Meeting, and at such time and place as may be determined by
the Board of Directors. Such Annual General Meetings shall be called "Annual
Meetings," and all other General Meetings of the shareholders shall be called
"Special Meetings".

         Only shareholders of record as reflected on our share register at the
close of business on the date fixed by the board of directors as the record date
determining the then shareholders who will be entitled to vote, shall be
entitled to notice of, and to vote, in person or by proxy, at a General Meeting
and any postponement or adjournment thereof.

         7.  PROCEEDINGS AT GENERAL MEETINGS

         No business shall be transacted at any General Meeting unless a quorum
is present when the meeting proceeds to business. The quorum at any meeting
shall be two shareholders present in person or by proxy, holding or representing
at least one-quarter of our total voting rights . A company being a shareholder
shall be deemed to be personally present for the purposes of our Articles of
Association if represented by its representative duly authorized in accordance
with Article 42 of our Articles of Association.

         If, within half an hour from the time appointed for the holding of a
General Meeting, a quorum is not present, the meeting shall stand adjourned to
the same day in the next week at the same time and place, or any time and hour
as the Board of Directors shall designate and state in a notice to the
shareholders entitled to vote at the original meeting, and if, at such adjourned
meeting, a quorum is not present within half an hour from the time appointed for
holding the adjourned meeting any two shareholders present in person or by proxy
shall constitute a quorum. Notwithstanding the aforesaid, if a General Meeting
was convened at the demand of shareholders as permitted by Section 63(b) of the
Israeli Companies Law, then a quorum at such adjourned meeting shall be present
only if one or more shareholders are present who held
in the aggregate at least 5% of our issued share capital and at least 1% of the
our voting rights or one or more shareholders who hold in the aggregate at least
5% of the our voting rights.

         8.  RESTRICTION ON NON-RESIDENTS

         Our Memorandum and Articles of Association do not restrict in any way
the ownership of ordinary shares by nonresidents, except with respect to
subjects of countries which are in a state of war with Israel, and neither the
Memorandum and Articles of Association nor Israeli law restricts the voting
rights of nonresidents of the State of Israel.

         9. RESTRICTIONS ON MERGERS; TAKEOVERS AND BUSINESS COMBINATIONS

         Pursuant to our Articles of Association, a merger requires approval by
the Board and by our shareholders. In accordance with the provisions of the
Israeli Companies Law and our Articles of Association, the Board may delay or
impede a merger in the event that, in its opinion, there is a reasonable
suspicion that as a result of the merger the surviving company will not be able
to meet Paradigm's obligations to its creditors.

         In addition, our current Articles of Association provide that we may
not engage in any business combination with an interested shareholder (in
general, the Articles of Association defines an interested shareholder as any
entity or person beneficially owning 15% or more of our outstanding voting
shares and any entity or person affiliated with, controlling or controlled by
such entity or person) for a period of three years following the date that such
shareholder became an interested shareholder, unless:

-        prior to such date, the Board of Directors approved either the business
         combination or the transaction that resulted in the shareholder
         becoming an interested shareholder; or

-        upon consummation of the transaction that resulted in the shareholder
         becoming an interested shareholder, the interested shareholder owned at
         least 75% of our outstanding voting shares at the time the transaction
         commenced.

         A business combination includes:

-        any merger or consolidation involving Paradigm and the interested
         shareholder;

-        any sale, transfer, pledge or other disposition of 10% or more of our
         assets in a transaction involving the interested shareholder;

-        subject to certain exceptions, any transaction that results in the
         issuance or transfer by us of any of our shares to the interested
         shareholder;

-        subject to certain minor exceptions, any transaction involving us (or
         any of our direct or indirect majority owned subsidiaries ) which has
         the effect of increasing the proportionate shareholding or convertible
         securities of Paradigm (or any such subsidiary) which is owned by the
         interested shareholder; or

-        the receipt by the interested shareholder of the benefit of any loans,
         advances, guarantees, pledges or other financial benefits provided by
         us.

         We have 2,000,000 special preferred shares ("Special Preferred
Shares")authorized. The Board of Directors has the authority to issue the
Special Preferred Shares in one or more series and to fix the rights,
preferences, privileges and restrictions of such shares, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption
(including price), liquidation preferences and the number of shares constituting
any series, without further vote or action by the shareholders. The issuance of
Special Preferred Shares may have the effect of delaying, deferring or
preventing a change in control of Paradigm without further action by the
shareholders. For example, the Board of Directors could issue Special Preferred
Shares with voting and conversion rights that may adversely affect the voting
power of the holders of ordinary shares, including the loss of voting control to
others. We have not issued, and currently have no plans to issue, any Special
Preferred Shares.

         Although Israeli law does not prohibit the issuance of preferred shares
with rights which were not approved by the shareholders at the time such
preferred shares were authorized, this matter has not been determined by Israeli
courts, and there is substantial doubt as to the validity of such an issuance.
Consequently, to the extent that the rights, preferences and privileges attached
to the Special Preferred Shares, if and when issued, derogate from the rights of
the our ordinary shares , there can be no assurance that, if such issuance was
challenged in legal proceedings, the legality of such issuance would be upheld
by an Israeli court.

         10.  APPROVAL OF SPECIAL TRANSACTIONS UNDER ISRAELI LAW

         Under the Israeli Companies Law, only the approval of the Board of
Directors is required for arrangements with respect to compensation of a
company's chief executive officer. Arrangements regarding the compensation of
directors also require audit committee and shareholder approval.

         The Israeli Companies Law requires that an officer or a controlling
shareholder in a public company, including an Israeli company that is publicly
traded outside of Israel, promptly disclose to the audit committee, Board of
Directors and, in certain circumstances, the shareholders, any personal interest
that he may have and all related material information known to him, in
connection with any existing or proposed transaction by the company (an officer
and a controlling shareholder are under no such duty of disclosure when the
personal interest stems only from the personal interest of a relative in a
transaction that is not exceptional). In addition, if the transaction is an
exceptional transaction, as defined in the Israeli Companies Law, the officer
must also disclose any personal interest held by the officer's spouse, siblings,
parents, grandparents, descendants, spouse's descendants and the spouse of any
of the foregoing, or by a corporation in which the officer is a 5% or greater
shareholder, director or general manager or in which he or she has the right to
appoint at least one director or the general manager. The disclosure must be
made without delay and not later than the Board of Directors meeting at which
the transaction is first discussed. For these purposes, the definition of a
controlling shareholder under the Israeli Companies Law includes a shareholder
that holds 25% or more of the voting rights in a company, unless another
shareholder holds more than 50% of the voting rights (if two or more
shareholders are interested parties in the same transaction their shareholdings
shall be deemed cumulative).

         Once the officer or controlling shareholder complies with these
disclosure requirements, the company may approve the transaction in accordance
with the provisions of the Israeli Companies Law and its articles of
association. Generally, the approval of the majority of the disinterested
members of the audit committee and the Board of Directors is required. If audit
committee approval is required for a transaction with an interested party, an
officer or a controlling shareholder, such approval may not be given unless, at
the time the approval was granted two members of the audit committee were
external directors and at least one of them was present at the meeting at which
the audit committee decided to grant the approval. Shareholder approval may also
be required if the transaction is an exceptional transaction. An exceptional
transaction is a transaction other than in the ordinary course of business,
otherwise than on market terms or that is likely to have a material impact on
the company's profitability, assets or liabilities. In such event, the principal
terms of such transaction must be disclosed in a notice to the shareholders
which will include all substantive documents relating to the transaction. If the
transaction is with an officer or with a third party in which the officer or the
controlling shareholder has a personal interest, the approval must confirm that
the transaction is not adverse to the company's interest. Shareholders must also
approve all compensation paid to directors in whatever capacity, a company's
undertaking to indemnify a director or indemnification under
a permit to indemnify and any transaction in which a majority of the board
members have a personal interest. An officer with a personal interest in any
matter may not be present at any audit committee or Board of Directors meeting
where such matter is being approved, and may not vote thereon, unless the
majority of the members of the audit committee or of the Board of Directors have
a personal interest in such approval. Shareholders' approval for an exceptional
transaction must include at least one third of the shareholders who have no
personal interest in the transaction and are present at the meeting. However,
the transaction can be approved by shareholders without this one-third approval
if the total shareholdings of those who vote against the transaction do not
represent more than one percent of the voting rights in the company, unless the
Minister of Justice shall determine a different percentage.

         However, under the Companies Regulations (Relief From Related Party
Transactions), 5760-2000, promulgated under the Israeli Companies Law and
amended in January 2002, certain transactions between a company and its
controlling shareholder(s) do not require shareholder approval.

         In addition, pursuant to the recent amendment to these regulations,
directors' compensation and employment arrangements do not require the approval
of the shareholders if both the audit committee and the board of directors agree
that such arrangements are for the benefit of the company. If the director or
the office holder is a controlling shareholder of the company, then the
employment and compensation arrangements of such director or office holder do
not require the approval of the shareholders provided that certain criteria are
met.

         The above exemptions will not apply if one or more shareholders,
holding at least 1% of the issued and outstanding share capital of the company
or of the company's voting rights, objects to the grant of such relief, provided
that such objection is submitted to the company in writing not later than seven
days from the date of the filing of a report regarding the adoption of such
resolution by the company pursuant to the requirements of the Israeli Securities
Law. If such objection is duly and timely submitted, then the compensation
arrangement of the directors will require shareholders' approval as detailed
above.

11.   ANTI-TAKEOVER PROVISIONS; MERGERS AND ACQUISITIONS UNDER ISRAELI LAW

         Pursuant to the Israeli Companies Law, if following any acquisition of
shares of a public company or of a class of shares of a public company the
acquiror holds 90% or more of that company's shares or 90% of any class of that
company's shares, respectively, then the acquiror must make a tender offer for
all of the remaining shares or the particular class of shares of the company. In
the event that 5% or more of the shareholders have not responded favorably to a
tender offer, the offeror may not purchase more than 90% of that class of
shares. According to the prevailing interpretation of the Israeli Companies Law,
this rule does not apply if the acquisition is made by way of a merger by a
party who is not a direct or indirect significant shareholder of the company.
Furthermore, the Israeli Companies Law provides that as long as a shareholder in
a public company holds more than 90% of the company's shares or of a class of
shares, such shareholder shall be precluded from purchasing any additional
shares of that type.

         The Israeli Companies Law further provides that if following the tender
offer such acquiring shareholder holds more than 95% of the outstanding shares
of any class, the holders of all the remaining shares will be obligated to
transfer such shares to the acquiror at the tender offer price. The Israeli
Companies Law requires that each company that is party to a merger approve the
transaction by a vote of the Board of Directors and by a vote of the majority of
its outstanding shares, generally excluding shares voted by the other party to
the merger or any person holding at least 25% of the other party to the merger.
In addition, the Israeli Companies Law does not generally require court approval
of a merger. Upon the request of a creditor to either party to the proposed
merger, the court may delay or prevent the merger if it concludes that there
exists a reasonable concern that as a result of the merger, the surviving
company will be unable to satisfy the obligations of any of the parties to the
merger. In addition, a merger may not be completed unless at least 70 days have
passed from the time that a proposal for approval of the merger has been filed
with the Israeli Registrar of Companies and certain notification and information
have been provided to debtors.
Notwithstanding the approval requirements set forth in the Israeli
Companies Law, companies, such as ours, which have been incorporated prior to
the Israeli Companies Law coming into effect, must specifically amend their
articles of association to provide for the shareholder voting requirements
contained in the Israeli Companies Law. We accordingly amended our articles of
association on November 30, 2000.

         The Israeli Companies Law also provides that an open market acquisition
of shares in a public company must be made by means of a tender offer if as a
result of the acquisition the purchaser would become a holder of at least 25% of
the voting rights in the company. This rule does not apply if there already is
another holder of at least 25% of the voting rights in the company. Similarly,
the Israeli Companies Law provides that an open market acquisition of shares in
a public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become the holder of at least 45% of the voting
rights in the company. This rule does not apply if another party already holds
more than 50% of the voting rights in the company. Regulations promulgated under
the Israeli Companies Law provide that these tender offer requirements do not
apply to companies whose shares are listed for trading on a stock exchange or
stock market outside of Israel only if, according to the laws in the country in
which its shares are traded there is either a limitation on the acquisition of a
specified percentage of control in the company or the acquisition of a specified
percentage of control requires the purchaser to also make a tender offer to the
public.

         The Israeli Companies Law extends the disclosure requirements
applicable to an office holder to a shareholder that holds 25% or more of the
voting rights in a public company, including an Israeli company that is publicly
traded outside of Israel such as on Nasdaq. Certain transactions between a
public company and a 25% shareholder, or transactions in which a 25% shareholder
of the company has a personal interest but which are between a public company
and another entity, require the approval of the Board of Directors and of the
shareholders. Moreover, an extraordinary transaction with a 25% shareholder or
the terms of compensation of a 25% shareholder must be approved by the audit
committee, the Board of Directors and shareholders.

         The shareholder approval for an extraordinary transaction must include
at least one third of the shareholders who have no personal interest in the
transaction and are present at the meeting; the transaction can be approved by
shareholders without this one third approval, if the total share holdings of
those who vote against the transaction do not represent more than 1% of the
voting rights in the company.

         The Israeli Companies Law requires that certain transactions, actions
and arrangements be approved as provided for in the company's Articles of
Association, by the company's Board of Directors, by the audit committee and/or
by the company's shareholders. The vote required by the Audit Committee and the
Board for approval of such matters, in each case, is a majority of the
disinterested directors participating in a duly convened meeting.

      C.   MATERIAL CONTRACTS

         Other than the definitive merger agreement discussed in Part I and Item
4 and the acquisition transaction agreements and related documents discussed in
Item 4. "Information on the Company - History and Development of the Company,"
in Item 5. "Operating and Financial Review and Prospects - Acquisitions," and in
Item 5. "Operating and Financial Review and Prospects - Debt Financing," in the
past two years we have not entered into any material contracts other than
contracts entered into in the ordinary course of our business.

     D.       EXCHANGE CONTROLS

         There are no restrictions under Israeli law on the payment of dividends
or other distributions in respect of ordinary shares and any amounts payable
upon the dissolution, liquidation or winding up of our affairs, as well as the
proceeds of any sale in Israel of our securities to an Israeli resident are
freely repatriable into non-Israeli currencies at the rate of exchange
prevailing at the time of conversion, provided that Israeli income tax has been
paid on (or withheld from) such payments.
Neither our Memorandum of Association, Articles of Association nor the
laws of the State of Israel restrict in any way the ownership or voting of
shares by non-residents, except with respect to subjects of countries that are
in a state of war with Israel.

    E.   TAXATION

    ISRAELI TAXATION AND INVESTMENT PROGRAMS

         The following discussion summarizes the material current tax laws of
the State of Israel as they relate to us, our shareholders and ownership and
disposition of our ordinary shares. This summary does not discuss all aspects of
Israeli tax law that may be relevant to a particular shareholder's personal
investment circumstances or to certain types of investors subject to special
treatment under Israeli law (for example, traders in securities or persons that
own, directly or indirectly, 10% or more of our outstanding voting shares). The
following also includes a discussion of certain Israeli government programs
benefiting various Israeli businesses, including Paradigm. To the extent that
the discussion is based on new legislation still subject to judicial or
administrative interpretation, there can be no assurance that the views
expressed herein will accord with any such interpretation in the future. In
addition, this discussion does not cover all possible tax consequences or
situations. Investors should consult with their own tax advisors regarding their
personal tax situation.

PROPOSED TAX REFORM

         In February 2002, the Minister of Finance appointed a committee to
review the current Israeli tax structure and to make recommendations (the "Tax
Reform Committee"). The Tax Reform Committee presented its recommendations to
the Minister of Finance on June 12, 2002. If implemented, the recommendations
might result in the imposition of Israeli capital gains taxes at the rate of 15%
to 35% on sales of securities of Israeli companies by Israeli residents. In
addition, the committee has proposed that a tax be imposed on all income of
Israeli residents (individuals and corporations) regardless of the territorial
source of income and tax will be imposed on income of foreign corporations
controlled by Israeli residents if the majority of profits or income of such
foreign company originate from "passive income", including interest, dividends,
royalties and rental income. We cannot predict whether such recommendations will
be adopted and eventually enacted into law.

GENERAL CORPORATE TAX STRUCTURE

         Israeli companies are generally subject to "Company Tax" at the rate of
36 % of taxable income, such rate having become effective January 1, 1996.
However, the effective tax rate payable by a company which derives income from
an Approved Enterprise (as further discussed below), may be considerably less.
Subject to relevant tax treaties, dividends or interest received by an Israeli
corporation from foreign subsidiaries are generally subject to tax regardless of
its status as an Approved Enterprise.

TAXATION UNDER INFLATIONARY CONDITIONS

         The Income Tax Law (Adjustment for Inflation), 1985 (the "Adjustment
for Inflation Law") attempts to overcome some of the problems experienced in a
traditional tax system by an economy experiencing rapid inflation, which was the
case in Israel at the time the Adjustment for Inflation Law was enacted.
Generally, the Adjustment for Inflation Law was designed to neutralize, for
Israeli tax purposes, the erosion of capital investments in businesses and to
prevent unintended tax benefits resulting from the deduction of inflationary
financing expenses. The Adjustment for Inflation Law applies a supplementary
set of inflationary adjustments to a normal taxable profit computed according to
regular historical cost principles.

         The Adjustment for Inflation Law introduced a special adjustment for
the preservation of equity for tax purposes based on changes in the Israeli CPI,
whereby corporate assets are classified broadly into fixed (inflation resistant)
assets and non-fixed assets. Where the shareholders' equity, as defined in the
Adjustment for Inflation Law, exceeds the depreciated cost of fixed assets, a
corporate tax deduction which takes into account the effect of inflationary
change on such excess is allowed (up to a ceiling of 70% of taxable income in
any single tax year, with the unused portion permitted to be carried forward on
an inflation-linked basis with no ceiling). If the depreciated cost of fixed
assets exceeds shareholders' equity, then such excess, multiplied by the annual
rate of inflation is added to taxable income.

         In addition, subject to certain limitations, depreciation on fixed
assets and loss carry forwards are adjusted for inflation based on changes in
the Israeli CPI. The net effect of the Adjustment for Inflation Law on us might
be that our taxable income, as determined for Israeli corporate tax purposes,
would be different from our dollar income, as reflected in our financial
statements, due to the difference between the annual changes in the CPI and in
the NIS exchange rate with respect to the dollar, causing changes in the actual
tax rate.

CAPITAL GAINS AND INCOME TAXES APPLICABLE TO NON-ISRAELI RESIDENT SHAREHOLDERS

         Under existing regulations, any capital gain realized by an individual
shareholder with respect to our ordinary shares acquired on or after the listing
of such shares for trading will be exempt from Israeli capital gains tax if the
ordinary shares are listed on an approved foreign securities market (which
includes Nasdaq in the United States), provided that we continue to qualify as
an Industrial Company under Israeli law and that the individual does not hold
such shares for business purposes. If we do not maintain our status as an
Industrial Company, then subject to any applicable tax treaty, the Israeli
capital gains tax rates would be up to 50% for non-Israeli resident individuals,
and 36% for companies, who are our shareholders. The Tax Reform Committee
proposes to institute capital gains tax on the real gains from the sale of
securities traded on foreign exchanges (including the securities of Israeli
companies traded on Nasdaq).

         Upon a distribution of dividends other than bonus shares (stock
dividends), income tax is generally withheld at source at the rate of 25% (or
the lower rate payable with respect to Approved Enterprises), unless a double
taxation treaty is in effect between Israel and the shareholder's country of
residence that provides for a lower tax rate in Israel on dividends.

         A tax treaty between the United States and Israel (the "Treaty")
provides for a maximum tax of 25% on dividends paid to a resident of the United
States (as defined in the Treaty). Dividends distributed by an Israeli company
and derived from the income of an Approved Enterprise are subject to a 15%
dividend withholding tax. The Treaty further provides that a 12.5% Israeli
dividend withholding tax applies to dividends paid to a United States
corporation owning 10% or more of an Israeli company's voting shares throughout
the current year to the date the dividend is paid and the preceding taxable year
(as applicable). The 12.5% rate applies only on dividends from a company that
does not have any projects with Approved Enterprise status in the applicable
period.

         If for any reason shareholders do not receive the above exemption for a
sale of shares in an Industrial Company, the Treaty provides U.S. resident
investors with an exemption from Israeli capital gains tax in certain
circumstances (there may still be U.S. taxes) upon a disposition of shares in
the company if they held under 10% of the company's voting stock throughout the
12 months prior to the share disposition. If Israeli capital gains tax is
payable, it can be credited against a shareholder's U.S. federal tax under the
circumstances specified in the Treaty.

         A non-resident of Israel who has derived or accrued dividend income in
Israel from which the applicable tax was withheld at source is currently exempt
from the duty to file an annual Israeli tax return
with respect to such income, provided such income was not derived from a
business carried on in Israel by such non-resident and that such non-resident
does not derive other non-passive income from sources in Israel.

LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969

         We currently qualify as an "Industrial Company" within the meaning of
the Law of the Encouragement of Industry (Taxes), 1969 (the "Industry
Encouragement Law") According to the Industry Encouragement Law, an "Industrial
Company" is a company resident in Israel, at least 90% of the income of which in
any tax year, determined in Israeli currency (exclusive of income from defense
loans, capital gains, interest and dividends) is derived from an "Industrial
Enterprise" that it owns. An "Industrial Enterprise" is defined by that law as
an enterprise whose major activity in a given tax year is industrial production
activity.

         Included among the tax benefits for an Industrial Company are
deductions of 12.5% per annum of the purchase price of a patent or of know-how,
an election under certain conditions to file a consolidated return and
accelerated depreciation rates on equipment and buildings.

         Eligibility for the benefits under the Industry Encouragement Law is
not subject to receipt of prior approval from any governmental authority. No
assurance can be given that we will continue to qualify as an "Industrial
Company" or that the benefits described above will be available in the future.

LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959

         The Law for the Encouragement of Capital Investments, 1959, as amended
(the "Investment Law"), provides that a capital investment in production
facilities (or other eligible facilities) may, upon application to the Israel
Investment Center, be designated as an Approved Enterprise. Each certificate of
approval for an Approved Enterprise relates to a specified capital investment
program delineated both by its financial scope, including its capital sources,
and its physical characteristics, i.e. the equipment to be purchased and
utilized pursuant to the program. The tax benefits derived from any such
certificate of approval relate only to taxable profits attributable to the
specific Approved Enterprise.

         Taxable income derived from an Approved Enterprise is subject to a
reduced corporate tax rate of 25% (the "Corporate Tax"). Such income is eligible
for further reductions in tax rates depending on the percentage of the foreign
investment in the company's share capital (conferring rights to profits, voting
and appointment of directors) and of its combined share and loan capital which
is owned by non-Israeli residents. The tax rate is 20% if the foreign investment
is 49% or more but less than 74%; 15% if the foreign investment is 74% or more
but less than 90%; and 10% if the foreign investment is 90% or more. The lowest
level of foreign investment during the year is used to determine the relevant
tax rate for that year. These tax benefits are granted for a limited period not
exceeding 7 or 10 years from the first year in which the Approved Enterprise has
taxable income. The period of benefits may in no event, however, exceed the
lesser of twelve years from the year in which production commenced or fourteen
years from the year of receipt of Approved Enterprise status.

         A company that has an Approved Enterprise status which was approved
after April 1, 1986 may elect to forego any entitlement to the grants otherwise
available under the Investment Law and, in lieu of the foregoing, participate in
an alternative benefits program (the "Alternative Benefits Program"), under
which the undistributed income from the Approved Enterprise is fully tax exempt
for a defined period of time. The period of tax exemption ranges between 2 and
10 years, depending upon the location within Israel of the Approved Enterprise
and the type of Approved Enterprise. On the expiration of the exemption period,
the Approved Enterprise would be eligible for beneficial tax rates under the
Investment Law for the remainder, if any, of the otherwise applicable benefits
period. We elected to participate in the Alternative Benefits Program. There can
be no assurance that the current Alternative Benefits Program will continue to
be available or that we will qualify for the benefits under the current program.
A company that has elected to participate in the Alternative Benefits
Program and that subsequently pays a dividend out of the income derived from the
Approved Enterprise during the tax exemption period will be subject to Corporate
Tax (in the year in which the dividend is distributed) with respect to the
amount distributed (plus withholding tax thereon) at the rate that would have
been applicable in the year in which the distributed income was generated had
the company not been exempt from tax in such year. The dividend recipient is
taxed at the reduced rate of 15% applicable to dividends from Approved
Enterprise if the dividend is distributed within twelve years after the tax
exemption period. The withholding tax rate will be 25% after such period. In
case of a company with over 25% foreign shareholding (as defined by law), the
twelve-year limitation on reduced withholding tax on dividends does not apply.
This tax should be withheld by a company at source, regardless of whether the
dividend is converted into foreign currency.

          We have been granted "Approved Enterprise" status under the Investment
Law with respect to four projects. Pursuant to the provisions of the Investment
Law, we chose the Alternative Benefits Program which, as discussed above,
provides for the waiver of grants in return for tax-exemption. Accordingly,
income derived from each Approved Enterprise is tax-exempt for a period of two
to four years, commencing with the year it first earns taxable income, and is
then subject to Corporate Tax at the rate of 10% - 25%, dependant on the
percentage of foreign investment as described above, for additional periods of
six to eight years.

         The Investment Law also provides that a company with an Approved
Enterprise is entitled to accelerated depreciation on its property and equipment
included in an approved investment program.

         Future applications to the Investment Center will be reviewed
separately, and decisions as to whether or not to approve such applications will
be based, among other things, on the then prevailing criteria set forth in the
Investment Law, on the specific objectives of the applicant company set forth in
such applications and on certain financial criteria of the applicant company.
Accordingly, there can be no assurance that any such applications will be
approved. In addition, the benefits available to an Approved Enterprise are
conditional upon the fulfillment of certain conditions stipulated in the
Investment Law and its regulations and the criteria set forth in the specific
certificate of approval, as described above. In the event that these conditions
are violated, in whole or in part, the company would be required to refund the
amount of tax benefits, plus the CPI linkage adjustment and interest.

TAX BENEFITS FOR RESEARCH AND DEVELOPMENT

         Under certain conditions, Israeli tax law allows a tax deduction in the
year incurred for expenditures (including depreciation on capital expenditures
but excluding depreciable capital expenditures) in connection with scientific
research and development projects, if the expenditures are approved by the
relevant Israeli Government Ministry (determined by the field of research) and
the research and development is for the promotion of the enterprise.
Expenditures not so approved are deductible over a three-year period. However,
expenditures made out of the proceeds of government grants are not deductible,
i.e. we will be able to deduct the unfunded portion of the research and
development expenditures but not the gross amount.

LAW FOR THE ENCOURAGEMENT OF INDUSTRIAL RESEARCH AND DEVELOPMENT, 1984

         Under the Law for the Encouragement of Industrial Research and
Development, 1984, (the "Research Law") and the Instructions of the Director
General of the Ministry of Industry and Trade, research and development
programs, plans for the intermediate stage between research and development, and
manufacturing and sales approved by a governmental committee of the Office of
the Chief Scientist (OCS) (the "Research Committee") are eligible for grants of
up to 50% of the project's expenditure, if they meet certain criteria. These
grants are issued in return for the payment of royalties from the sale of
products developed in accordance with the program as follows: 3% of revenues
during the first three years and 3.5% of revenues in the fourth year and
thereafter, with the total royalties not to exceed 100% - 150% of the
dollar value of the OCS grant (or in some cases up to 300%). Following the full
payment of such royalties, there is no further liability for payment.

         The Israeli government further requires that products developed with
government grants are to be manufactured in Israel. However, in the event that
any portion of the manufacturing is not conducted in Israel, if approval is
received from the OCS, the company would be required to pay royalties that are
adjusted in proportion to manufacturing outside of Israel as follows: when the
manufacturing is performed outside of Israel by the company or an affiliate
company in which the company has no less than 51% ownership, the royalties are
to be paid as described above with the addition of 1%, and when the
manufacturing outside of Israel is not performed by the company or an affiliate
the royalties paid shall be equal to the ratio of the amount of grant received
from the OCS divided by the amount of grant received from the OCS and the
investment(s) made by the company in the project. The payback also will be
adjusted to 120%, 150% or 300% of the grant if the portion of manufacturing that
is performed outside of Israel is up to 50%, between 50% and 90%, or more than
90%, respectively. The technology developed pursuant to the terms of these
grants may not be transferred to third parties without the prior approval of the
Research Committee. Such approval is not required for the export of any products
resulting from such research or development. Approval of the transfer of
technology may be granted only if the recipient abides by all the provisions of
the Research Law and the regulations promulgated thereunder, including the
restrictions on the transfer of know-how and the obligation to pay royalties in
an amount that may be increased.

         In order to meet certain conditions in connection with the grants and
programs of the OCS, we have made certain representations to the Israeli
government about our s future plans for our Israeli operations. From time to
time, the extent of our Israeli operations has differed and may in the future
differ, from our representations. If, after receiving grants under certain
programs, we fail to meet certain conditions to those benefits, including, with
respect to grants received from the OCS, the maintenance of a material preserve
in Israel, or if there is any material deviation from the representations made
by us to the Israeli government, we could be required to refund to the State of
Israel funds or other benefits previously received (including interest and CPI
linkage difference) and would likely be denied receipt of such grants or
benefits, and participation in such programs, thereafter.

         We have participated in programs sponsored by the OCS for the support
of research and development activities (See notes to the Financial Statements).

         Each application to the OCS is reviewed separately, and grants are
based on a program approved by the Research Committee. Expenditures supported
under other incentive programs of the State of Israel are not eligible for OCS
grants. As a result, there can be no assurance that applications to the OCS will
be approved or, if approved, what the amounts of the grants will be.

FUND FOR THE ENCOURAGEMENT OF MARKETING ACTIVITIES

         We have received grants relating to our overseas marketing expenses
from the Marketing Fund. These grants are awarded for specific expenses incurred
by us for overseas marketing and are based upon the expenses reported by us to
the Marketing Fund. All marketing grants recorded from the Marketing Fund until
1997 are linked to the dollar and are repayable as royalties at the rate of 3%
of the amount of increases in export sales realized by us from the Marketing
Fund. Grants recorded beginning January 1, 1998 bear royalties of 4% plus
interest at LIBOR rates. We will be required to pay royalties on grants from the
Marketing Fund only to the extent that it actually achieves increases in export
sales. The proceeds of these grants are presented in our consolidated financial
statements as offsets to marketing expenses. Through December 31, 2001, we had
received grants from the Marketing Fund in the amount of approximately $430,000.
At May 31, 2002, royalties paid to the Marketing Fund had eliminated any
contingent liability for the payment of further royalties.
UNITED STATED FEDERAL INCOME TAX CONSIDERATIONS

         The following summary describes certain of the material U.S. Federal
income tax consequences to U.S. Holders (as defined below) arising from the
purchase, ownership and disposition of ordinary shares. This summary is based on
the provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
final, temporary and proposed U.S. Treasury Regulations promulgated thereunder,
and administrative and judicial interpretations thereof, all as in effect as of
the date hereof, and all of which are subject to change, possibly with
retroactive effect.

         This summary does not deal with all aspects of U.S. Federal income
taxation that may be relevant to particular U.S. Holders in light of their
particular circumstances, or to U.S. Holders subject to special rules,
including, without limitation, certain retirement plans, insurance companies,
U.S. Holders of securities held as part of a "straddle," "synthetic security,"
"hedge", "conversion transaction" or other integrated investment, persons that
enter into "constructive sales" involving ordinary shares or substantially
identical property with other investments, U.S. Holders whose functional
currency is not the United States dollar, U.S. Holders subject to the
alternative minimum tax, certain expatriates or former long-term residents of
the United States, financial institutions, broker-dealers, tax-exempt
organizations and U.S. Holders who own (directly, indirectly or through
attribution) 10% or more of our outstanding voting stock. The following
discussion does not address the effect of any applicable state, local or foreign
tax laws or any U.S. federal estate or gift tax laws. This summary does not
consider the tax treatment of persons who own ordinary shares through a
partnership or other pass-through entity, and deals only with ordinary shares
held as "capital assets" as defined in Section 1221 of the Code.

         This discussion is addressed only to "U.S. Holders." A U.S. Holder is a
holder of ordinary shares that is a U.S. citizen, an individual resident in the
United States for U.S. Federal income tax purposes, a domestic corporation, an
estate the income of which is includible in its gross income for U.S. Federal
income tax purposes without regard to its source, or a trust if either: (i) a
U.S. court is able to exercise primary supervision over the administration of
the trust and one or more U.S. persons have the authority to control all the
substantial decisions of the trust or (ii) the trust was in existence on August
20, 1996 and, in general, would have been treated as a U.S. Holder under rules
applicable prior to such time, provided the trust elects to continue such
treatment thereafter.

         U.S. HOLDERS OF ORDINARY SHARES ARE ADVISED TO CONSULT WITH THEIR OWN
TAX ADVISORS WITH RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL TAX CONSEQUENCES,
AS WELL AS THE TAX CONSEQUENCES IN OTHER JURISDICTIONS, OF THE PURCHASE,
OWNERSHIP AND SALE OF ORDINARY SHARES APPLICABLE IN THEIR PARTICULAR TAX
SITUATIONS.

TAXATION OF DIVIDENDS

         The gross amount of any distributions received with respect to ordinary
shares, including the amount of any Israeli taxes withheld therefrom, will
constitute dividends for U.S. Federal income tax purposes, to the extent of our
current and accumulated earnings and profits as determined for U.S. Federal
income tax principles. You will be required to include this amount of dividends
in gross income as ordinary income. Distributions in excess of our earnings and
profits will be treated as a non-taxable return of capital to the extent of your
tax basis in the ordinary shares, and, subject to the discussion below under the
heading "Passive Foreign Investment Company," any amount in excess of your tax
basis will be treated as gain from the sale of ordinary shares. See
"--Disposition of Ordinary shares" below for the discussion on the taxation of
capital gains. Dividends will not qualify for the dividends-received deduction
generally available to corporations under Section 243 of the Code.

         Dividends that we pay in NIS, including the amount of any Israeli taxes
withheld therefrom, will be included in your income in a U.S. dollar amount
calculated by reference to the exchange rate in effect on the day such dividends
are received. A U.S. Holder who receives payment in NIS and converts NIS into
U.S. dollars at an exchange rate other than the rate in effect on such day may
have a foreign currency
exchange gain or loss that would be treated as ordinary income or loss. U.S.
Holders should consult their own tax advisors concerning the U.S. tax
consequences of acquiring, holding and disposing of NIS.

         Any Israeli withholding tax imposed on such dividends will be a foreign
income tax eligible for credit against a U.S. Holder's U.S. Federal income tax
liability, subject to certain limitations set out in the Code (or,
alternatively, for deduction against income in determining such tax liability).
The limitations set out in the Code include computational rules under which
foreign tax credits allowable with respect to specific classes of income cannot
exceed the U.S. Federal income taxes otherwise payable with respect to each such
class of income. Dividends generally will be treated as foreign-source passive
income or, in the case of certain types of U.S.Holders, financial services
income for United States foreign tax credit purposes. The rules relating to the
determination of the foreign tax credit are complex, and you should consult with
your personal tax advisors to determine whether and to what extent you would be
entitled to this credit.

DISPOSITIONS OF ORDINARY SHARES

         If you sell or otherwise dispose of ordinary shares, you will recognize
gain or loss for U.S. Federal income tax purposes in an amount equal to the
difference between the amount realized on the sale or other disposition and the
adjusted tax basis in the ordinary shares. Subject to the discussion below under
the heading "Passive Foreign Investment Companies," such gain or loss generally
will be capital gain or loss and will be long-term capital gain or loss if you
have held the ordinary shares for more than one year at the time of the sale or
other disposition. In general, any gain that you recognize on the sale or other
disposition of ordinary shares will be U.S.-source for purposes of the foreign
tax credit limitation; losses, will generally be allocated against U.S. source
income. Deduction of capital losses is subject to certain limitations under the
Code.

         In the case of a cash basis U.S. Holder who receives NIS in connection
with the sale or disposition of ordinary shares, the amount realized will be
based on the U.S. dollar value of the NIS received with respect to the ordinary
shares as determined on the settlement date of such exchange. A U.S. Holder who
receives payment in NIS and converts NIS into United States dollars at a
conversion rate other than the rate in effect on the settlement date may have a
foreign currency exchange gain or loss that would be treated as ordinary income
or loss.

         An accrual basis U.S. Holder may elect the same treatment required of
cash basis taxpayers with respect to a sale or disposition of ordinary shares,
provided that the election is applied consistently from year to year. Such
election may not be changed without the consent of the Internal Revenue Service
(the "IRS"). In the event that an accrual basis U.S. Holder does not elect to be
treated as a cash basis taxpayer (pursuant to the Treasury regulations
applicable to foreign currency transactions), such U.S. Holder may have a
foreign currency gain or loss for U.S. Federal income tax purposes because of
differences between the U.S. dollar value of the currency received prevailing on
the trade date and the settlement date. Any such currency gain or loss would be
treated as ordinary income or loss and would be in addition to gain or loss, if
any, recognized by such U.S. Holder on the sale or disposition of such ordinary
shares.

PASSIVE FOREIGN INVESTMENT COMPANIES

         For U.S. Federal income tax purposes, we will be considered a passive
foreign investment company ("PFIC") for any taxable year in which either (1) 75%
or more of our gross income is passive income, or (ii) at least 50% of the
average value of all of our assets for the taxable year produce or are held for
the production of passive income. For this purpose, passive income includes
dividends, interest, royalties, rents, annuities and the excess of gains over
losses from the disposition of assets which produce passive income. If we were
determined to be a PFIC for U.S. Federal income tax purposes, highly complex
rules would apply to U.S. Holders owning ordinary shares. Accordingly, you are
urged to consult your tax advisors regarding the application of such rules.
Based on our current and projected income, assets and activities, we
believe that we are not currently a PFIC nor do we expect to become a PFIC in
the foreseeable future. However, because the determination of whether we are a
PFIC is determined as of the end of each taxable year and is dependent on a
number of factors, including the value of our assets (based on the fair market
value of our ordinary shares) and the amount and type of our gross income, there
can be no assurances that we will not become a PFIC for any future taxable year.

         If we are treated as a PFIC for any taxable year, then, unless you
elect either to treat your investment in ordinary shares as an investment in a
"qualified electing fund" (a "QEF election") or to "mark-to-market" your
ordinary shares, as described below,

     - you would be required to allocate income recognized upon receiving
certain distributions ("excess distributions") or gain recognized upon the
disposition of ordinary shares ratably over the holding period for such ordinary
shares,

     - the amount allocated to each year during which we are considered a PFIC
other than the year of the excess distribution payment or disposition would be
subject to tax at the highest individual or corporate tax rate, whichever is
applicable, and an interest charge would be imposed with respect to the
resulting tax liability allocated to each such year,

     - gain recognized upon the disposition of ordinary shares would be taxable
as ordinary income,

     - the tax basis in our ordinary shares that are acquired from a decedent
who was a U.S.Holder would not receive a step-up to fair market value as of the
date of the decedent's death but would instead be equal to the decedent's basis,
if lower, and

     - you would be required to make an annual return on IRS Form 8621 regarding
distributions received with respect to ordinary shares and any gain realized on
your ordinary shares.

         If you make either a timely QEF election or a timely mark-to-market
election in respect of your ordinary shares, you would not be subject to the
rules described above. If you make a timely QEF election, you would be required
to include in your income for each taxable year your pro rata share of our
ordinary earnings as ordinary income and your pro rata share of our net capital
gain as long-term capital gain, whether or not such amounts are actually
distributed to you. You would not be eligible to make a QEF election unless we
comply with certain applicable information reporting requirements.

         Alternatively, if you elect to "mark-to-market" your ordinary shares,
you will generally include in income any excess of the fair market value of the
ordinary shares at the close of each tax year over your adjusted basis in the
ordinary shares. If the fair market value of the ordinary shares had depreciated
below your adjusted basis at the close of the tax year, you may generally deduct
the excess of the adjusted basis of the ordinary shares over its fair market
value at that time. However, such deductions generally would be limited to the
net mark-to-market gains, if any, that you included in income with respect to
such ordinary shares in prior years. Income recognized and deductions allowed
under the mark-to-market provisions, as well as any gain or loss on the
disposition of ordinary shares with respect to which the mark-to-market election
is made, is treated as ordinary income or loss. If the mark-to-market election
with respect to ordinary shares is in effect on the date of a U.S. Holder's
death, the tax basis of the ordinary shares in the case of a U.S. Holder who
acquired them from decedent will be the lesser of the decedent's tax basis or
the fair market value of the ordinary shares.

BACKUP WITHHOLDING AND INFORMATION REPORTING

         Payments in respect of ordinary shares may be subject to information
reporting to the U.S. Internal Revenue Service and to U.S. backup withholding
tax. Backup withholding will not apply, however, if you (i) are a corporation or
come within certain exempt categories, and demonstrate the fact when so
required, or (ii) furnish a correct taxpayer identification number and make any
other required
certification. Any amount withheld under these rules may be credited against
your federal income tax liability.

         Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules may be credited against a U.S. Holder's U.S. tax
liability, and a U.S. Holder may obtain a refund of any excess amounts withheld
under the backup withholding rules by filing the appropriate claim for refund
with the IRS.

         Any U.S. holder who holds 10% or more in vote or value of our ordinary
shares will be subject to certain additional United States information reporting
requirements.

         F. DIVIDEND AND PAYING AGENTS

            Not applicable.

         G. STATEMENT BY EXPERTS

            Not applicable.

         H. DOCUMENTS ON DISPLAY

         This Annual Report and the exhibits thereto and any other document we
file pursuant to the Securities Exchange Act of 1934, as amended, may be
inspected without charge and copied at prescribed rates at the Securities and
Exchange Commission's public reference room at 450 Fifth Street, N.W., Judiciary
Plaza, Room 1024, Washington, D.C. 20549. You may obtain information on the
operation of the Securities and Exchange Commission's public reference room in
Washington, D.C. by calling the Securities and Exchange Commission at
1-800-SEC-0330. The Exchange Act file number for our Securities and Exchange
Commission filings is 0-29538.

         The documents concerning Paradigm which are referred to in this Annual
Report may also be inspected at our offices located at Gav-Yam Center No 3., 9
Shenkar St., Herzlia B 46120, Israel.

         I. SUBSIDIARY INFORMATION

            Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         CURRENCY FLUCTUATIONS

         Approximately 90% of our revenue is in dollars, or linked to the
dollar, and therefore the dollar is our functional currency. Approximately 50%
of our operating expenses are paid in dollars or are linked to dollars. Other
significant currencies in which we receive revenue or pay expenses are
Australian dollars, British pounds, Canadian dollars, the European Monetary
Union currency (the "euro"), Russian Rubles and Israeli shekels. Historically,
the effect of fluctuations in currency exchange rates has had a minimal impact
on our operations. As we expand our operations outside of the United States and
receive revenue and pay expenses in currencies other than the dollar, our
exposure to fluctuations in currency exchange rates could increase. In managing
our foreign exchange risk, where we believe appropriate, we enter into various
foreign exchange contracts. As of December 31, 2001, we had entered into hedging
transactions only in regard to our New Israeli Shekel/ dollar exposure, which
was our most significant exposure.
FOREIGN CURRENCY RISK

         Market risks relating to our operations may result from changes in
interest rates, foreign currency exchange rates and weak economic conditions in
foreign markets. In general, we do not invest in foreign currency or engage in
interest-risk hedging or other risk-related tradable financial instruments, and
we do not hold any derivative financial instruments.

         Where we believe appropriate, we enter into foreign exchange forward
contracts to hedge some of our foreign currency exposure. We use such contracts
to hedge exposure to changes in foreign currency exchange rates associated with
revenue denominated in a foreign currency and anticipated costs to be incurred
in a foreign currency. We seek to minimize the risk that the fair value of sales
of our products and services and cash flow required for our expenses denominated
in a currency other than our functional currency, the dollar, will be affected
by changes in exchange rates.

         INTEREST RATE RISK

         Our interest expenses and income are sensitive to changes in interest
rates, as all of our cash reserves and borrowings are subject to interest rate
changes. Excess liquidity is invested in short-term interest-bearing
investments, consisting primarily of short term bank deposits, which bear
minimal interest rate risk. As of December 31, 2001, our total outstanding
indebtedness in regard to short-term debt and current maturities of long term
bank loans was approximately $ 6.8 million bearing interest of three to six
months LIBOR plus 1%-1.5%, in regard to medium term bank loans was $ 5.1
million, also bearing interest of three to six months LIBOR plus 1%-1.5% and in
connection with capital lease obligations our indebtedness was $ 0.3 million.

         In November 2001, we issued an aggregate of $ 8.0 million principal
amount of convertible subordinated debentures pursuant to an agreement with The
Israel Mezzanine Fund, L.P., The Israel Mezzanine Fund (In Israel), Limited
Partnership and The Jordan (Bermuda) Investment Company Ltd. (collectively
"FIMI"). The annual interest rate is three months LIBOR minus 1% payable
quarterly and the outstanding loan principal amount is repayable in three equal
annual payments commencing October 2004. We are required to repay the debentures
upon the acquisition of 90% or more of our securities by a third party pursuant
to which the convertible debentures will be repaid upon the acquisition of 100%
of our outstanding ordinary shares by Paradigm Geotechnology B.V. in the
proposed merger, if consummated.

         In the aggregate, the indebtedness in this "Interest Rate Risk" section
bears a minimal interest rate risk.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

         Not applicable.

                                     PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

         None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
         PROCEEDS

         None

                                    PART III
ITEM 17. FINANCIAL STATEMENTS

     Not applicable.

ITEM 18 - FINANCIAL STATEMENTS AND EXHIBITS

         The following consolidated financial statements are filed as part of
this Annual Report.

Index to Financial Statements:

   1.   Report of Independent Auditors...................................  F-2

   2.   Consolidated Balance Sheets......................................  F-3

   3.   Consolidated Statements of Operations............................  F-5

   4.   Statements of Changes in Shareholders' Equity....................  F-6

   5.   Consolidated Statements of Cash Flows............................  F-7

   6.   Notes to Consolidated Financial Statements....................... F-10

ITEM 19 - EXHIBITS

  The following exhibits are filed as part of this Annual Report:

         EXHIBITS  NO.                      EXHIBIT

         1.1++*           Memorandum of Association of Paradigm Geophysical Ltd.

         1.2*****         Amended and Restated Articles of Association of
                          Paradigm Geophysical Ltd.

         2.1*             Form of Warrant Agreement dated as of October 10,
                          1997 between Paradigm Geophysical Ltd. and the Bridge
                          Loan lenders.

         2.2*             Form of Warrant Certificate by Paradigm Geophysical
                          Ltd. in favor of the Bridge Loan lenders.

         2.3***           Registration Rights Agreement, dated March 12, 1999,
                          by and among Paradigm Geophysical Ltd., Jerusalem
                          Venture Partners L.P. and Jerusalem Venture Partners
                          Israel) L.P.

         2.4***           Registration Rights Agreement by and among Paradigm
                          Geophysical Ltd., Shamrock Holdings, Inc., Eastgate
                          Fund L.P., Eastgate International Limited, Mr. Harris
                          Kaplan and Berman Eastgate Growth Fund.

         4.1**            Stock Purchase Agreement, dated as of September 5,
                          1997, as amended September 24, 1997 among Paradigm
                          Geophysical Ltd., Paradigm Geophysical Corp. and
                          GeoScience Corporation.

         4.2*             Key Employee Plan.
4.3*              May 1994 Stock Option Plan.

         4.4*              1994 General Stock Option Plan.

         4.5*              1997 Executive Stock Option Plan.

         4.6*              1997 Stock Option Plan for Qualifying Israel
                           Employees.

         4.7*              1997 Stock Option Plan for U.S. Employees.

         4.8***            Amended and Restated Asset Purchase Agreement by and
                           among Geotech Joint Stock Company and Dr. Nikolai L.
                           Baransky, Dr. Evgenii A. Kozlov, Mr. Dimitry V.
                           Sulitsky, Mr. Christopher D. Kim, Paradigm
                           Geophysical (U.K.) Ltd., Paradigm Geophysical Europe
                           Ltd., Paradigm Geophysical Services Ltd. and Paradigm
                           Geophysical Ltd.

         4.9***            Business Sale Agreement, dated March 31, 1999, by and
                           among Mincom Limited, Mincom Inc., Mincom
                           International Pty Limited, Mincom Pty Ltd., Mincom
                           Services Pty Ltd., Mincom Inc. and Paradigm
                           Geophysical Ltd.

         4.10***           Share Purchase Agreement, dated March 12, 1999, by
                           and among Paradigm Geophysical Ltd., Jerusalem
                           Venture Partners L.P. and Jerusalem Venture Partners
                           (Israel) L.P.

         4.11***           Share Purchase Agreement, dated April 14, 1999, by
                           and between Paradigm Geophysical Ltd. and Shamrock
                           Holdings, Inc.

         4.12***           Share Purchase Agreement, dated April 14, 1999,
                           between Paradigm Geophysical Ltd. and Eastgate Fund
                           L.P., Eastgate International Limited, Mr. Harris
                           Kaplan and Berman Eastgate Growth Fund.

         4.13*****         Securities Purchase Agreement by and between
                           Compagnie Generale de Geophysique and Paradigm
                           Geophysical Ltd. and Paradigm Geophysical Corp. with
                           respect to Flagship S.A. and Flagship Geosciences LLC
                           dated October 4,2000.

         4.14****          Share Purchase Agreement dated May 16 2001, by and
                           between Paradigm Geophysical Ltd. and Peter David
                           Raby regarding the purchase of the entire issued
                           share capital of Sysdrill Ltd

         4.15#             Convertible Loan Agreement dated October 10, 2001, by
                           and between Paradigm Geophysical Ltd. and The Israel
                           Mezzanine Fund, L.P., The Israel Mezzanine Fund (in
                           Israel), Limited Partnership and The Jordan (Bermuda)
                           Investment Company Ltd.

         4.16******        Agreement of Merger by and among Paradigm
                           Geotechnology B.V. (formerly Talamantes B.V.),
                           F.P. Acquisition Ltd. and Paradigm Geophysical Ltd.

         8.1#              Subsidiaries of Paradigm Geophysical Ltd.

         10.1#             Consent of Kost Forer and Gabbay.
*        Incorporated herein by reference to Paradigm Geophysical
                  Ltd.'s Registration Statement on Form F-1 (File No. 333-7926),
                  filed with the Commission on November 10, 1997.

         **       Incorporated herein by reference to Amendment No. 1 to
                  Paradigm Geophysical Ltd.'s Registration Statement on Form F-1
                  (File No. 333-7926), filed with the Commission on November 21,
                  1997.

         ***      Incorporated herein by reference to Paradigm Geophysical
                  Ltd.'s Annual Report on Form 20-F for the fiscal year ended
                  December 31, 1998.

         ****     Incorporated herein by reference to Paradigm Geophysical
                  Ltd.'s Form 6-K Report for the month of May 16, 2001.

         *****    Incorporated herein by reference to Paradigm Geophysical
                  Ltd.'s Annual Report on Form 20-F for the fiscal year ended
                  December 31, 2000.

         ******   Incorporated herein by reference to Annex A to the proxy
                  statement of Paradigm Geophysical Ltd. set forth as
                  Exhibit 99.1 to Paradigm Geophysical Ltd.'s Form 6-K dated
                  May 31, 2002.

         #        Filed herewith

         ++       English translations from Hebrew original.

                                   SIGNATURES

The registrant certifies that it meets all of the requirements for filing on
Form 20-F and has duly caused and authorized the undersigned to sign this annual
report on its behalf.

                                                       PARADIGM GEOPHYSICAL LTD.

                                                  /s/  Brian Berman
                                                       Chief Financial Officer

Date: July 1, 2002
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2001

                                 IN U.S. DOLLARS

                                      INDEX

                                                                          PAGE
                                                                         -------

REPORT OF INDEPENDENT AUDITORS                                              2

CONSOLIDATED BALANCE SHEETS                                               3 - 4

CONSOLIDATED STATEMENTS OF OPERATIONS                                       5

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY                               6

CONSOLIDATED STATEMENTS OF CASH FLOWS                                     7 - 9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                               10 - 38

                                 - - - - - - - -
[ERNST & YOUNG LOGO]

                         REPORT OF INDEPENDENT AUDITORS

                             TO THE SHAREHOLDERS OF

                            PARADIGM GEOPHYSICAL LTD.

             We have audited the accompanying consolidated balance sheets of
Paradigm Geophysical Ltd. ("the Company") and its subsidiaries as of December
31, 2000 and 2001, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of a consolidated subsidiary, which statements reflect
approximately 22% of total consolidated revenues for the year ended December 31,
1999. Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to data included for
aforementioned subsidiaries, is based solely on the reports of other auditors.

             We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
the other auditors provide a reasonable basis for our opinion.

             In our opinion, based on our audits and the reports of the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2000 and 2001, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.

Tel-Aviv, Israel                                          KOST FORER & GABBAY
January 29, 2002                                       A Member of Ernst & Young
                                                             International

                                      -2-
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
                                                               -----------------
                                                                2000      2001
                                                               -------   -------
ASSETS

CURRENT ASSETS:
Cash and cash equivalents                                      $ 8,647   $ 9,814
Short-term bank deposit                                             --     1,941
Trade receivables (net of allowance for doubtful accounts of
     $2,950 in 2000 and $2,883 in 2001)                         22,707    28,306
Accrued income                                                   4,077     5,451
Other receivables and prepaid expenses                           4,110     5,686
                                                               -------   -------

Total current assets                                            39,541    51,198
                                                               -------   -------

LONG-TERM TRADE RECEIVABLES                                        221        --
                                                               -------   -------

SEVERANCE PAY FUND                                               1,076     1,525
                                                               -------   -------

PROPERTY AND EQUIPMENT, NET                                     13,318    15,902
                                                               -------   -------

OTHER ASSETS, NET                                               25,605    30,561
                                                               -------   -------

                                                               $79,761   $99,186
                                                               =======   =======
The accompanying notes are an integral part of the consolidated financial
statements.

                                      -3-
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
DECEMBER 31,
                                                                                   --------------------
                                                                                     2000        2001
                                                                                   --------    --------
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Short-term bank loans                                                           $  4,528    $  5,500
   Current maturities of long-term bank loans                                         3,112       1,278
   Current maturities of capital lease obligations                                      546         260
   Trade payables                                                                     5,375       3,555
   Other payables and accrued expenses                                               10,601      13,240
   Note payable                                                                          --       6,318
   Deferred revenues                                                                  4,519       3,810
                                                                                   --------    --------

Total current liabilities                                                            28,681      33,961
                                                                                   --------    --------

LONG TERM LIABILITIES:
   Long-term bank loans, net of current maturities                                    1,277       5,099
   Convertible loan                                                                      --       8,000
   Capital lease obligations, net of current maturities                                 206          --
   Accrued severance pay                                                              2,338       2,502
   Other long-term liabilities                                                          790         549
                                                                                   --------    --------

Total long-term liabilities                                                           4,611      16,150
                                                                                   --------    --------

SHAREHOLDERS' EQUITY:
   Share capital:
   Authorized - 18,000,000 Ordinary shares of NIS 0.5 par value and
     2,000,000 Preferred shares of NIS 0.5 par value
     as of December 31, 2000 and 2001
   Issued and outstanding - 0 Preferred shares as of December 31, 2000 and
      2001; 14,691,904 Ordinary shares as of December 31, 2000 and
      14,891,904 Ordinary shares as of December 31, 2001                              2,273       2,297
   Additional paid-in capital                                                        60,954      62,038
   Accumulated other comprehensive loss                                              (1,784)     (2,416)
   Accumulated deficit                                                              (14,974)    (12,844)
                                                                                   --------    --------

                                                                                     46,469      49,075
                                                                                   --------    --------

                                                                                   $ 79,761    $ 99,186
                                                                                   ========    ========
The accompanying notes are an integral part of the consolidated financial
statements.

                                      -4-
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
YEAR ENDED DECEMBER 31,
                                                    --------------------------------
                                                      1999        2000        2001
                                                    --------    --------    --------
Revenues:
  Products                                          $ 43,023    $ 46,390    $ 50,765
  Services                                            11,483      16,908      22,001
                                                    --------    --------    --------

Total revenues                                        54,506      63,298      72,766
                                                    --------    --------    --------

Operating expenses:
  Cost of products                                    12,418      10,816      10,592
  Cost of services                                     5,804       6,352       9,793
  Research and development                             9,306      11,215      12,847
  Sales and marketing, general and administrative     20,638      23,518      26,850
  Depreciation                                         3,865       4,746       5,589
  Amortization of intangible assets                    3,064       3,360       3,214
  Non-recurring expenses                               2,705          --          --
  Restructuring charges                                   --          --         540
                                                    --------    --------    --------

Total operating expenses                              57,800      60,007      69,425
                                                    --------    --------    --------

Operating income (loss)                               (3,294)      3,291       3,341
Financial expenses, net                                 (484)       (552)       (642)
                                                    --------    --------    --------

Income (loss) before taxes on income                  (3,778)      2,739       2,699
Taxes on income                                           --         380         569
                                                    --------    --------    --------

Net income (loss)                                   $ (3,778)   $  2,359    $  2,130
                                                    ========    ========    ========

Basic net earnings (loss) per share                 $  (0.31)   $   0.17    $   0.14
                                                    ========    ========    ========

Diluted net earnings (loss) per share               $  (0.31)   $   0.17    $   0.14
                                                    ========    ========    ========
The accompanying notes are an integral part of the consolidated financial
statements.

                                      -5-
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
ACCUMULATED
                                                              ORDINARY SHARES     ADDITIONAL      OTHER
                                                          ---------------------    PAID IN    COMPREHENSIVE  ACCUMULATED
                                                             SHARES      AMOUNT    CAPITAL        LOSS         DEFICIT
                                                          ------------   ------   ----------  -------------  -----------
Balance as of January 1, 1999                               10,514,484   $1,758     $39,236      $  (742)      $(13,555)
Comprehensive loss:
  Net loss                                                          --       --          --           --         (3,778)
  Foreign currency translation adjustments                          --       --          --         (424)            --
  Total comprehensive loss
  Issuance of Ordinary shares, net                           2,017,544      246      10,736           --             --
  Issuance of shares upon exercise of warrants                 479,908       58       1,861           --             --
  Issuance of shares upon exercise of stock options             14,400        2          70           --             --
                                                          ------------   ------     -------      -------       --------

Balance as of December 31, 1999                             13,026,336    2,064      51,903       (1,166)       (17,333)
Comprehensive income:
  Net income                                                        --       --          --           --          2,359
  Foreign currency translation
    adjustments                                                     --       --          --         (618)            --
  Total comprehensive income
  Issuance of shares upon acquisition of Flagship            1,500,000      186       8,889           --             --
  Issuance of shares upon exercise of warrants                 119,782       15          --           --             --
  Issuance of shares upon exercise of stock options, net        45,786        8         162           --             --
                                                          ------------   ------     -------      -------       --------

Balance as of December 31, 2000                             14,691,904    2,273      60,954       (1,784)       (14,974)

Comprehensive income:
  Net income                                                        --       --          --           --          2,130
  Foreign currency translation adjustments                          --       --          --         (632)            --
  Total comprehensive income
  Issuance of shares upon acquisition of Sysdrill              200,000       24       1,084           --             --
                                                          ------------   ------     -------      -------       --------

Balance as of December 31, 2001                             14,891,904   $2,297     $62,038      $(2,416)      $(12,844)
                                                          ============   ======     =======      =======       ========
TOTAL
                                                           SHAREHOLDERS'
                                                              EQUITY
                                                           -------------
Balance as of January 1, 1999                                $ 26,697
Comprehensive loss:
  Net loss                                                     (3,778)
  Foreign currency translation adjustments                       (424)
                                                             --------
  Total comprehensive loss                                   $ (4,202)
                                                             ========
  Issuance of Ordinary shares, net                           $ 10,982
  Issuance of shares upon exercise of warrants                  1,919
  Issuance of shares upon exercise of stock options                72
                                                             --------

Balance as of December 31, 1999                                35,468
Comprehensive income:
  Net income                                                    2,359
  Foreign currency translation adjustments                       (618)
                                                             --------
  Total comprehensive income                                 $  1,741
                                                             ========
  Issuance of shares upon acquisition of Flagship            $  9,075
  Issuance of shares upon exercise of warrants                     15
  Issuance of shares upon exercise of stock options, net          170
                                                             --------

Balance as of December 31, 2000                                46,469

Comprehensive income:
  Net income                                                    2,130
  Foreign currency translation adjustments                       (632)
                                                             --------
  Total comprehensive income                                 $  1,498
                                                             ========
  Issuance of shares upon acquisition of Sysdrill            $  1,108
                                                             --------

Balance as of December 31, 2001                              $ 49,075
                                                             ========
The accompanying notes are an integral part of the consolidated financial
statements.

                                      -6-
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
                                                                       ------------------------------------
                                                                         1999          2000          2001
                                                                       --------      --------      --------
Cash flows from operating activities:
Net income (loss)                                                      $ (3,778)     $  2,359      $  2,130
Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
    Depreciation and amortization                                         6,929         8,106         8,803
    Impairment of developed technology                                    1,595            --            --
    Decrease (increase) in trade receivables, accrued income
       and long-term trade receivables                                   (8,866)       10,081        (5,677)
    Decrease (increase) in other receivables and prepaid expenses           (98)          441        (1,299)
    Increase (decrease) in deferred income
       taxes, net                                                           203          (171)           --
    Increase (decrease) in trade and other payables and
       accrued expenses                                                   1,795        (4,561)         (364)
    Increase (decrease) in deferred revenues                              1,004        (2,522)         (468)
    Accrued severance pay, net                                              243        (1,083)         (271)
    Other                                                                    84           (22)           --
                                                                       --------      --------      --------
Net cash provided by (used in) operating activities                        (889)       12,628         2,854
                                                                       --------      --------      --------

 Cash flows from investing activities:
Purchase of property and equipment                                       (5,847)       (5,331)       (8,677)
Proceeds from sale of property and equipment                                 --            39           453
Purchase of developed technology                                         (1,175)         (170)         (685)
Purchase of a short-term bank deposit                                        --            --        (1,941)
Payment for acquisition of a consolidated subsidiary, PTM (1)            (8,379)           --            --
Payment for acquisition of a consolidated subsidiary, Flagship (2)           --        (3,980)           --
Payment for acquisition of a consolidated subsidiary, Sysdrill (3)           --            --          (141)
                                                                       --------      --------      --------
Net cash used in investing activities                                   (15,401)       (9,442)      (10,991)
                                                                       --------      --------      --------

Cash flows from financing activities:
Proceeds from short-term bank loans                                       2,000         7,506         4,500
Principal payment of short-term bank loans                               (1,778)       (4,978)       (3,528)
Principal payments of capital lease obligations                            (200)         (424)         (519)
Proceeds from long-term bank loans                                        6,500            --         5,100
Principal payment of long-term bank loans                                  (427)       (2,173)       (3,112)
Issuance of a convertible loan, net of issuance expenses of $615             --            --         7,385
Payment of other lease obligations                                         (200)         (242)         (229)
Issuance of share capital, net                                           10,982            --            --
Proceeds from exercise of warrants and stock options                      1,991           185            --
                                                                       --------      --------      --------
Net cash provided by (used in) financing activities                      18,868          (126)        9,597
                                                                       --------      --------      --------

Effect of exchange rate changes on cash and cash equivalents               (584)          130          (293)
                                                                       --------      --------      --------

Increase in cash and cash equivalents                                     1,994         3,190         1,167
Cash and cash equivalents at the beginning of the year                    3,463         5,457         8,647
                                                                       --------      --------      --------

Cash and cash equivalents at the end of the year                       $  5,457      $  8,647      $  9,814
                                                                       ========      ========      ========
The accompanying notes are an integral part of the consolidated financial
statements.

                                      -7-
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
                                                                                    ---------------------------------
                                                                                     1999          2000        2001
                                                                                    -------      --------     -------
(1)    Payment for acquisition of a consolidated subsidiary, PTM, estimated
       fair values of assets acquired and liabilities assumed at the date of
       acquisition:
          Working capital deficiency, excluding cash and cash equivalents           $  (672)
          Property and equipment                                                        318
          Acquired technology                                                         5,146
          Assembled work-force                                                          851
          Goodwill                                                                    2,736
                                                                                    -------

                                                                                    $ 8,379
                                                                                    =======
(2)    Payment for acquisition of a consolidated subsidiary, Flagship,
       estimated fair values of assets acquired and liabilities assumed at
       the date of acquisition:
          Working capital deficiency, excluding cash and cash equivalents                        $(1,014)
          Property and equipment                                                                     743
          Acquired technology                                                                      3,430
          Assembled work-force                                                                     1,180
          Customer base                                                                            2,410
          Goodwill                                                                                 7,056
                                                                                                 -------

                                                                                                  13,805
       Less - amount financed by issuance of shares, net                                          (9,075)
       Less - accrued prepaid acquisition expenses                                                  (750)
                                                                                                 -------

                                                                                                 $ 3,980
                                                                                                 =======
(3)    Payment for acquisition of a consolidated subsidiary Sysdrill,
       estimated fair values of assets acquired and liabilities assumed at
       the date of acquisition:
          Working capital, excluding cash and cash equivalents                                                $ 1,477
          Property and equipment                                                                                  140
          Acquired technology                                                                                   2,948
          Goodwill                                                                                              3,249
                                                                                                              -------

                                                                                                                7,814
         Less - amount financed by issuance of shares, net                                                     (1,108)
         Less - accrued prepaid acquisition expenses                                                             (283)
         Less - amount financed by a note payable                                                              (6,282)
                                                                                                              -------

                                                                                                              $   141
                                                                                                              =======
Supplemental disclosure of cash flow activities: Cash paid during the year for:
     Interest                                                                       $    42      $    949     $   745
                                                                                    =======      ========     =======

     Income taxes                                                                   $   379      $     --     $   642
                                                                                    =======      ========     =======
-8-
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
                                                                         ------------------------------
                                                                           1999       2000       2001
                                                                         --------   --------   --------
Non-cash activities:
   Purchase of leased property and equipment in  capital leases          $  1,376   $     --
                                                                         ========   ========   ========

   Note payable issued in respect of acquisition of Sysdrill             $     --   $     --   $  6,282
                                                                         ========   ========   ========

   Accrued prepaid acquisition expenses associated with the Flagship
     acquisition                                                         $     --   $    750   $     --
                                                                         ========   ========   ========
The accompanying notes are an integral part of the consolidated financial
statements.

                                      -9-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1:- BUSINESS AND ORGANIZATION

         a.       General:

                  Paradigm Geophysical Ltd. ("Paradigm" or the "Company") was
                  incorporated under the laws of Israel. The Company provides
                  Geoscience knowledge solutions for the oil and gas industry,
                  which facilitate the exploration and development of oil and
                  gas reserves. Paradigm provides exploration and production
                  Geoscience software solutions, technical training, data
                  processing, interpretation and reservoir-studies services,
                  adding value to the oil and gas industry's reservoir assets.

                  Paradigm operates worldwide through wholly-owned subsidiaries
                  in the United States, Canada, Venezuela, Argentina, Brazil,
                  the Netherlands, United Kingdom, France, Australia, Indonesia,
                  Scotland and Singapore and through representative offices in
                  Russia, Bahrain and China. These subsidiaries and
                  representative offices coordinate the activities of the
                  Company's direct sales force and its network of representative
                  agents in the Far East, Near East, Pacific Rim, Africa and
                  South America.

         b.       Acquisition of Sysdrill:

                  On May 15, 2001, the Company acquired all the outstanding
                  capital stock of Sysdrill Ltd ("Sysdrill"), a Scottish based
                  company. Sysdrill's solutions provide well planning and
                  drilling engineering products. The total consideration of the
                  acquisition was $8,533,000 (including $283,000 of costs
                  related to the acquisition), which was financed by an issuance
                  of 200,000 Ordinary shares of the Company valued at
                  $1,108,000, $860,000 paid in cash and additional $6,282,000
                  through an issuance of a note, which shall be paid in British
                  Pound by May 15, 2002 and will bear six months LIBOR interest
                  (see Note 8d).

                  The transaction has been accounted for using the purchase
                  method of accounting, and accordingly, the purchase price has
                  been allocated to the assets acquired and liabilities assumed
                  based upon their fair values. The excess of the purchase price
                  over the fair value of the tangible assets acquired and
                  liabilities assumed has been allocated to identifiable
                  intangible assets including acquired technology and goodwill,
                  as follows (U.S. dollars in thousands):
Acquired technology     $2,948
                         Goodwill                 3,249
                                                 ------

                         Total                   $6,197
                                                 ======
The acquired technology and goodwill are being amortized over
                  their expected useful lives, which is estimated at ten years
                  for the acquired technology and twenty years for the goodwill
                  (see Note 2g).

                  The financial statements of Sysdrill were consolidated with
                  the accounts of the Company, commencing May 15, 2001.

                                      -10-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1:- BUSINESS AND ORGANIZATION (CONT.)

                  The following represents the unaudited pro-forma results of
                  operations for the years ended December 31, 2000 and 2001,
                  assuming that the Sysdrill acquisition had been consummated as
                  of January 1, 2000 and January 1, 2001, respectively:
DECEMBER 31,
                                                     ------------------------
                                                        2000          2001
                                                     ----------    ----------
                                                           IN THOUSANDS,
                                                      EXCEPT PER SHARE DATA
Revenues                           $   65,739    $   73,896
                                                     ==========    ==========

                  Net income                         $    2,248    $    2,293
                                                     ==========    ==========

                  Basic net earnings per share       $     0.16    $     0.15
                                                     ==========    ==========

                  Diluted net earnings per share     $     0.16    $     0.15
                                                     ==========    ==========
c.       Acquisition of Flagship:

                  On October 4, 2000, the Company acquired all assets and
                  assumed all liabilities of Flagship S.A., a France based
                  company, and Flagship LLC, a U.S. based company (together
                  "Flagship"), wholly owned subsidiaries of Compagnie Generale
                  de Geophysique ("CGG"). Flagship products provide structural
                  geological interpretation and reservoir characterization. The
                  total consideration of the acquisition was $14,219,000
                  (including $1,055,000 of costs related to the acquisition),
                  which was financed by an issuance of 1,500,000 Ordinary shares
                  of the Company valued at $9,075,000 (net of $89,000 issuance
                  expenses) and $5,055,000 in cash (of which $4,305,000 was paid
                  and $750,000 was recorded as accrued expenses as of December
                  31, 2000).

                  The transaction has been accounted for using the purchase
                  method of accounting, and accordingly, the purchase price has
                  been allocated to the assets acquired and liabilities assumed
                  based upon their fair values. The excess of the purchase price
                  over the fair value of the tangible assets acquired and
                  liabilities assumed has been allocated to identifiable
                  intangible assets including acquired technology, assembled
                  work-force, customer base and goodwill, as follows (in
                  thousands):
Acquired technology      $ 3,430
                        Assembled work-force       1,180
                        Customer base              2,410
                        Goodwill                   7,056
                                                 -------

                        Total                    $14,076
                                                 =======
The acquired assembled work-force and the acquired technology
                  are being amortized over their expected useful lives, which is
                  estimated at ten years for the acquired technology and
                  customer base and twenty years for the goodwill (see Note 2g).

                                      -11-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1:- BUSINESS AND ORGANIZATION (CONT.)

                  The financial statements of Flagship were consolidated with
                  the accounts of the Company, commencing October 4, 2000.

                  The following represents the unaudited pro-forma results of
                  operations for the years ended December 31, 1999 and 2000,
                  assuming that the Flagship acquisition had been consummated as
                  of January 1, 1999 and January 1, 2000, respectively:
DECEMBER 31,
                                               ----------------------------
                                                  1999             2000
                                               -----------      -----------
                                                      IN THOUSANDS,
                                                 EXCEPT PER SHARE DATA
Revenues                                  $    72,514      $    75,033
                                               ===========      ===========

     Net income (loss)                         $    (5,359)     $       457
                                               ===========      ===========

     Basic net earnings (loss) per share       $     (0.39)     $      0.03
                                               ===========      ===========

     Diluted net earnings (loss) per share     $     (0.39)     $      0.03
                                               ===========      ===========
d.       Acquisition of PTM:

                  On March 31, 1999, Paradigm acquired the net assets of the
                  Petroleum Technology Division of Mincom Limited ("PTM"), an
                  Australian entity for $8,379,000 in cash, including $317,000
                  acquisition costs. PTM's is the developer of the Geolog
                  product, which is an information software tool for log
                  analysis and petrophysics.

                  The acquisition has been accounted for using the purchase
                  method of accounting, and accordingly, the purchase price has
                  been allocated to the assets acquired and liabilities assumed,
                  based upon their fair values. The excess of the purchase price
                  over the fair value of the tangible assets acquired and
                  liabilities assumed has been allocated to identifiable
                  intangible assets including acquired technology, assembled
                  work-force and goodwill, as follows (in thousands):
Acquired technology      $5,146
                        Assembled work-force        851
                        Goodwill                  2,736
                                                 ------

                                                 $8,733
                                                 ======
The acquired assembled work-force and the acquired technology
                  are being amortized over their expected useful lives, which is
                  estimated at ten years, goodwill is being amortized over a
                  twenty years period. In prior years, goodwill has been
                  amortized over a ten years period (see Notes 2g and 6c).

                                      -12-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1:- BUSINESS AND ORGANIZATION (CONT.)

                  The financial statements of PTM were consolidated with the
                  accounts of the Company, commencing March 31, 1999.

                  The following are pro-forma unaudited results of operations
                  for the year ended December 31, 1999, assuming that the PTM
                  acquisition had been consummated as of January 1, 1999:
DECEMBER 31,
                                                         1999
                                               ------------------------
                                               IN THOUSANDS, EXCEPT PER
                                                      SHARE DATA
Revenues                           $   56,105
                                                      ==========

                   Net loss                           $   (3,867)
                                                      ==========

                   Basic net loss per share           $    (0.32)
                                                      ==========

                   Diluted net loss per share         $    (0.32)
                                                      ==========
e.       Restructuring costs

                  During December 2001, the Company recorded restructuring
                  charges of approximately $540,000, which were accrued as a
                  short-term liability as of December 31, 2001. The
                  restructuring costs consist of employee termination benefits
                  associated with involuntary terminations of approximately 20
                  employees in France and the United States and accounted for in
                  accordance with EITF 94-3, "Liability Recognition for Certain
                  Employee Termination Benefits and Other Costs to Exit an
                  Activity (Including Certain Costs Incurred in a
                  Restructuring)" ("EITF 94-3") and SAB 100, "Restructuring and
                  Impairment Charges" ("SAB 100"). The terminations resulted
                  from the Company's strategy to reduce costs and restore
                  profitability.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

         The consolidated financial statements have been prepared in accordance
         with accounting principles generally accepted in the United States
         ("U.S. GAAP").

         a.       Use of estimates:

                  The preparation of financial statements in conformity with
                  generally accepted accounting principles requires management
                  to make estimates and assumptions that affect the amounts
                  reported in the financial statements and accompanying notes.
                  Actual results could differ from those estimates.

                                      -13-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

         b.       Financial statements in U.S. dollars:

                  A majority of the Company's revenues is generated in U.S.
                  dollars ("dollar"). In addition, a substantial portion of its
                  costs is incurred in dollars. Since the dollar is the primary
                  currency in the economic environment in which the Company
                  operates, the dollar is its functional and reporting currency.
                  Accordingly, monetary accounts maintained in currencies other
                  than the dollar are remeasured into U.S. dollars in accordance
                  with Statement of Financial Accounting Standards No. 52,
                  "Foreign Currency Translation" ("SFAS No. 52"). All
                  transactions gains and losses from remeasurement of monetary
                  balance sheet items are reflected in the consolidated
                  statements of operations as financial income or expenses, as
                  appropriate.

                  Total foreign currency translation net income (expenses)
                  included in financial income (expenses), net amounted to
                  $(6,000), $(53,000) and $83,000 for the years ended December
                  31, 1999, 2000 and 2001, respectively.

                  The functional and reporting currency of certain subsidiaries
                  has been determined to be their local currency. For those
                  subsidiaries assets and liabilities are translated at year-end
                  exchange rate and statement of operations items are translated
                  at the average rates prevailing during the year. These
                  translation adjustments are recorded as accumulated other
                  comprehensive income (loss), in the statement of changes in
                  shareholders' equity.

         c.       Principles of consolidation:

                  The consolidated financial statements include the accounts of
                  the Company and its wholly-owned subsidiaries. Intercompany
                  balances and transactions have been eliminated upon
                  consolidation.

         d.       Cash equivalents:

                  Cash equivalents are short-term highly liquid investments that
                  are readily convertible to cash with original maturities of
                  three months or less.

         e.       Short-term bank deposits:

                  Bank deposits with maturities of more than three months but
                  less than one year are included in short-term bank deposits.
                  Such bank deposits are stated at cost.

         f.       Property and Equipment:

                  Property and equipment are stated at cost, net of accumulated
                  depreciation. Depreciation is calculated by the straight-line
                  method over the estimated useful lives of the assets at the
                  following annual rates:
%
                                                      --------------------------
Computers and peripheral equipment           16 - 33
                  Office furniture and equipment                6 - 15
                  Motor vehicles                                  15
                  Leasehold improvements              over the term of the lease
-14-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                  The Company and its subsidiaries periodically assess the
                  recoverability of the carrying amount of property and
                  equipment and provide for any possible impairment loss based
                  upon the difference between the carrying amount and fair value
                  of such assets in accordance with Statement of Financial
                  Accounting Standard No. 121 "Accounting for the Impairment of
                  Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
                  ("SFAS No. 121"). As of December 31, 2001, no impairment
                  losses have been identified.

         g.       Other assets:

                  Other assets are stated at cost less accumulated amortization.
                  Amortization is computed using the straight-line method over
                  their expected useful lives, as follows:
YEARS
                                                       -----
Acquired technology                  10
                  Assembled work-force                 5-10
                  Customer base                        20
                  Goodwill                             20
                  Issuance costs of convertible loan   3-5 (over the period from issuance to maturity)
                  Other                                5
The carrying value of intangible assets is periodically
                  reviewed by management, based on the expected future
                  undiscounted operating cash flows over the remaining
                  amortization period. If this review indicates that the
                  intangible assets will not be recoverable, the carrying value
                  of the intangible assets is reduced to estimated fair value.
                  In 1999, following the PTM acquisition such impairment was
                  indicated, and the Company recognized an impairment loss in
                  the amount of $1,595,000 related to developed technology. In
                  2000 and 2001 the Company did not recognize any impairment
                  loss in relation to intangible assets.

         h.       Revenue recognition:

                  The Company and its subsidiaries generate revenues mainly from
                  licensing the rights to use their software products, from
                  consulting services and from sales of professional services of
                  seismic data processing, interpretation and reservoir-studies
                  services. The Company and its subsidiaries also generate
                  revenues from maintenance and technical support, training,
                  installation and hardware sales. The Company and its
                  subsidiaries sell their products primarily through their
                  direct sales force.

                                      -15-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                  The Company and its subsidiaries implement Statement of
                  Position 97-2, "Software Revenue Recognition", SOP 97-2 as
                  amended. Revenues from software arrangements are recognized
                  upon delivery of the product, when collection is probable, the
                  product fee is otherwise fixed or determinable, persuasive
                  evidence of an arrangement exists, collectibility is probable
                  and no further obligation remains. SOP 97-2 requires revenue
                  earned on software arrangements involving multiple elements to
                  be allocated to each element based on the relative fair value
                  of the elements. The Company has also adopted "Modification of
                  SOP 97-2, Software Revenue Recognition with Respect to Certain
                  Transactions," SOP 98-9, for all transactions entered into
                  after January 1, 2000. The Company's Vendor Specific Objective
                  Evidence ("VSOE") used to allocate the sales price to
                  maintenance, support, technical training and installation is
                  based on the price charges when these elements are sold
                  separately. SOP 98-9 requires that revenue be recognized under
                  the "residual method" when (1) VSOE of fair value exists for
                  all undelivered elements and no VSOE exists for the delivered
                  elements, and (2) all revenue recognition criteria of SOP
                  97-2, as amended, are satisfied. Under the residual method any
                  discount in the arrangement is allocated to the delivered
                  element. The Company and its subsidiaries do not grant a right
                  of return to their customers.

                  SOP 97-2 specifies that extended payment terms in a software
                  licensing arrangement may indicate that the software license
                  fees are not deemed to be fixed or determinable. In addition,
                  if payment of a significant portion of the software license
                  fees is not due until more than twelve months after delivery,
                  the software license fees should be presumed not to be fixed
                  or determinable, and thus should be recognized as the payments
                  become due. However, SOP 97-2 specifies that if the Company
                  has a standard business practice of using extended payment
                  terms in software licensing arrangements and has a history of
                  successfully collecting the software license fees under the
                  original terms of the software licensing arrangement without
                  making concessions, the Company overcomes the presumption that
                  the software license fees are not fixed or determinable. Thus,
                  revenues should be recognized when all other SOP 97-2 revenue
                  recognition criteria are met. The Company has concluded that
                  for certain software arrangements with extended payment terms,
                  the "fixed or determinable" presumption has been overcome and
                  software license fees have been recognized upon meeting the
                  remaining SOP 97-2 revenue recognition criteria.

                  Arrangements that include installation services are evaluated
                  to determine whether those services are essential to the
                  functionality of other elements of the arrangement. When
                  services are considered essential, the entire revenue under
                  the arrangement is recognized using the contract accounting
                  under the percentage of completion method. When services are
                  not considered essential, the service revenue is recognized
                  when the services are performed.

                  Maintenance and support revenue included is deferred and
                  recognized on a straight-line basis over the term of the
                  maintenance and support agreement.

                  Revenues from technical training and installation and from
                  consulting services are recognized at the time they are
                  rendered.

                  Revenues from hardware sales are recognized in accordance with
                  Staff Accounting Bulletin No. 101 "Revenue Recognition in
                  Financial Statements" ("SAB No. 101"), when shipment has
                  occurred, persuasive evidence of an arrangement exists, the
                  vendor's fee is fixed or determinable, no further obligation
                  remains and collectibility is probable.

                                      -16-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                  Revenues from seismic data processing, interpretation,
                  reservoir-studies services and significant customization of
                  software are recognized based on "Accounting for Performance
                  of Construction Type and Certain Production Type Contracts",
                  ("SOP 81-1"), using contract accounting on a percentage of
                  completion method. The percentage of completion for software
                  licenses arrangements that require significant customization
                  is determined based on the relationship of actual costs
                  incurred to total costs estimated to be incurred over the
                  duration of the contract. The percentage of completion for
                  seismic data processing, interpretation and reservoir-studies
                  services is determined based on the amount of data interpreted
                  or processed to the total amount of data to be interpreted or
                  processed. A provision for estimated losses on uncompleted
                  contracts is recorded in the period in which such losses are
                  first identified, in the amount of the estimated loss on the
                  entire contract. As of December 31, 2001, no provisions for
                  losses have been recorded.

                  Deferred revenue includes unearned amounts received under
                  maintenance and support contracts, and amounts received from
                  customers but not yet recognized as revenues.

         i.       Research and development costs:

                  Research and development costs incurred in the process of
                  developing product improvements or new products, are generally
                  charged to expenses as incurred.

                  Statement of Financial Accounting Standards No. 86 "Accounting
                  for the Costs of Computer Software to be Sold, Leased or
                  Otherwise Marketed, ("SFAS No. 86") requires capitalization of
                  certain software development costs subsequent to the
                  establishment of technological feasibility. Based on the
                  Company and its subsidiaries product development process,
                  technological feasibility is established upon completion of a
                  working model. Costs incurred by the Company and its
                  subsidiaries between completion of the working model and the
                  point at which the product is ready for general release which
                  are insignificant, have been capitalized.

                  Capitalized software costs are amortized by the greater of the
                  amount computed using the: (i) ratio that current gross
                  revenues from sales of the software to the total of current
                  and anticipated future gross revenues from sales of that
                  software, or (ii) the straight-line method over the estimated
                  useful life of the product (not to exceed three years). The
                  Company assesses the recoverability of this intangible asset
                  on a regular basis by determining whether the amortization of
                  the asset over its remaining life can be recovered through
                  undiscounted future operating cash flows from the specific
                  software product sold.

         j.       Income taxes:

                  The Company and its subsidiaries account for income taxes in
                  accordance with Statement of Financial Accounting Standard No.
                  109, "Accounting for Income Taxes, ("SFAS No. 109"). This
                  Statement prescribes the use of the liability method whereby
                  deferred tax assets and liability account balances are
                  determined based on differences between financial reporting
                  and tax bases of assets and liabilities and are measured using
                  the enacted tax rates and laws that will be in effect when the
                  differences are expected to reverse. The Company and its
                  subsidiaries provide a valuation allowance, if necessary, to
                  reduce deferred tax assets to their estimated realizable
                  value.

                                      -17-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

         k.       Concentrations of credit risks:

                  Financial instruments that potentially subject the Company and
                  its subsidiaries to concentrations of credit risk consist
                  principally of cash and cash equivalents, trade receivables,
                  accrued income and long-term trade receivables.

                  Cash and cash equivalents and a short-term deposit are
                  invested in U.S. dollars with major banks in the United
                  States, France and in Israel. Such investments in the United
                  States may be in excess of insured limits and are not insured
                  in other jurisdictions. Management believes that the financial
                  institutions that hold the Company and its subsidiaries
                  investments are financially sound and, accordingly, minimal
                  credit risk exists with respect to these investments.

                  The Company and its subsidiaries' trade receivables, long-term
                  trade receivables and accrued income are generally derived
                  from sales of products and services rendered to large and
                  solid organizations located primarily in Europe, the Middle
                  East and Asia ("EMEA"), North and South America, and the Far
                  East. The Company and its subsidiaries perform ongoing credit
                  evaluations of its customers. An allowance for doubtful
                  accounts is determined with respect to those amounts that the
                  Company has determined to be doubtful of collection and a
                  general allowance is provided to cover additional potential
                  exposures. As of December 31, 2001, the Company has not
                  incurred significant losses.

         l.       Accounting for stock-based compensation:

                  The Company has elected to follow Accounting Principles Board
                  Opinion No. 25 "Accounting for Stock Issued to Employees"
                  ("APB No. 25") and FASB Interpretation No. 44 "Accounting for
                  Certain Transactions Involving Stock Compensation" ("FIN 44")
                  in accounting for its employee stock option plans. Under APB
                  No. 25, when the exercise price of the Company's share options
                  is less than the market price of the underlying shares on the
                  date of grant, compensation expense is recognized. The pro
                  forma disclosures required by SFAS No. 123 "Accounting for
                  Stock-Based Compensation" ("SFAS No. 123") are provided in
                  Note 10g.

                  The Company applies SFAS No. 123 and EITF 96-18 "Accounting
                  for Equity Instruments that are Issued to Other than Employees
                  for Acquiring, or in Conjunction with Selling, Goods or
                  Services" ("EITF No. 96-18") with respect to warrants and
                  options issued to non-employees. SFAS No. 123 requires use of
                  an option valuation model to measure the fair value of the
                  options at the grant date.

         m.       Severance pay:

                  The Company's liability for severance pay for its Israeli
                  employees, is calculated pursuant to Israeli severance pay law
                  based on the most recent salary of the employees multiplied by
                  the number of years of employment, as of the balance sheet
                  date. Israeli employees are entitled to one month's salary for
                  each year of employment or a portion thereof. The Company's
                  liability for all of these employees, is fully provided by
                  monthly deposits with severance pay funds, insurance policies
                  and by an accrual.

                                      -18-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                  The deposited funds include profits accumulated up to the
                  balance sheet date. The deposited funds may be withdrawn only
                  upon the fulfillment of the Company's obligation pursuant to
                  Israeli severance pay law and labor agreements. The value of
                  the deposited funds is based on the cash surrendered value of
                  these policies, and includes immaterial profits.

         n.       Fair value of financial instruments:

                  The following methods and assumptions were used by the Company
                  and its subsidiaries in estimating their fair value
                  disclosures for financial instruments:

                  The carrying amounts of cash and cash equivalents, short-term
                  deposits, trade receivables, short-term bank loans, trade
                  payables and note payable approximate their fair value due to
                  the short-term maturity of such instruments.

                  Long-term trade receivables, long-term bank loans, long-term
                  lease obligations and convertible loan are estimated by
                  discounting the future cash flows using current interest rates
                  for borrowings and lending of similar terms and maturities.
                  The carrying amount of the long-term trade receivables,
                  long-term bank loans, long-term lease obligations and
                  convertible loan approximates their fair value.

         o.       Derivatives and hedging:

                  The Company accounts for derivatives and hedging based on
                  Financial Accounting Standards Board Statement No. 133,
                  "Accounting for Derivative Instruments and Hedging Activities"
                  as amended ("SFAS No. 133"). SFAS No. 133 requires companies
                  to recognize all of its derivative instruments on the balance
                  sheet at fair value. The accounting for changes in the fair
                  value of a derivative instrument depends on whether it has
                  been designated and qualifies as part of a hedging
                  relationship and further, on the type of hedging relationship.
                  For those derivative instruments that are designated and
                  qualify as hedging instruments, a company must designate the
                  hedging instrument, based upon the exposure being hedged, as a
                  fair value hedge, cash flow hedge or a hedge of a net
                  investment in a foreign operation.

                  For derivative instruments that are designated and qualify as
                  a fair value hedge, the gain or loss on the derivative
                  instrument as well as the offsetting loss or gain on the
                  hedged item attributable to the hedged risk are recognized in
                  the same line item associated with the hedged item in current
                  earnings during the period of the change in fair values.

                  The Company entered into forward exchange contract to minimize
                  the short term impact of foreign currency fluctuation on the
                  note payable denominated in British Pound (see Note 8d). This
                  is highly correlated to the hedge item and is designated as,
                  and considered effective as hedge of the underlying liability.
                  Gains and losses on this contract are included in net
                  financial expenses, and off set foreign exchange gains and
                  losses from the revaluation of the note payable denominated in
                  British Pound.

                                      -19-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                  The Company entered into additional forward exchange contracts
                  to hedge certain transactions denominated in foreign
                  currencies. The purpose of the Company's foreign currency
                  hedging activities is to protect the Company from risk that
                  the eventual dollar cash flows from the sale of products to
                  international customers will be adversely affected by changes
                  in the exchange rates. The Company's forward contracts did not
                  qualify as hedging instruments and the changes in the forward
                  fair value are reflected in the statement of operations as
                  financial income or expense.

         p.       Advertising expenses:

                  Advertising expenses are charged to the statements of
                  operations as incurred. Advertising expenses for the years
                  ended December 31, 1999, 2000 and 2001 were $587,000, $536,000
                  and $171,000, respectively.

         q.       Basic and diluted net earnings (loss) per share:

                  Basic net earnings (loss) per share are computed based on the
                  weighted average number of Ordinary shares outstanding during
                  each year. Diluted net earnings per share is computed based on
                  the weighted average number of Ordinary shares outstanding
                  during each year, plus dilutive potential Ordinary shares
                  considered outstanding during the year, in accordance with
                  Statement of Financial Accounting Standards No. 128, "Earnings
                  Per Share". ("SFAS No. 128").

                  The total weighted average number of shares related to
                  outstanding options and warrants excluded from the calculation
                  of diluted net earnings (loss) per share, because these
                  securities are anti-dilutive, was 46,000, 1,230,590 and
                  1,834,808 for the years ended December 31, 1999, 2000 and
                  2001, respectively

         r.       Impact of recently issued accounting standards:

                  In June 2001, the Financial Accounting Standards Board issued
                  Statement of Financial Accounting Standards No. 141, Business
                  Combinations and No. 142, Goodwill and other Intangible
                  Assets. ("SFAS No. 141" and "SFAS No. 142"). SFAS No. 141
                  requires that the purchase method of accounting be used for
                  all business combinations initiated after June 30, 2001.

                  SFAS No. 141 also includes guidance on the initial recognition
                  and measurement of goodwill and other intangible assets
                  arising from business combination completed after June 30,
                  2001. SFAS No. 142 prohibits the amortization of goodwill and
                  intangible assets with indefinite useful lives. SFAS No. 142
                  requires that these assets be reviewed for impairment at least
                  annually. Intangible assets with finite lives will continue to
                  be amortized over their estimated useful lives.

                                      -20-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                  The Company will apply Statement No. 142 beginning in January
                  1, 2002. The Company will test the goodwill for impairment
                  using the two-step process prescribed in SFAS No. 142. The
                  first step is a screen for potential impairment, while the
                  second step measures the amount of the impairment, if any. The
                  Company expects to perform the first of the required
                  impairment tests of goodwill and identified lived intangible
                  assets as of January 1, 2002 in the first half of 2002. Any
                  impairment charge resulting from these transitional impairment
                  tests will be reflected as cumulative effect of a change in
                  accounting principle in the first half of 2002. Application of
                  the non-amortization of the SFAS is expected to result in an
                  increase in net income of approximately $1,453,000 ($0.1 per
                  year). The Company will reclassify an assembled workforce
                  intangible asset with an unamortized balance of $1,957,000 to
                  goodwill at the date of adoption.

                  In August 2001, the Financial Accounting Standards Board
                  issued Statement of Financial Accounting Standard No. 144,
                  "Accounting for the Impairment or Disposal of Long-Lived
                  Assets" ("SFAS No.144"), which addresses financial accounting
                  and reporting for the impairment or disposal of long-lived
                  assets and superseded SFAS No. 121, "Accounting for the
                  Impairment of Long-Lived Assets and for Long-Lived Assets to
                  be Disposed Of", and the accounting and reporting provisions
                  of APB Opinion No. 30, "Reporting the Results of Operations
                  for a Disposal of a Segment of a Business". SFAS No. 144 is
                  effective for fiscal years beginning after December 15, 2001,
                  with earlier application encouraged.

                  The Company expects to adopt SFAS No. 144 as of January 1,
                  2002 and it has not determined the effect, if any, the
                  adoption of SFAS No. 144 will have on the Company's financial
                  position and results of operations.

         s.       Reclassification:

                  Certain prior years amounts have been reclassified to conform
                  to the current year's presentation.

NOTE 3: SHORT-TERM BANK DEPOSIT

                  Short-term bank deposit is maintained with a bank as security
                  for the note payable (see Note 8a). The deposit bears an
                  annual interest of 3.75% and is linked to the British Pound.

                                      -21-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 4:- OTHER RECEIVABLES AND PREPAID EXPENSES
DECEMBER 31,
                                          -------------------------
                                           2000               2001
                                          ------             ------
                                          U.S. DOLLARS IN THOUSANDS
                                          -------------------------
Government authorities    $1,481             $1,741
                Prepaid expenses           1,350              1,608
                Other (1)                  1,279              2,337
                                          ------             ------

                                          $4,110             $5,686
                                          ======             ======
(1)      Includes two loans to the Company's officer, amounted to
                  $110,000, linked to the Israeli Consumer Price Index, with
                  interest at the rate of 2% per annum until May 31, 2000 and 4%
                  per annum from June 1, 2000. These loans were originally
                  repayable on December 31, 2000. Repayment has been extended to
                  December 31, 2002.

NOTE 5:- PROPERTY AND EQUIPMENT, NET

         a.       Comprised as follows:
DECEMBER 31,
                                                        -------------------------
                                                         2000               2001
                                                        -------           -------
                                                        U.S. DOLLARS IN THOUSANDS
                                                        -------------------------
Cost:
                    Computers and peripheral equipment  $26,180           $27,877
                    Office furniture and equipment        2,604             3,365
                    Motor vehicles                           48               139
                    Leasehold improvements                3,301             6,240
                                                        -------           -------
                                                         32,133            37,621

                  Accumulated depreciation               18,815            21,719
                                                        -------           -------

                  Depreciated cost                      $13,318           $15,902
                                                        =======           =======
b.       Effective October 1, 2001, the Company changed the estimated
                  useful life of some of its computer equipment from mainly 4
                  years to 6 years. The effect of this change of estimate on the
                  net income and the net earning per share for the year ended
                  December 31, 2001, has been immaterial.

         c.       The equipment acquired under capital lease in accordance with
                  Statement of Financial Accounting Standards No. 13,
                  "Accounting for Leases" ("SFAS No. 13"), in the amount of
                  $1,300,000 is included in property and equipment. Depreciation
                  expense relating to this equipment was approximately $115,000,
                  $275,000 and $381,000 for the years ended December 31, 1999,
                  2000 and 2001, respectively (see also Note 12c).

         d.       As for charges, see Note 12e.

                                      -22-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 6: - OTHER ASSETS, NET

         a.       Comprised as follows:
DECEMBER 31,
                                                                 -------------------------
                                                                    2000           2001
                                                                   -------        -------
                                                                 U.S. DOLLARS IN THOUSANDS
                                                                 -------------------------
Acquired technology (net of accumulated amortization
   of $3,724,000 in 2000 and $6,154,000 in 2001)                   $11,171        $12,123
Assembled work-force (net of accumulated amortization
   of $1,012,000 in 2000 and $1,463,000 in 2001)                     2,408          1,957
Customer base (net of accumulated amortization of $30,000 in
   2000 and $151,000 in 2001)                                        2,380          2,259
Goodwill (net of accumulated amortization of $992,000 in 2000
   and $1,641,000 in 2001)                                           9,499         12,985
Issuance costs of convertible loan (net of accumulated
   amortization of $0 in 2000 and $18,000 in 2001 (see Note 9)          --            597
Other (net of accumulated amortization of $1,499,000 in 2000
   and $1,650,000 in 2001)                                             147            640
                                                                   -------        -------

                                                                   $25,605        $30,561
                                                                   =======        =======
b.       Effective April 1, 2001, the Company changed the estimated
                  useful life of the remaining acquire technology, workforce and
                  goodwill acquired in connection with Canada acquisition and
                  certain other acquisitions from 5 to 10 years. The effect of
                  change of estimate on the net income and net earnings per
                  share for the year ended December 31, 2001, is an increase of
                  approximately $975,000 and $0.07, respectively.

                  The expected effect of this change of estimate for the
                  following eight years is an increase of approximately $1.3
                  million and $0.09 on the net income and on the net earnings
                  per share per annum, respectively.

         c.       Effective October 1, 2000, the Company changed the estimated
                  useful life of the remaining goodwill acquired in connection
                  with the PTM acquisition from 10 to 20 years. The effect of
                  change of estimate on the net income and net earnings per
                  share for the year ended December 31, 2000, has been
                  immaterial.

                                      -23-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 7:- OTHER PAYABLES AND ACCRUED EXPENSES
DECEMBER 31,
                                                -------------------------
                                                 2000              2001
                                                -------           -------
                                                U.S. DOLLARS IN THOUSANDS
                                                -------------------------
Accrued expenses                        $ 2,493           $ 3,975
        Employees and payroll accruals            2,585             3,428
        Royalties                                 1,473             1,682
        Employees termination expense               136               540
        Income taxes and other taxes              2,093             2,545
        Other                                     1,821             1,070
                                                -------           -------

                                                $10,601           $13,240
                                                =======           =======
NOTE 8:- FINANCING ARRANGEMENTS

         a.       The Company has available unsecured revolving credit line
                  facilities for borrowings of up to a total of approximately $
                  22 million as of December 31, 2001, which are available until
                  August to November, 2002. Additionally, the Company is
                  required to maintain certain covenants according to which, (1)
                  its shareholders' equity will not be less than 40% of its
                  total assets and (2) the net profit excluding one time
                  expenses will be positive on an annual basis. Borrowings under
                  these agreements bear interest at rates LIBOR for three to six
                  months, plus 1%-1.5%. The Company had an unused credit
                  facility in the amount of approximately $10 million as of
                  December 31, 2001. A portion of the Company's short-term bank
                  loans require that the Company pledges cash and places
                  floating charge as collateral for its borrowings (see Note
                  12e).

         b.       Short-term bank loans consist of loans under the above
                  discussed facility, linked to the US dollar. The interest rate
                  on these borrowings is the London Inter Bank Offer Rate
                  ("LIBOR") for three to six months, plus 1%. The weighted
                  average interest rate as of December 31, 2000 and 2001, was
                  approximately 7.5% and 4.5% respectively.

         c.       Long-term bank loans under the above discussed facility,
                  represent other bank loans which are linked to the U.S.
                  dollar. The interest rate on these borrowings is the LIBOR for
                  three months, plus 1%-1.5%.

                         Aggregate maturities of long-term loans:
DECEMBER 31,
                                                -------------------------
                                                  2000            2001
                                                 ------          ------
                                                U.S. DOLLARS IN THOUSANDS
                                                -------------------------
First year (current maturities)          $3,112          $1,278
        Second year                               1,277           1,300
        Third year                                   --           3,799
                                                 ------          ------

                                                 $4,389          $6,377
                                                 ======          ======
-24-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 8:- FINANCING ARRANGEMENTS (CONT.)

         d.       In May 2001, the Company issued a note payable amounting
                  $6,282,000, in respect of the acquisition of Sysdrill, to the
                  previous owner of Sysdrill ("the lender"). The note shall be
                  paid in British Pound by May 15, 2002 and bears six months
                  LIBOR interest. The lender shall be entitled, by given 90 day
                  notice, to require a redemption of up to one million British
                  Pound (see Note 1b).

NOTE 9:- CONVERTIBLE LOAN

         On October 11, 2001, the Company entered into an agreement with The
         Israel Mezzanine Fund, L.P., The Israel Mezzanine Fund (In Israel),
         Limited Partnership and The Jordan (Bermuda) Investment Company Ltd.
         (collectively "FIMI") pursuant to which the Company would issue FIMI $8
         million convertible debentures ("Convertible loan"), with the option to
         increase to $11 million under certain conditions. Annual interest rate
         is three months LIBOR minus 1% payable quarterly. The outstanding loan
         principal amount shall be repaid in three equal annual payments
         commencing October 2004.

         The loan shall be convertible into Ordinary shares by FIMI at any time
         at $7.5 per share ("Conversion Price").

         The Conversion Price shall be subject to adjustment in the event that
         the average closing prices of the Company's Ordinary shares, sixty
         trading days immediately preceding the second and the third
         anniversaries of the agreement ("Market Price") is lower than $7.5 per
         share. The Conversion Price shall be adjusted to the Market Price,
         provided that it shall not be lower than $3.26 per share. In the event
         that the Market Price shall be equal to or lower than $3.26 per share,
         the conversion price shall be $3.26 per share.

         In the event that the average closing prices of the Company's Ordinary
         shares, sixty trading days immediately preceding a conversion date
         ("Conversion Closing Price") is equal to or higher than $20 but lower
         than $30, the adjusted Conversion Price, shall be $9 per share.
         Further, in the event that the Conversion Closing Price is equal to or
         higher than $30, the adjusted Conversion Price, shall be $12. As of
         December 31, 2001, no conversion of the loan took place.

         The outstanding convertible loan amount shall be repaid in three equal
         annual payments commencing on the third anniversary of the agreement
         closing date; provided, however, that prior to each payment date, FIMI,
         at its sole discretion, may elect, by giving an irrevocable written
         notice to the Company, to have any portion of the principal deferred
         and repaid on the fifth anniversary of the agreement closing date. The
         parties agreed to certain covenants, such that as long as the loan has
         not been repaid, the Company's shareholders' equity will not be less
         than (i) its shareholders' equity as of June 30, 2001 and (ii) 40% of
         its total assets.

         Upon the closing of a merger or consolidation of the Company, or a sale
         of securities of the Company, which results in shareholders, prior to
         the transaction, owning less than 51% of the surviving entity, FIMI has
         the right to require that the Company repay the Convertible loan. In
         addition, the Company is required to repay the Convertible loan upon
         the acquisition of 90% or more of the securities of the Company by a
         third party.

                                      -25-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 9:- CONVERTIBLE LOAN (CONT.)

         As of December 31, 2001, no beneficial conversion feature value was
         required in respect of the convertible loan, in accordance with
         Emerging Issues Task Force ("EITF") 98-5 "Accounting for Convertible
         Securities with Beneficial Conversion Features or Contingently
         Adjustable Conversion Ratios" and EITF 00-27 "Application of Issue No.
         98-5 to Certain Convertible Instruments".

NOTE 10:- SHAREHOLDERS' EQUITY

         a.       Ordinary shares:

                  Ordinary shares confer upon their holders voting rights, the
                  right to receive cash dividends, and the right to a share in
                  excess assets upon liquidation of the Company.

                       As for charges, see Note 12(e)(1).

         b.       Preferred shares:

                  All the issued and outstanding Preferred shares were
                  automatically converted into Ordinary shares at the time of
                  the Company's Initial Public Offering ("IPO"), which took
                  place in 1998. Since then, the Ordinary shares have been
                  traded on NASDAQ in the U.S. In February 2001, under the
                  provisions of the Tel-Aviv Stock exchange regulations for dual
                  listings, the Company's shares commence trading on the
                  Tel-Aviv Stock exchange.

         c.       In May 2001, the Company issued 200,000 Ordinary shares in
                  connection with the acquisition of Sysdrill (see Note 1b).

         d.       In October 2000, the Company issued 1,500,000 Ordinary shares
                  to CGG as part of the consideration in regarding to the
                  Flagship acquisition (see Note 1c).

         e.       In April and May 1999, the Company completed through a private
                  placement, a share issuance of 2,017,544 Ordinary shares to
                  new and existing investors, and raised approximately $11
                  million.

         f.       Stock options:

                  Under the Company's 1994 and 1997 Stock Option Plans ("the
                  Plans"), options may be granted to employees, officers,
                  directors and consultants who provide services to the Company
                  or any of its subsidiaries. Pursuant to the Plans, a total of
                  2,300,000 Ordinary shares of the Company are reserved for
                  issuance. Options granted under the 1994 and 1997 Plans, if
                  unexercised, expire ten and eight years from the date of
                  grant, respectively. The exercise price of these options may
                  not be less than 100% of the market price of the share at the
                  date of grant. Options granted under the Plans are generally
                  exercisable in installments over the vesting period which is
                  generally four years. Options, which are canceled or forfeited
                  before expiration become available for future grants. All
                  options were granted with an exercise price equal to the fair
                  market value at the date of grant. Total amount of options
                  available for future grants as of December 31, 2001 amounted
                  to 391,000.

                                      -26-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 10:- SHAREHOLDERS' EQUITY (CONT.)

                  The following is a summary of the options granted among the
                  various Plans.
YEAR ENDED DECEMBER 31,
                            ---------------------------------------------------------------------------------------
                                       1999                          2000                          2001
                            --------------------------     --------------------------    --------------------------
                                             WEIGHTED                       WEIGHTED                      WEIGHTED
                                              AVERAGE                        AVERAGE                       AVERAGE
                                             EXERCISE                       EXERCISE                      EXERCISE
                              NUMBER           PRICE         NUMBER           PRICE        NUMBER           PRICE
                            ----------      ----------     ----------      ----------    ----------      ----------
Outstanding at the
  beginning of the year      1,592,616      $     5.65      1,603,216      $     5.67     1,845,156      $     6.01
  Granted                      121,500      $        7        598,350      $        7       101,000      $     3.88
  Canceled or forfeited        (96,500)     $        7       (310,624)     $     6.49       (98,314)     $      6.9
  Exercised                    (14,400)     $        5        (45,786)     $     3.84            --      $       --
                            ----------      ----------     ----------      ----------    ----------      ----------

Outstanding at the
  end of the year            1,603,216      $     5.67      1,845,156      $     6.01     1,847,842      $     5.85
                            ==========      ==========     ==========      ==========    ==========      ==========
 Exercisable at the
  end of the year            1,013,064      $     5.18      1,079,435      $     5.31     1,236,108      $     5.53
                            ==========      ==========     ==========      ==========    ==========      ==========
The options outstanding as of December 31, 2001, have been
                  separated into ranges of exercise price as follows:
WEIGHTED
                    OPTIONS          WEIGHTED                    OPTIONS         AVERAGE
                  OUTSTANDING         AVERAGE      WEIGHTED    EXERCISABLE       EXERCISE
   RANGE OF          AS OF           REMAINING      AVERAGE       AS OF          PRICE OF
   EXERCISE       DECEMBER 31,      CONTRACTUAL    EXERCISE    DECEMBER 31,      OPTIONS
    PRICE             2001         LIFE (YEARS)      PRICE         2001        EXERCISABLE
--------------    ------------     ------------    --------    ------------    -----------
$ 0.59               63,336            0.33         $ 0.59         63,336         $ 0.59
$ 2.5 - $ 3.67      174,190            4.03         $ 3.07         89,190         $  2.5
$ 4 - $ 6           473,026            3.15         $ 4.64        457,026         $  4.8
$ 7               1,137,290            5.67         $    7        626,556         $    7
                  ---------                         ------      ---------         ------

                  1,847,842                         $ 5.85      1,236,108         $ 5.53
                  =========                         ======      =========         ======
g.       Pro-forma information regarding net income (loss) and net
                  earnings (loss) per share is required by SFAS No. 123, and has
                  been determined as if the Company had accounted for its
                  employee stock options under the fair value method of that
                  Statement. The fair value for these options was estimated at
                  the grant date using a Black and Scholes option pricing model
                  with the following weighted-average assumptions for each of
                  the three years in the period ended December 31, 1999, 2000
                  and 2001, respectively: risk-free interest rates of 6%, 6% and
                  2%-5% for the years ended December 31, 1999, 2000 and 2001,
                  respectively; dividend yields of 0% for each year; a
                  volatility factor of the expected market price of the
                  Company's Ordinary shares of 0.567, 0.621 and 0.547 for the
                  years ended December 31, 1999, 2000 and 2001, respectively and
                  a weighted-average expected life of the option of eight years
                  for each year. For pro forma purposes, deferred compensation
                  is being amortized over the vesting period.

                  The weighted average fair value of the options at their dates
                  of grant in 1999, 2000 and 2001 was $4.38, $4.82 and $2.51,
                  respectively.

                                      -27-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 10:- SHAREHOLDERS' EQUITY (CONT.)

                  Pro-forma information under SFAS No. 123 (in thousands, except
                  per share data):
YEAR ENDED DECEMBER 31,
                                                 --------------------------------
                                                   1999        2000       2001
                                                 ---------   ---------  ---------
Net income (loss) as reported                    $  (3,778)  $   2,359  $   2,130
                                                 =========   =========  =========
Pro-forma net income (loss)                      $  (5,035)  $     744  $     957
                                                 =========   =========  =========
Pro-forma basic net earnings (loss) per share    $   (0.41)  $    0.06  $    0.06
                                                 =========   =========  =========
Pro-forma diluted net earnings (loss) per share  $   (0.41)  $    0.06  $    0.06
                                                 =========   =========  =========
h.       Warrants:

                  In 1994, the Company issued 539,244 warrants to purchase
                  Ordinary shares of the Company to various shareholders, in
                  connection with their loan guarantees to the Company. These
                  warrants were exercisable over five years, and terminated on
                  July 21, 1999, at an exercise price of the lower of either:
                  (i) 80% of the price of the last private placement, or (ii)
                  80% of the IPO price of the Company's shares. In the year
                  ended December 31, 1999, 479,908 warrants were exercised at an
                  exercise price of $4 per share and as of December 31, 1999,
                  all of the warrants were exercised.

                  In October 1997, the Company issued 720,000 warrants in
                  connection with bridge loans received in relation with the
                  acquisition of CogneSeis Development Inc. ("CogneSeis"), at an
                  exercise price of $6.00 per Ordinary share. These warrants are
                  exercisable over seven years. The fair value of these warrants
                  was estimated using a Black and Scholes option pricing model
                  with the following weighted-average assumptions: risk-free
                  interest rate of 6%; dividend yields of 0%; a volatility
                  factor of the expected market price of the Company's Ordinary
                  shares of 0.285; and a weighted-average expected life of the
                  warrants of one year; The fair value of these warrants in the
                  amount of $600,000 was amortized as additional interest
                  expense in 1997 and 1998, amounting to $125,000 and $475,000,
                  respectively. In April 2000, 360,000 warrants were exercised
                  to 119,782 of the Company's Ordinary shares at an exercise
                  price equal to the par value of NIS 0.5, due to a cashless
                  exercise mechanism. As of December 31, 2001, 363,000 warrants
                  are exercisable.

                  In 1999, as compensation for services provided to the Company
                  in connection with the share issuance (see Note 10e),
                  investment bankers received 250,000 warrants exercisable
                  during a three year period at an exercise price of $5.70 per
                  Ordinary share. As of December 31, 2001, 250,000 warrants are
                  exercisable. These warrants will expire on May 15, 2002.

         i.       Dividends:

                  Dividends, if any, will be paid in NIS. Dividends paid to
                  shareholders outside Israel may be converted to U.S. dollars
                  on the basis of the exchange rate prevailing at the date of
                  the conversion. The Company does not intend to pay cash
                  dividends in the foreseeable future.

                                      -28-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 11:- INCOME TAXES

         a.       Israeli income tax:

                  The Company's production facilities in Israel have been
                  granted an "Approved Enterprise" status for four investment
                  programs approved in 1988, 1993, 1996 and 1999 by the Israeli
                  Government under the Law for the Encouragement of Capital
                  Investments, 1959. The main benefit arising from such status
                  is the reduction in tax rates on income derived from "Approved
                  Enterprise". Consequently, the Company is entitled to two to
                  four years of tax exempt and three to five years of reduced
                  tax rate (10% - 25%).

                  Additionally, the Company is a "foreign investors' company",
                  as defined by that law and, as such, is entitled to additional
                  reduction of the tax to 10% - 25% (based on the percentage of
                  foreign ownership in each taxable year) and extension of above
                  3-5 years of the benefit period.

                  As the Company has no taxable income, the benefit periods have
                  not yet commenced for all programs.

                  The Company has completed implementation of three investment
                  programs and currently implements the fourth investment
                  program.

                  The period of tax benefits, detailed above, is subject to
                  limit of 12 years from the commencement of production, or 14
                  years from the approval date, whichever is earlier. Given the
                  above-mentioned conditions, under the various investment
                  programs, the period of benefits for the production facilities
                  will terminate in the years from 2002 thorough 2013.

                  The entitlement to the above benefits is conditional upon the
                  Company's fulfilling the conditions stipulated by the above
                  law, regulations published thereunder and the instruments of
                  approval for the specific investments in "Approved
                  Enterprises". In the event of failure to comply with these
                  conditions, the benefits may be canceled and the Company may
                  be required to refund the amount of the benefits, in whole or
                  in part, including interest. As of December 31, 2001, the
                  Company is in compliance with all the conditions required by
                  law.

                  The tax-exempt income attributable to the "Approved
                  Enterprise" can be distributed to shareholders without
                  subjecting the Company to taxes only upon the complete
                  liquidation of the Company. If these retained tax-exempt
                  profits are distributed in a manner other than in the complete
                  liquidation of the Company they would be taxed at the
                  corporate tax rate applicable to such profits as if the
                  Company had not elected the alternative system of benefits,
                  currently between 10% - 25% for an "Approved Enterprise".

                  As of December 31, 2001, the accumulated deficit of the
                  Company does not include any tax-exempt profits earned by the
                  Company's "Approved Enterprise".

                  Income from sources other than "Approved Enterprise" is taxed
                  at the regular rate of 36%.

                  By right of this law, the Company is entitled to claim
                  accelerated depreciation on equipment used in the "Approved
                  Enterprise" during five tax years.

                                      -29-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 11:- INCOME TAXES (CONT.)

                  Results for tax purposes are measured in terms of earnings in
                  NIS after certain adjustments for increases in the Israeli
                  Consumer Price Index ("CPI"). As explained in Note 2b, the
                  financial statements are measured in U.S. dollars. The
                  difference between the annual change in the Israeli CPI and in
                  the NIS/dollar exchange rate causes a further difference
                  between taxable income and the income before taxes shown in
                  the financial statements. In accordance with paragraph 9(f) of
                  SFAS No. 109, the Company has not provided deferred income
                  taxes on the difference between the functional currency and
                  the tax bases of assets and liabilities.

                  The Company is an "Industrial Company", as defined by the Law
                  for the Encouragement of Industry (Taxes), 1969 and, as such,
                  is entitled to certain tax benefits, mainly accelerated
                  depreciation of machinery and equipment, as prescribed by
                  regulations published under the Inflationary Adjustments Law,
                  the right to claim public issuance expenses and amortization
                  of other intangible property rights as a deduction for tax
                  purposes.

         b.       Deferred income taxes:

                  Deferred income taxes reflect the net tax effects of temporary
                  differences between the carrying amounts of assets and
                  liabilities for financial reporting purposes and the amounts
                  used for income tax purposes. Significant components of the
                  Company and its subsidiaries deferred tax liabilities and
                  assets are as follows:
DECEMBER 31,
                                                             -------------------------
                                                              2000              2001
                                                             -------           -------
                                                             U.S. DOLLARS IN THOUSANDS
                                                             -------------------------
Deferred income tax assets:
  Operating loss carryforward                                $ 1,200           $   946
  Other                                                          300               187
                                                             -------           -------

  Net deferred income tax asset before valuation allowance     1,500             1,133
  Valuation allowance                                          (1500)           (1,133)
                                                             -------           -------

  Net deferred income tax asset                              $    --           $    --
                                                             =======           =======
The Company and its subsidiaries have provided valuation
                  allowances in respect of deferred tax assets resulting from
                  tax loss carryforwards and other differences.

                  Management currently believes that since the Company and its
                  subsidiaries have a history of losses it is more likely than
                  not that the deferred tax regarding the loss carryforwards and
                  other temporary differences will not be realized in the
                  foreseeable future.

                                      -30-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 11:- INCOME TAXES (CONT.)

         c.       Net operating losses carryforwards:

                  The Company has accumulated losses for tax purposes as of
                  December 31, 2001, in the amount of approximately $1 million,
                  which may be carried forward and offset against taxable income
                  in the future for an indefinite period.

                  Through December 31, 2001, the Company has accumulated losses
                  for tax purposes in the amounts of approximately $3.5 million
                  related to certain subsidiaries.

         d.       Reconciliation of the theoretical tax expense (benefit) to the
                  actual tax expense (benefit):

                  A reconciliation of the theoretical tax expense, assuming all
                  income is taxed at the statutory rate applicable to income of
                  the Company, and the actual tax expense are as follows:
YEAR ENDED DECEMBER 31,
                                                -------------------------
                                                  1999     2000    2001
                                                 -------   -----   -----
                                                U.S. DOLLARS IN THOUSANDS
                                                -------------------------
Theoretical tax (benefit) computed
             at the statutory rate of 36%        $(1,360)  $ 986   $ 972
          Increase (decrease) in income
             taxes resulting from:
             Carryforward losses for which a
              valuation allowance was provided        --    (500)   (254)
            Losses for which benefits
              are not recognized                   2,878      --      --
             Prior year income tax benefit          (258)     --      --
             Other                                (1,260)   (106)   (149)
                                                 -------   -----   -----

         Taxes on income                         $    --   $ 380   $ 569
                                                 =======   =====   =====
e.       Income taxes consist of the following:
YEAR ENDED DECEMBER 31,
                                 --------------------------
                                 1999       2000       2001
                                 -----      -----      ----
                                 U.S. DOLLARS IN THOUSANDS
                                 --------------------------
Current        $ 725      $ 552      $569
                  Deferred        (467)      (172)       --
                  Prior year      (258)        --        --
                                 -----      -----      ----

                                 $  --      $ 380      $569
                                 =====      =====      ====

                  Domestic       $  --      $ 123      $ 44
                  Foreign           --        257       525
                                 -----      -----      ----

                                 $  --      $ 380      $569
                                 =====      =====      ====
-31-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 11:- INCOME TAXES (CONT.)

         f.       Income (loss) before income taxes from continued operation
                  consists of the following :
YEAR ENDED DECEMBER 31,
                               ------------------------------
                                1999         2000       2001
                               -------      ------     ------
                                 U.S. DOLLARS IN THOUSANDS
                               ------------------------------
Domestic     $(3,465)     $  874     $1,400
                  Foreign         (313)      1,865      1,299
                               -------      ------     ------

                               $(3,778)     $2,739     $2,699
                               =======      ======     ======
NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES

         a.       Royalty obligation to the Office of the Chief Scientist
                  ("OCS") of the Government of Israel:

                  Under the Company's research and development agreements with
                  the OCS and pursuant to applicable laws, the Company is
                  required to pay royalties at the rate of 3% of sales of
                  products developed with funds provided by the Office of the
                  Chief Scientist, up to an amount equal to 100% - 150% of the
                  Office of the Chief Scientist's research and development
                  grants (dollar-linked) related to such projects. The Company
                  is obligated to repay the Government for the grants received
                  only to the extent that there are sales of the funded product.
                  The Company did not receive grants for the years ended
                  December 31, 1999, 2000 and 2001.

                  The Company has paid or accrued royalties in the amounts of
                  $100,000, $100,000 and $236,000 for the years ended December
                  31, 1999, 2000 and 2001, respectively, relating to the
                  repayment of such grants.

                  As of December 31, 2001, the Company had a contingent
                  obligation to pay royalties in the amount of approximately
                  $303,000.

         b.       Royalty obligation to the Marketing Fund of the Government of
                  Israel:

                  The Israeli Government, through the Fund for the Encouragement
                  of Marketing Activities, awarded the Company grants for
                  participation in foreign marketing expenses. The Company is
                  committed to pay royalties at the rate of 3% of the increase
                  in foreign sales. Total royalties are not to exceed the
                  amounts of grants received by the Company (dollar-linked). The
                  Company did not receive grants for the years ended December
                  31, 1999, 2000 and 2001.

                  As of December 31, 2001, the Company had a contingent
                  obligation to pay royalties in the amount of approximately
                  $391,000.

                                      -32-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

         c.       Leases:

                  The Company and its subsidiaries rent their offices under
                  various operating lease agreements, which expire on various
                  dates. The rental fees are partly linked to the dollar and
                  partly to the Israeli Consumer Price Index.

                  In August 1999, the Company entered into a three years lease
                  agreement to acquire computer equipment, which has been
                  recorded as a capital lease in accordance with SFAS No. 13

                  Future minimum rental commitments under non-cancelable
                  operating and capital leases as of December 31, 2001, are as
                  follows:
OPERATING          CAPITAL
     YEAR ENDED DECEMBER 31,                      LEASES           LEASES
                                                 --------          -------
                                                 U.S. DOLLARS IN THOUSANDS
                                                 -------------------------
2002                                        $  2,883          $   325
     2003                                           3,363                -
     2004                                           3,343                -
     2005                                           3,056                -
     2006 and thereafter                            8,736                -
                                                 --------          -------

     Total minimum lease payments                $ 21,381              325
                                                 ========

     Less - amount representing  interest                              (65)
                                                                   -------

     Present value of capital lease obligation                     $   260
                                                                   =======
Total rent expenses for the years ended December 31, 1999,
                  2000 and 2001, amounted to $2,020,000, $2,930,000 and
                  $3,601,000, respectively.

                                      -33-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

         d.       Legal:

                  On December 11, 1997, the Company filed a lawsuit for a
                  declaratory judgment to determine whether it has any
                  obligation to Geophysical Micro Computer Application
                  (international) Ltd.("GMA") under a letter of intent (the
                  "letter of intent"). Under the terms of the letter of intent,
                  the company and GMA contemplated a transaction in which GMA
                  would purchase certain computer software programs and related
                  products ("SeisX") from the Company, provided that the Company
                  acquired the SeisX assets from a third party. On May 5, 1998,
                  GMA filed a counterclaim for breach of contract, claiming that
                  the letter of intent required the Company to sell SeisX to
                  GMA. GMA sought compensatory, injunctive and declaratory
                  relief. On September 11, 1998, the trial court granted summary
                  judgment in favor of the Company and declared that the Company
                  has no obligation to sell the SeisX assets or related products
                  to GMA, and that GMA lost its counterclaim. On December 7,
                  1998, GMA filed the an appeal. As for subsequent events see
                  Note 15c.

         e.       Charges:

                  1.       The Company has a floating charge on all of its
                           assets and on its outstanding share capital, with
                           respect to its short-term and long-term bank loans,
                           and credit lines in favor of two individual banks and
                           to FIMI.

                  2.       All financed equipment is pledged in favor of the
                           related financial institution.

                  3.       The Company has pledged $1.9 million of its short
                           term bank deposit in favor of one of its Banks as
                           collateral for the note payable repayment (see Note
                           8d).

NOTE 13:- SEGMENTS, CUSTOMERS AND GEOGRAPHICS INFORMATION

         a.       Operating data:

                  In the year 2000, the Company began to evaluate its business
                  as two separate operating segments.

                  1.       Products - consist of software products, software
                           licenses that require significant customization,
                           maintenance and support, training and installation.

                  2.       Services - consist of professional services of
                           seismic data processing, interpretation, and
                           reservoir-studies services.

                                      -34-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 13:- SEGMENTS, CUSTOMERS AND GEOGRAPHICS INFORMATION (CONT.)

                  The information evaluated by the Company's decision makers in
                  deciding how to allocate resources to these segments are total
                  revenues, cost of revenues, depreciation of property and
                  equipment, segment profit and segments property and equipment
                  as presented in the consolidated statements of operations and
                  balance sheets.

                  In prior years, the Company operated and reported in its
                  management internal reporting in a single segment - providing
                  of software licenses, seismic data processing and
                  interpretation services.

                  Prior years have been restated in order to reflect the new
                  internal reporting form.

                  The accounting policy of the segments is in accordance with
                  the requirements of Statement of Financial Accounting
                  Standards No. 131 Disclosure about Segments of an Enterprise
                  and Related Information", ("SFAS No. 131").

                  Segments revenues, cost of revenues, depreciation, assets and
                  other data are as follows:
YEAR ENDED DECEMBER 31, 2001
                            ---------------------------------------------------
                            PRODUCTS    SERVICES  RECONCILIATION   CONSOLIDATED
                            --------    --------  --------------   ------------
                                        U.S. DOLLARS IN THOUSANDS
                            ---------------------------------------------------
Revenues             $50,765     $22,001       $    --        $72,766
       Cost of revenues      10,592       9,793            --         20,385
       Depreciation             718       2,151         2,720          5,589
                            -------     -------       -------        -------

       Segment profit       $39,455     $10,057       $(2,720)       $46,792
                            =======     =======       =======        =======
YEAR ENDED DECEMBER 31, 2000
                            ---------------------------------------------------
                            PRODUCTS    SERVICES  RECONCILIATION   CONSOLIDATED
                            --------    --------  --------------   ------------
                                        U.S. DOLLARS IN THOUSANDS
                            ---------------------------------------------------
Revenues             $46,390     $16,908       $    --        $63,298
       Cost of revenues      10,816       6,352            --         17,168
       Depreciation             609       1,827         2,310          4,746
                            -------     -------       -------        -------

       Segment profit       $34,965     $ 8,729       $(2,310)       $41,384
                            =======     =======       =======        =======
YEAR ENDED DECEMBER 31, 1999
                            ---------------------------------------------------
                            PRODUCTS    SERVICES  RECONCILIATION   CONSOLIDATED
                            --------    --------  --------------   ------------
                                        U.S. DOLLARS IN THOUSANDS
                            ---------------------------------------------------
Revenues             $43,023     $11,483       $    --        $54,506
       Cost of revenues      12,418       5,804            --         18,222
       Depreciation             448       1,395         2,022          3,865
                            -------     -------       -------        -------

       Segment profit       $30,157     $ 4,284       $(2,022)       $32,419
                            =======     =======       =======        =======
-35-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 13:- SEGMENTS, CUSTOMERS AND GEOGRAPHICS INFORMATION (CONT.)

                  Segments assets, net are as follows:
DECEMBER 31,
                                     -------------------------------
                                      1999        2000        2001
                                     -------     -------     -------
                                       U.S. DOLLARS IN THOUSANDS
                                     -------------------------------
Products                 $ 2,264     $ 2,622     $ 1,101
            Services                   6,692       8,520       7,826
            Other                      3,051       2,176       6,975
                                     -------     -------     -------

            Total segment assets     $12,007     $13,318     $15,902
                                     =======     =======     =======
b.       Geographic operational information:

                  Revenues attributed to countries based on the location of the
                  end customers are as follows:
YEAR ENDED DECEMBER 31,
                                      -------------------------------
                                       1999        2000        2001
                                      -------     -------     -------
                                         U.S. DOLLARS IN THOUSANDS
                                      -------------------------------
North and South America     $24,219     $32,104     $33,531
          EMEA                         14,604      19,240      25,121
          Far East                     15,683      11,954      14,114
                                      -------     -------     -------

                                      $54,506     $63,298     $72,766
                                      =======     =======     =======
Long-lived assets are as follows:
DECEMBER 31,
                                      -------------------------------
                                       1999        2000        2001
                                      -------     -------     -------
                                         U.S. DOLLARS IN THOUSANDS
                                      -------------------------------
North and South America     $ 7,932     $ 7,232     $ 8,951
          EMEA                          1,704      17,270      17,103
          Far East                      1,074       1,029       2,133
          Israel                       16,016      13,392      18,276
                                      -------     -------     -------

                                      $26,726     $38,923     $46,463
                                      =======     =======     =======
c.       Major customers:

                  The Company had one major customer, which accounted for
                  approximately 0%, 12% and 0% of the Company's revenues, for
                  the years ended December 31, 1999, 2000 and 2001,
                  respectively.

                                      -36-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 14:- SELECTED STATEMENTS OF OPERATIONS DATA

         a.       Non-recurring expenses:
YEAR ENDED
                                                               DECEMBER 31,
                                                                   1999
                                                              ---------------
                                                              U.S. DOLLARS IN
                                                                 THOUSANDS
                                                              ---------------
Lease termination costs                       $   763
                   Impairment of developed technology              1,595
                   Other                                             347
                                                                 -------

                                                                 $ 2,705
                                                                 =======
b.       The following table sets forth the reconciliation of basic and
                  diluted net earnings (loss) per share:
YEAR ENDED DECEMBER 31,
                                             ----------------------------------
                                               1999         2000         2001
                                             --------      -------      -------
                                                  U.S. DOLLARS IN THOUSANDS
                                             ----------------------------------
Numerator:

Net earnings (loss) for basic net earnings
(loss) per share                             $ (3,778)     $ 2,359      $ 2,130
                                             ========      =======      =======
Numerator for diluted net earnings (loss)
   per share -
  Net earning (loss) available to
   shareholders of Ordinary shares           $ (3,778)     $ 2,359      $ 2,162
                                             ========      =======      =======

Denominator (in thousands):
Weighted average number of Ordinary
   shares (denominator for basic net
   earnings (loss) per share)                  12,205       13,504       14,817
                                             --------      -------      -------
Effect of securities:
   Employee stock options                      *)  --          225          149
   Warrants issued to third parties            *)  --           60       *)  --
   Convertible loan                                --           --          158
                                             --------      -------      -------

Dilutive potential of Ordinary shares          *)  --          285          307
                                             --------      -------      -------
Denominator for diluted net earnings
   (loss) per share -                          12,205       13,789       15,124
                                             ========      =======      =======
*) Anti-dilutive.

                                      -37-
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 15:- SUBSEQUENT EVENTS (UNAUDITED)

         a.       The Company has been approached by and is currently in the
                  final stages of negotiation with a private investment firm
                  regarding the acquisition of the entire share capital of
                  Company by way of merger, for consideration of $5.15 per
                  share. The parties have not yet signed an agreement. The
                  Company expects such an agreement to be signed in the near
                  future. The closing of the transaction contemplated by the
                  agreement, if signed, is subject to shareholders approval and
                  other customary closing conditions. There can be no assurance
                  that the transaction will be completed.

         b.       On April 24, 2002, Leumi &.Co. Investment House filed a claim
                  in the Tel Aviv Magistrates court against the Company and
                  Eldad Weiss, the Company's Chairman and Chief Executive
                  Officer, claiming a finders fee in connection with the FIMI
                  Convertible note transaction (see Note 9) in a total amount of
                  approximately $250,000. The Company and Mr. Weiss have not yet
                  filed a Statement of Defense. This legal proceeding is in a
                  preliminary stage and the Company and its legal counselors can
                  not predict its outcome.

         c.       On May 9, 2002, in connection with GMA case (see Note 12d),
                  the Texas Supreme Court denied appeals by the Company from a
                  Texas appellate court decision reversing and remanding for
                  further proceedings a trial court decision in September 1998,
                  under the terms of a Letter of Intent with GMA. The case will
                  be returned to the Dallas County District Court for further
                  proceedings. The Company believes that the outcome of the
                  above claim will not have an adverse effect on the Company's
                  consolidated financial statements.

         d.       On April 9, 2002, Dr. Cesar A. Egas-Teran filed a lawsuit
                  against Mr. Cesar Yepes, Paradigm's Geophysical  de Venezuela
                  S.A. and Paradigm's Geophysical B.V. ("the Venezuelan and
                  Netherlands subsidiaries"), registered agent in Ecuador, and
                  Mr. Alberto Jaramillo-De Howitt, the Venezuelan and
                  Netherlands subsidiaries' former registered agent in Ecuador,
                  both individually and as representatives in Ecuador of the
                  Venezuelan and Netherlands subsidiaries', and against the
                  Venezuelan and Netherlands subsidiaries', in the Ecuador civil
                  courts, requesting that the judge order payment to Dr.
                  Egas-Teran of $727,000 in commissions which Mr. Egas-Teran
                  claims are allegedly owing to him in connection with contracts
                  awarded to the Venezuelan and Netherlands subsidiaries' in
                  Ecuador, plus interest and legal expenses. In addition, the
                  plaintiff asked that the judge order that this amount be
                  retained by Petroproduccion, the Venezuelan and Netherlands
                  subsidiaries' customer in Ecuador, from monies owned to the
                  Venezuelan and the Netherlands subsidiaries'. The Company
                  believes that there is no basis for commissions between either
                  Paradigm Geophysical de Venezuela S.A. or Paradigm Geophysical
                  B.V and the plaintiff. On April 12, 2002, the judge confirmed
                  retention of the amount by Petroproduccion and ordered the
                  defendants to be subpoenaed for trial. Mr. Yepes has informed
                  the Company that he only became aware of this lawsuit on June
                  12, 2002 and, therefore, he did not inform the Company of this
                  action, including, the order requiring retention of funds by
                  Petroproduccion, until June 12, 2002. The Company is not in
                  contact with Mr. Jaramillo-De Howitt. The Company is currently
                  examining the claims against it and has not yet filed a
                  Statement of Defense. At this time, the Company and its legal
                  counsel cannot predict the outcome of this lawsuit.

                           - - - - - - - - - - - - -

                                      -38-
EXHIBIT INDEX

EXHIBIT NO.                         EXHIBIT                            PAGE

4.15           Convertible Loan Agreement dated October 10, 2001
               between Paradigm Geophysical Ltd. and The Israel
               Mezzanine Fund, L.P., The Israel Mezzanine Fund
               (in Israel), Limited Partnership and The Jordan
               (Bermuda) Investment Company Ltd.

8.1            Subsidiaries of Paradigm Geophysical Ltd.

10.1           Consent of Kost Forer and Gabbay.