<PAGE>   1

                       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, 2000

                                       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 offices)


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, 2000, the Registrant had outstanding 14,691,902 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 preceeding 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>   2
                                     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.

ITEM 1.        IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

         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, 1996, 1997, 1998, 1999 and 2000 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."


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<PAGE>   3
CONSOLIDATED INCOME STATEMENT DATA

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                               ------------------------
                                                    1996        1997          1998        1999         2000
                                                    ----        ----          ----        ----         ----
REVENUES:                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                               <C>         <C>          <C>          <C>          <C>

   Products ...................................   $  7,718    $ 19,979     $ 38,074     $ 43,023     $ 46,390
   Services ...................................      3,884       4,886        7,288       11,483       16,908
                                                  --------    --------     --------     --------     --------
           TOTAL REVENUES .....................   $ 11,602    $ 24,865     $ 45,362     $ 54,506     $ 63,298
                                                  --------    --------     --------     --------     --------
             YEAR-TO-YEAR % CHANGE ..........                   114.3%        82.4%        20.2%        16.1%

OPERATING EXPENSES:

   Cost of products ...........................   $  2,450    $  5,070     $  8,559     $ 12,418     $ 10,816
   Cost of services ...........................      1,539       1,849        3,107        5,804        6,352
   Research and development ...................      1,466       4,728        7,660        9,306       11,215
   Selling, general and administrative ........      9,536       9,744       15,822       20,638       23,518
   Depreciation ...............................        997       2,012        2,298        3,865        4,746
   Amortization ...............................      1,040       1,185        2,347        3,064        3,360
   Non recurring expenses .....................         --      10,676           --        2,705           --
                                                  --------    --------     --------     --------     --------
     TOTAL OPERATING EXPENSES .................   $ 17,028    $ 35,264     $ 39,793     $ 57,800     $ 60,007
                                                  --------    --------     --------     --------     --------

  OPERATING INCOME (LOSS) .....................     (5,426)    (10,399)       5,569       (3,294)       3,291
   Financial income (expenses), net ...........         57        (446)        (661)        (484)        (552)
                                                  --------    --------     --------     --------     --------
  INCOME (LOSS) BEFORE INCOME TAXES ...........     (5,369)    (10,845)       4,908       (3,778)       2,739
   Income tax .................................         --          --          356           --          380
                                                  --------    --------     --------     --------     --------
  NET INCOME(LOSS) ............................   $ (5,369)   $(10,845)    $  4,552     $ (3,778)    $  2,359
                                                  --------    --------     --------     --------     --------


BASIC EARNINGS (LOSS) PER SHARE ...............   $  (2.33)   $  (4.66)    $   0.66     $  (0.31)    $  (0.17)
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES USED
 IN COMPUTATION OF BASIC EARNINGS (LOSS)
 PER SHARE ....................................      2,300       2,328        6,850       12,205       13,504

DILUTED EARNINGS (LOSS) PER SHARE .............   $  (2.33)   $  (4.66)    $   0.49     $  (0.31)    $  (0.17)
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES
 USED IN COMPUTATION OF DILUTED EARNINGS(LOSS)
 PER SHARE ....................................      2,300       2,328        9,306       12,205       13,789
</TABLE>



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<PAGE>   4
SELECTED CONSOLIDATED BALANCE SHEET DATA

<TABLE>
<CAPTION>

                                                                             AS OF DECEMBER 31,
                                                                             ------------------
                                                         1996          1997          1998          1999          2000
                                                         ----          ----          ----          ----          ----
                                                                               (IN THOUSANDS)
<S>                                                    <C>           <C>           <C>           <C>           <C>
  CASH AND CASH EQUIVALENTS ......................     $  7,113      $  8,229      $  3,463      $  5,457      $  8,647
  WORKING CAPITAL(DEFICIENCY) ....................     $  7,958      $   (692)     $  9,154      $ 15,346      $ 10,860
  TOTAL ASSETS ...................................     $ 19,383      $ 47,883      $ 46,135      $ 66,165      $ 79,761
  CURRENT DEBT ...................................     $  1,193      $  1,288      $  2,228      $  5,073      $  8,186
  NOTE PAYABLE ...................................     $      0      $  9,500      $      0      $      0      $      0
  BRIDGE LOAN  PAYABLE ...........................     $      0      $ 12,000      $      0      $      0      $      0
  LONG TERM DEBT (EXCLUDING CURRENT MATURITIES) ..     $    367      $    483      $     39      $  4,665      $  1,483
  TOTAL SHAREHOLDERS' EQUITY .....................     $ 12,885      $  2,640      $ 26,697      $ 35,468      $ 46,469

CASH FLOW  DATA

  CASH  PROVIDED BY (USED IN) OPERATING ACTIVITIES     $ (1,658)     $  1,633      $ (1,773)     $   (889)     $ 12,628
  CASH  PROVIDED BY (USED IN) INVESTING ACTIVITIES     $ (2,436)     $(11,594)     $ (4,516)     $(15,401)     $ (9,442)
  CASH  PROVIDED BY (USED IN) FINANCING ACTIVITIES     $ 10,734      $ 11,077      $  1,674      $ 18,868      $   (126)

</TABLE>



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<PAGE>   5
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.

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, political
requirements of national governments, coordination by the Organization of
Petroleum Exporting Countries ("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, 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 may also
affect the planned budget expenditures of our customers. Consequently, there may
be significant variations in time lags of our customers in adjusting the level
of expenditure to correspond to their short- and medium-term outlook regarding
the impact of the international oil price 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.


                                       4
<PAGE>   6
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 recognition, and
more extensive and diversified operations than we do. We compete with Geoquest,
a division of Schlumberger Ltd. and Landmark Graphics Corporation, a subsidiary
of Halliburton Co. in regard to the provision of software solutions and
products. In addition, we compete with Western Geco, a joint-venture between
Schlumberger Ltd. and Baker Hughes Inc. and Compagnie Generale de Geophyisique,
one of our major shareholders, and Veritas DGC Inc. and others in the seismic
data processing and analysis services industry. We also face competition from a
number of much smaller companies that provide products that serve niche portions
of our markets and from small service bureaus providing seismic data processing
and analysis services. 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 and 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 EXTRA EXPENSES, WHICH COULD DISRUPT OUR BUSINESS AND
HARM OUR FINANCIAL CONDITION.

         We have pursued, and may continue to pursue, acquisitions of business,
products and technologies, or the establishment of joint venture arrangements,
that could expand our business. For example, in October 2000, we acquired the
Flagship software division from Compagnie Generale de Geophysique, and in April
2001 we acquired the GeoScene(R) product line from



                                       5
<PAGE>   7
Oilfield Systems Limited. In addition, in May 2001, we acquired Sysdrill
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 or product
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 goodwill and other intangibles;

          -    research and development write-offs; 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 Flagship, GeoScene(R) or
Sysdrill acquisitions will significantly enhance our products or strengthen our
competitive position.

         Acquired business 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.

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 products require highly qualified personnel for research and
development, sales and marketing, software programming and technical customer
support and services. 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 efforts. 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.


                                       6
<PAGE>   8
         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.

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 on the oil and gas industry expenditure
               decisions; and

          -    general economic and political factors.

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

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 2000, approximately 60% of our revenues were generated from
customers in North America, Europe, the Middle East and Africa and the balance
of our revenues were 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. The expansion of our existing
international operations and entry into additional international markets will
require significant management attention and financial resources. We 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, Latin America, China and the
Asia-Pacific region.

         In addition, conducting our business internationally subjects us to
certain risks including:


                                       7
<PAGE>   9
          -    legal and cultural differences in the conduct of business;

          -    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;

          -    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 U.S. dollars,
approximately 70% 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 counties 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 could in the future have a material
adverse effect on our results of operations and financial condition.

         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 depend substantially upon our
internally developed technology. Any misappropriation of our technology could
seriously harm our business. We


                                       8
<PAGE>   10
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 includes license manager mechanisms to prevent or inhibit
unauthorized use but these can be violated by sophisticated users. We generally
enter into confidentiality agreements with our employees, consultants, customers
and potential customers 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 to 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 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 receive benefits from certain Israeli government investment
incentive programs and tax benefits. For example, we 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 affect 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;


                                       9
<PAGE>   11
          -    these programs and tax benefits may be unavailable in the future,
               either at all, or at their current levels; or

          -    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 or we may
               be required to refund previously accredited tax benefits 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
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 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 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.

         We are organized under the laws of the State of Israel. However, as of
December 31, 2000, only approximately 17% of the Company's total staff, our
principal research and development facility and the Company's 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. We could be adversely affected if
major hostilities break out in the Middle East or if trade involving Israeli
origin goods and services is curtailed. Any future armed conflicts or political
instability in the region could negatively affect our business or harm our
results of operations. We cannot predict whether a full resolution of these
problems will be achieved, the nature of any such resolution or any consequences
that any of these factors may have on us. The peace process between Israel and
the Palestinian Authority has seriously deteriorated due to the recent increased
violence between Palestinians and Israelis. Continued hostilities between the
Palestinian community and Israel and any failure to settle the conflict may have
a material adverse effect on our business. Further deterioration of hostilities


                                       10
<PAGE>   12
into a full scale conflict might require more widespread military services by
some of our employees which may have a material adverse effect on our business.

          Israeli companies and companies doing business with them have been
subject to an economic boycott initiated by the Arab countries. Some of the
companies that are significant suppliers of hydrocarbon products are located in
countries that may very well participate in boycotts of products and service of
Israeli origin. This boycott and policies may harm our operating results or 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;

          -    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 subjected 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 within the United States.




                                       11
<PAGE>   13
         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 judgement;

          -    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 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.



                                       12
<PAGE>   14
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 Allen Center, 1200 Smith Street, Suite
2100, Houston, TX 77002.

         Our global 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, 2000

         In October 2000, we acquired the Flagship reservoir interpretation and
characterization software business division of Compagnie Generale de Geophysique
for a purchase price of approximately $14 million comprising cash and ordinary
shares of Paradigm. The acquisition of the Flagship business included Integral
Plus and Stratimagic products, which are widely installed worldwide and provide
significant additions to Paradigm's reservoir interpretation and
characterization product line.

         In April 2001, we acquired all the rights to the GeoScene(R) product
line and related customer services from Oilfield Systems Limited. This product
suite strengthens the range of products and services that we offer in the field
of geological interpretation.

         In May 2001, we acquired Sysdrill Limited, a Scottish company, for a
cash consideration and ordinary shares of Paradigm. Sysdrill is one of the
leading software and service providers of drilling engineering and well
operations solutions.

         Our principal capital expenditures for 2000 was for computer and
peripheral equipment, resulting in a significant expansion in computer capacity
for services.

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:



                                       13
<PAGE>   15
          -    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 SERVICES - Advanced reservoir characterization
               and simulations services and integrated studies based on our
               software solutions and our interpretation and reservoir
               characterization experts.

         We operate a global network of sales, users' support and services with
21 offices in 17 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, political
requirements of national governments, coordination by the Organization of
Petroleum Exporting Countries ("OPEC"), 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 at or near record highs throughout 2000. As
oil and gas prices were significantly above the price levels assumed for their
budgets, oil companies achieved higher profits and greater cash flows than
expected. This did not fully translate into additional capital investment.
Investments made by oil and gas companies were predominantly to improve
production efficiency on existing prospects, or on the purchase of producing
assets and reserves, primarily gas opportunities in North America.

         The merger and consolidation activities of a number of large customers
over the past two years has affected the demand for products and services. The
companies that have merged continue to evaluate their oil and gas properties,
refining and distribution facilities, and organizations. This evaluation process
has translated into a short-term reluctance to undertake new investments in non
core-business activities.

         However, the second half of 2000 reflected increased exploration and
production investment , particularly in North America. Although there can be no
assurances, we believe that this trend will continue in 2001 on an international
scale. Over the longer term we believe


                                       14
<PAGE>   16
that rising populations in many countries and greater industrialization efforts
will continue to propel worldwide economic expansion, especially in developing
nations and that these factors will result in increasing demand for oil and gas
needed for refined products and petrochemicals.

         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 2000, we redefined our solutions
based on our existing product modules and the product modules acquired by us 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 acquisition,
               and new petrophysical and geological modules from Chevron and
               TotalFinaElf.

          -    MORE KNOWLEDGE FROM EXISTING DATA: We have introduced 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.

          -    EXPANDED GLOBAL SERVICE CAPACITY: We have expanded our global
               service capacity with additional super computer power in Houston
               and expanded staff in Asia Pacific, the CIS 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 and Probe
               products.

          -    SEISMIC DATA ANALYSIS AND QUALITY CONTROL SOLUTIONS for customers
               that are using our products for the analysis of seismic data and
               quality control of data processing, based on Geodepth(R) Power,
               Probe(TM), Vanguard(TM) and Earthstudy(TM) workflows and
               supplying workflows for interpretive AVO (amplitude with offset),
               attribute analysis, seismic modeling and velocity analysis in an
               integrated environment.



                                       15
<PAGE>   17
          -    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(TM), SeisX(TM) and
               Voxelgeo(TM), 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(TM), Voxelgeo(TM),
               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(TM),
               Stratimagic(R) and Voxelgeo(TM) based workflows.

          -    PETROPHYSICAL ANALYSIS & ROCK PHYSICS SOLUTIONS for customers
               that are using our products for analysis and modeling of rock
               properties based on Geolog(TM), 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(TM) 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 eleven service centers worldwide offer the skills and knowledge of
          specialist and experienced geoscientists in partnership with our
          customer's 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.







                                       16
<PAGE>   18
         CUSTOMER SUPPORT

         We employ geoscientists and computer scientists to provide installation
and 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. We provide our customers with
optional post-contract maintenance and support agreements, which are renewable
annually. 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
professional and technical support.



         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 knowledge of local geology and
local hydrocarbon conditions and 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 -
               advertizing 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 $7.7 million, $9.3 million,
$11.2 million in 1998, 1999 and 2000, respectively.



                                       17
<PAGE>   19
         Three major new products have been launched by us since October 1997 -
Probe, Vanguard and GeoSec3D - and all of our products have been enhanced and
upgraded to provide new analysis features and, in some cases, re-engineered, to
keep pace with changes in computing sciences and graphics manipulation. In
addition, our acquisitions have also added several new technologies and products
to our range of products and solutions.

         Because of the open-architecture expected by the industry we have
enabled our software to work on our competitors' data bases 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.

         Recent industry restructuring has resulted in a significant downsizing
of the research and development staff in several oil companies, many of whom now
look to companies like Paradigm for technology cooperation. In 2000, we signed
Technology Cooperation agreements with Chevron and TotalFinaElf. These two
agreements allow us to incorporate the results of Chevron and TotalFinaElf
research and field testing of specialized geological analysis and well-logging
into our software for the benefit of the entire industry.

         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 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 eight centers, Israel, Houston, Paris and Pau, Aberdeen,
Moscow, Brisbane and Calgary. Each center has its areas of specialization and
expertise whilst product commercialization, integration and delivery are the
responsibility of the research and development group in Israel. As of December
31, 2000, our research and development department consisted of 137 employees.

         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
will 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 which is integrated with Paradigm-developed software and
which we use in our service centers.

         CUSTOMERS AND COMPETITION

         Our installed base of customers consists of approximately 500 customers
and about 4,500 user licenses, representing a full range of the high-end users
in the industry. In 2000, no single customer represented more than 5% of our
revenues.



                                       18
<PAGE>   20
         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 lead by three conglomerates,
Schlumberger, Halliburton and Baker Hughes which provide vertically-integrated
oilfield services including drilling, well completion and hardware
infrastructure. Schlumberger and Halliburton own and operate substantial
geoscience and data management software divisions, respectively, Geoquest, a
division of Schlumberger Ltd. and Landmark Graphics Corporation, a subsidiary of
Halliburton Co. We compete with these two companies and a number of smaller
niche technology providers in connection with providing geoscience software
solutions.

         Seismic data acquisition, processing and analysis are provided by
several large companies amongst whom are Westerngeco, a joint-venture of
Schlumberger and BakerHughes, Compagnie Generale Geophysique a major
shareholder in Paradigm and Veritas DGC Inc. We compete with these companies
and a range of smaller companies in relation to the provision of seismic data
processing services and, to a lesser extent, in connection with services related
to reservoir studies.

         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.


                                       19
<PAGE>   21


         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.

<TABLE>
<CAPTION>
                           REVENUES - PRODUCTS                2000             1999             1998
                                                              $'000           $'000             $'000
<S>                                                         <C>              <C>              <C>
                         North and South America             21,289           16,582           18,893
                       Europe, Africa, Middle East           14,804           11,881            9,116
                            Far East and China               10,297           14,560           10,065
                                                            -------          -------          -------
                                  TOTAL                     $46,390          $43,023          $38,074
                                                            -------          -------          -------

                           REVENUES - SERVICES
                         North and South America             10,815            7,637            2,828
                       Europe, Africa, Middle East            4,436            2,723            3,846
                            Far East and China                1,657            1,123              614
                                                            -------          -------          -------
                                  TOTAL                     $16,908          $11,483          $ 7,288
                                                            -------          -------          -------

                             REVENUES - TOTAL
                         North and South America             32,104           24,219           21,721
                       Europe, Africa, Middle East           19,240           14,604           12,962
                            Far East and China               11,954           15,683           10,679
                                                            -------          -------          -------
                                  TOTAL                     $63,298          $54,506          $45,362
                                                            -------          -------          -------
</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

         -        Paradigm Geophysical (Services) 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 Pte Ltd., incorporated in Singapore


                                       20
<PAGE>   22
         -        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


                                       21
<PAGE>   23
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:

<TABLE>
<CAPTION>
          LOCATION                             ACTIVITIES                 FLOOR AREA
                                                                             SQ.FT
<S>                                          <C>                          <C>
          Herzlia, Israel                     Corporate HQ                  30,601
                                                   R&D

          Houston, Texas                      Sales office                  34,217
                                             Service center
                                                   R&D

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

          Massy, France                       Sales office                  12,471
                                                   R&D

          Moscow, Russia                      Sales office                   9,081
                                             Service center
                                                   R&D

          Calgary, Canada                     Sales office                   8,016
                                             Service center
                                                   R&D

          Perth, Australia                    Sales office                   6,553
                                             Service center

          Brisbane, Australia                      R&D                       6,004

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

         In addition to the above principal facilities we also lease premises in
Beijing, Jakarta, Bahrain, Caracas, Buenos Aries, Rio de Janeiro, Pau and
Almaty. We believe that the facilities we currently occupy are suitable and
adequate for our current needs. If we expand our operations further than we
currently anticipate, we may need additional space.


                                       22
<PAGE>   24
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,
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.

         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 solutions and our seismic data analysis experts.

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

         We operate a global network of sales, users' support and services with
21 offices in 17 countries, serving all major oil-and gas-producing countries in
the world.



                                       23
<PAGE>   25
         MARKET CONDITIONS IN 2000

         Our results in 2000 should be viewed within the context of the
developments and trends in the market in which we operate, i.e. the oil field
services market. This market is, in turn, directly impacted by the overall
macroeconomics of oil and gas supply and demand, international oil prices, and
the spending patterns of oil and gas companies.

         Despite predictions by industry analysts that capital spending by oil
and gas companies on exploration and production would increase in early 2000,
expenditures in those areas only started to increase in the second half of 2000.
Spending by oil and gas companies during the first half of the year appears to
have been concentrated mostly on production enhancement investments and related
activities.

         International oil prices remained at or near record highs throughout
2000, resulting in higher profits and cash flows of oil and gas companies
than forecasted. Generally, these unanticipated profits and cash flows appear to
have been primarily allocated by the major oil and gas companies to items such
as the trading of hydrocarbon assets and investments that improve returns on
capital, such as improving production efficiency on existing prospects and on
the purchase of producing assets and reserves.

         IMPACT ON PARADIGM

         While there was a demand for our software products and services in
2000, it did not meet our anticipated forecast of orders for products and
services during the first half of 2000.

         Activity in the latter half of 2000 confirmed that the oil and gas
companies were extensively re-analyzing archive data for their planned 2001
and beyond field development programs, and reanalyzing newly purchased library
data. Our service operation benefited from this activity, as many oil and gas
companies outsourced the analysis of archive data to companies that provide
seismic data analysis services.

         INDUSTRY TRENDS AND THEIR SIGNIFICANCE FOR FUTURE MARKET DEVELOPMENT

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

         Within the seismic data processing market, the trend that is emerging
is a return to proprietary seismic surveys, and we believe that there will
consequently be an increase in seismic 4D and 4C surveys. This may increase the
demand for out-sourced services for analysis of seismic surveys, well-logs, and
for integrated reservoir studies.

         There is an increasing emphasis by oil exploration companies on looking
for "new oil" in existing fields, requiring "high resolution" structural
interpretation solutions. This may increase the demand for geological and
petrophysical solutions to complement geophysical analysis and integrated
reservoir studies.

         Higher oil and gas prices are expected to result in the allocation of
budget resources to improve returns on existing investments and investment in
new prospects based on high expected returns. This may increase capital
expenditure by oil and gas companies.


                                       24
<PAGE>   26
         The scarcity of drillable prospects is an increasing concern to
operators, especially in North America. Consequently, we believe there will be a
corresponding increase in exploration spending in 2001, which is a continuation
of the trend seen in 2000. This is in contrast to the emphasis placed by oil and
gas companies in 1999 on production related investments. This trend may also
increase capital expenditure by oil and gas companies.

         We expect that exploration activity will increase in areas of difficult
geological structures such as sub-salt and ultra deep sea. Exploration in this
type of difficult geological terrain may increase the demand for high
value-added 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.

         Expected increases in seismic budgets and the increasing availability
of high-quality multi-client data may increase the demand by the operating
companies for this data. This could result in increased spending in 2001, and
beyond, on data analysis and interpretation services for data acquired in 2000
(or before) and for data from new surveys or data purchased during 2000 and
2001.


                                       25
<PAGE>   27
         ACQUISITIONS

         The PTM acquisition - March 1999

         On March 31, 1999, we acquired the assets of the Petroleum Technologies
Division of Mincom, or "PTM", a privately held Australian company for $8.4
million in cash. The primary product asset is GeoLog(TM), a well-log and
petrophysics analysis program. PTM's financial results were consolidated with
those of Paradigm commencing in the second quarter of 1999.

         The Flagship Acquisition - October 2000

         On October 4, 2000, we acquired the Flagship reservoir interpretation
and characterization software business division of Compagnie Generale de
Geophysique ("CGG") for a purchase price of approximately $14.1 million,
comprised of cash and ordinary shares of Paradigm. As a consequence of the
transaction, CGG acquired approximately 10.1% of our outstanding shares and is
therefore an important strategic industry partner in our business.

         The Flagship business included the Integral Plus and Stratimagic
products, which are widely installed worldwide and provide significant additions
to Paradigm's reservoir interpretation and characterization product line. We
also took over a staff of 80 employees, mainly in France, which included
management, product development, sales, customer support and consulting
expertise for reservoir studies. We believe that the Flagship acquisition will
significantly expand our current customer base. We are in the process of
integrating the operations of Flagship with our business.

         ACQUISITIONS IN 2001

         In April 2001, we acquired all the rights to the GeoScene(R) product
line and related customer services from Oilfield Systems Limited. We believe
that this product suite will further strengthen our products and service
offerings in geological interpretation.

         In May 2001, we acquired Sysdrill Limited, a Scottish company, for cash
and ordinary shares of Paradigm. Sysdrill is one of the leading software and
service provider of drilling engineering and well operations solutions. We
believe that the acquisition of Sysdrill will allow us to combine our
technologies with those of Sysdrill in order to offer technical solutions that
integrate geoscience knowledge with drilling and well operations solutions.

         THE FINANCIAL IMPACT OF THE FLAGSHIP ACQUISITION

         The acquisition was accounted for using the purchase method of
accounting. The fair market value of Flagship's assets and liabilities have been
included in our balance sheet as of October 4, 2000. Pursuant to an acquired
technology valuation obtained in connection with the acquisition, an independent
specialist valued the Flagship technology acquired from CGG at $3.4 million, by
applying the income approach method, which considers the present value of
prospective earnings that will be generated from the software. This amount is
being amortized over ten years. Pursuant to the acquired technology valuation,
the customer base of Flagship was valued at $ 2.4 million by applying the
avoided cost approach, and is being amortized over twenty years. The
workforce-in-place was valued at $1.2 million using the cost approach, and is


                                       26
<PAGE>   28
being amortized over ten years. The goodwill in connection with the Flagship
business is valued at $ 7.1 million and is being amortized over twenty years. .

         Flagship's financial results were consolidated into our financial
results, commencing in the fourth quarter of 2000. The Flagship financial
results had a negative impact on our net income for the fourth quarter of 2000.
The full impact of efficiency gains through the integration of various regional
operations is expected to take up to twelve months from the date of the
acquisition.



         The following table sets forth for the fiscal years ended December 31,
2000, 1999 and 1998, our consolidated statements of operations reflected as a
percentage of total revenues:

<TABLE>
<CAPTION>
                                                            1998           1999          2000
                                                            ----           ----          ----
<S>                                                        <C>            <C>           <C>
REVENUES:

 Products                                                   83.9%          78.9%         73.3%
 Services                                                   16.1%          21.1%         26.7%
                                                           -----          -----         -----
      TOTAL REVENUES                                       100.0%         100.0%        100.0%
                                                           -----          -----         -----


OPERATING EXPENSES:

 Cost of products                                           18.9%          22.8%         17.1%
 Cost of services                                            6.8%          10.6%         10.0%
 Research and development                                   16.9%          17.1%         17.7%
 Selling, general and administrative                        34.9%          37.9%         37.2%
 Depreciation                                                5.1%           7.1%          7.5%
 Amortization                                                5.2%           5.6%          5.3%
 Non recurring expenses                                      0.0%           5.0%          0.0%
                                                           -----          -----         -----
  TOTAL OPERATING EXPENSES                                  87.8%         106.1%         94.8%
                                                           -----          -----         -----

OPERATING INCOME (LOSS)                                     12.3%          (6.0%)         5.2%
 Financial income (expenses), net                           (1.5%)         (0.9%)        (0.9%)
                                                           -----          -----         -----
INCOME (LOSS) BEFORE INCOME TAXES                           10.8%          (6.9%)         4.3%
 Income tax                                                  0.8%           0.0%          0.6%
                                                           -----          -----         -----
NET INCOME(LOSS)                                            10.0%          (6.9%)         3.7%
                                                           -----          -----         -----
</TABLE>

         The results of operations for the year ended December 31, 2000
described above and elsewhere in this annual report include 12 months of
operations of Paradigm, consolidated with 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.

         We believe that the contribution of 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


                                       27
<PAGE>   29
periods are not directly comparable. Note 1 to our audited financial statements
for the year ended December 31, 2000 includes the pro-forma unaudited results of
operations of Paradigm and Flagship for the year ended December 31, 1999 and
2000 assuming that the Flagship acquisition had been completed on January 1,
1999 and January 2000, respectively, and pro-forma unaudited combined results of
operations of Paradigm and PTM for the years ended December 31, 1998 and 1999,
as if the PTM acquisition had been completed on January 1, 1998 and 1999,
respectively. Where we have considered it relevant to an understanding of our
results of operations for the years ended December 31, 1998, 1999 and 2000, we
have referred to the consolidated pro forma results.

         REVENUES

         Our revenues are derived mainly from the sale of software licenses and
related maintenance and support contracts and 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. Maintenance and support revenues also provide
a predictable revenue stream.

         Total revenues in 2000 increased by 16% over 1999. Assuming that the
Flagship acquisition had not been completed on October 4, 2000, total revenues
in 2000 would have increased by 11% over 1999. If the pro-forma total revenues
in 1999 (i.e. assuming that the PTM acquisition had been completed as of January
1, 1999) are compared to the total revenues in 2000 (without taking into account
Flagship), total revenues increased by 7% over 1999.

         Total revenues in 1999 increased by 20% over 1998. This increase is 9%
when comparing pro-forma 1999 total revenues to pro-forma 1998 total revenues
(assuming that the PTM acquisition had been completed as of January 1 1999 and
1998, respectively).

         In 2000, the relative proportion of revenues derived from services
increased to 27% of total revenues compared to 21% of total revenue in 1999 and
16% in 1998. This increase was due both to the organic growth in service
revenues on a year-over-year basis, and the relative slowdown in growth in
product revenues in 2000 and 1999.

         PRODUCTS

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

         Product revenues in 2000 increased by 8% over 1999. Within the limits
of the analysis of pro-forma estimates and assuming that the Flagship
acquisition had not been completed as of December 31, 2000 and assuming that the
PTM acquisition had been completed as of January 1, 1999, pro-forma product
revenues would have decreased by 2% in 2000 over 1999. Product revenues in 1999
increased by 13% over 1998. Within the limits of the analysis of pro-forma
estimates and assuming that the PTM acquisition had been completed as of January
1, 1998, pro-forma product revenues would have increased by 2% in 1999 over
1998.


                                       28
<PAGE>   30
         Both 1999 and 2000 product revenues are influenced to different extents
by the impact of the one-time turnkey project, which included hardware and
software and on-going maintenance revenues. Turnkey project revenues were $1.7
million in 2000 and $6.7 million in 1999.

         Product sales in 2000 were characterized by the increase in purchases
of advanced interpretation, visualization, and reservoir characterization
solutions as stand-alone solutions and also as add-ons to the existing installed
base of our products and those of our competitors. In 2000, there was a decline
in purchases of seismic data processing software, which we attribute to the
industry's move to increased outsourcing of high-end processing.

         The Flagship business acquired in October 2000 contributed $ 2.8
million of total product revenues in 2000, constituting 6% of total product
revenues for the year.

         SERVICES

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

         Revenues from services increased by 47% over 1999, which was 58% higher
than in 1998. In 2000, we continued to capture a significant share of the
outsourcing demand for high-end seismic data processing services in the US and
other international markets.

         To meet the increase in demand for high-end seismic data processing
services and to provide for faster turn-around time for large surveys, in 2000,
we continued to invest in our service business, increasing computer capacity and
expertise in the US, Latin America, the former Soviet Union and the Asia Pacific
region. We currently operate 13 service centers worldwide.

         REGIONAL DISTRIBUTION OF REVENUES

         The following table presents the geographic distribution of our
revenues:

<TABLE>
<CAPTION>
% Segment Revenue                           1998          1999          2000
                                            ----          ----          ----
<S>                                         <C>           <C>           <C>
PRODUCTS
North and South America                       50%           39%           46%
Europe, Middle East and Africa                24%           28%           32%
Asia and Pacific                              26%           33%           22%
                                             ---           ---           ---
                                             100%          100%          100%
SERVICES
North and South America                       39%           67%           64%
Europe, Middle East and Africa                53%           23%           26%
Asia and Pacific                               8%           10%           10%
                                             ---           ---           ---
                                             100%          100%          100%
</TABLE>


                                       29
<PAGE>   31
         The changes in regional distribution of revenues for the period 1998 to
2000 for our two revenue segments reflects the changing regional economic
situation, the oil price crisis, the merger activity in oil companies, and the
regionally differential growth in outsourcing demand.

         The table 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 and a wide
customer spread.

         REGIONAL PRODUCTS REVENUE DISTRIBUTION

         In 1998, regional product revenues were affected by the Asia and
Russian economic crises. In 1999, and to some extent in 2000, regional revenues
in North America and Europe were impacted by the downturn in the spending of the
major oil companies, while in relative terms, the regional markets where the
national oil companies dominate, recovered earlier than did the home markets of
the majors. The relatively higher proportion of revenues in 1999 derived from
Asia reflects the impact of the large turn-key project for a seismic data
processing center discussed above.

         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 this center in 1999 and 2000.The 1998 economic crisis
impacted on revenues derived from the Asia-Pacific region and the former Soviet
Union, while the North Sea remained a comparatively strong market. With the
purchase of the super computer at the commencement of 1999, our position in the
U.S. market improved substantially, at the time when the oil price crisis
impacted most severely on demand for services in the North Sea and Asia-Pacific
region. Recovery of energy prices (and particularly gas prices in the U.S.) had
a positive impact on the growth of our services revenues derived from customers
in the U.S. and also contributed to the relative growth of our services revenues
in Latin America and the former Soviet Union.

         OPERATING COSTS

         COST OF REVENUES:

<TABLE>
<CAPTION>
(US $ millions)                        1998              1999              2000
                                     -------           -------           -------
<S>                                  <C>               <C>               <C>
PRODUCT COSTS                        $   8.6           $  12.4           $  10.8
year-over-year increase                                     45%              -13%
                                     -------           -------           -------
SERVICES COSTS                       $   3.1           $   5.8           $   6.4
year-over-year increase                                     87%               10%
                                     -------           -------           -------
TOTAL COSTS                          $  11.7           $  18.2           $  17.1
year-over-year increase                                     56%              -6%
                                     -------           -------           -------
</TABLE>


                                       30
<PAGE>   32
GROSS MARGINS

<TABLE>
<CAPTION>
(US $ millions)                        1998              1999              2000
                                     -------           -------           -------
<S>                                  <C>               <C>               <C>
PRODUCT MARGIN                       $  29.5           $  30.6           $  35.6
% margin                                                    71%               77%
                                     -------           -------           -------
SERVICES MARGIN                      $   4.2           $   5.7           $  10.5
% margin                                                    49%               62%
                                     -------           -------           -------
GROSS MARGIN                         $  33.7           $  36.3           $  46.1
% margin                                                    67%               73%
                                     -------           -------           -------
</TABLE>



         Product costs is comprised of software production and distribution
costs, personnel costs associated with providing maintenance and support,
hardware costs for turnkey solutions and the maintenance of production
equipment.

         Service costs is comprised of personnel costs associated with providing
services, cost of materials and the maintenance of equipment.

         The material differences between 2000 and 1999 in connection with the
components of our cost of revenues are attributable to:

         -    PRODUCTS: the lower levels of hardware expenses in 2000 ($0.5
              million compared to $4.3 million in 1999) due to the completion of
              the turnkey project in early 2000, which resulted in a favorable
              improvement in product margins; and

         -    SERVICES: improved services margins, reflecting the improved
              staff efficiency and data throughput resulting from larger
              capacity computing installations.

         Looking forward, we expect that product margins to continue at about
the 2000 level, in the absence of further turnkey projects. However, as our
installed base of customers grow, we expect a larger proportion of our revenues
to be generated from maintenance and customer support and a resulting increase
in the direct cost of supporting this installed base. Consequently, in the
future, we expect a reduction of product margins, taking into account the
growing installed base's support costs in the product cost structure.

         We expect future service margins to be impacted by two factors:

-    the expected difficult labor markets for high caliber geoscience staff that
     we need to recruit in order to deliver our service solutions; and

-    the lowering of costs of computing hardware, which permits increased
     computing power and wider deployment with increased staff efficiency.


                                       31
<PAGE>   33
       RESEARCH AND DEVELOPMENT EXPENSES

<TABLE>
<CAPTION>
(US $ millions)                                 1998         1999          2000
                                                ----         ----          ----
<S>                                             <C>          <C>          <C>
RESEARCH AND DEVELOPMENT EXPENSES               $7.7         $9.3         $11.2
As % of Total Revenue                             17%          17%           18%
year-over-year increase                                        21%           20%
                                                ----         ----          ----
YEAR-END RESEARCH AND DEVELOPMENT                 90           98           137
STAFF
year-over-year increase                                        9%           40%
</TABLE>

         Research and development expenses consist primarily of salaries and
other related expenses and the cost of facilities. In 2000, expenditures on
research and development were held to almost the same proportion of total
revenues as in 1999 and 1998, with minimal expansion of the core staff, and the
addition in the fourth quarter of 2000 of additional research and development
staff as part of our acquisition of the Flagship business.

         Research and development continues to be managed as an integrated
global team with centers in our Israel headquarters, Houston, Aberdeen, Paris
and Pau, Moscow, Brisbane and Calgary. 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.

         1999 and 2000 were characterized by increasing costs of highly skilled
research and development staff worldwide, although to varying degrees. This was
most evident in Israel, where we compete with other technology companies in
order to attract highly skilled employees.

         Competition for high caliber research and development staff is likely
to be a permanent feature of the various labor markets in which we operates. We
face labor market pressures on computing engineering skills and similar
pressures on retaining and recruiting high caliber geoscience staff. The present
moderation in the labor market (due to the recent decline of the high-tech
sector, and the layoffs by the major oil companies) 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 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 anticipated
increase in oil exploration and production expenditures.

         We believe that high levels of reinvestment in new product development
is essential to maintain our competitive position, and to continue to deliver
innovative technologically advanced products. The expected demands of the
industry for an expanded set of solutions also sets the level of our product
development expenditures. Looking forward, we expect to continue the levels of
research and development expenditures at similar proportions to our total
revenues.

         Major efforts have been expended to provide truly integrated software
across all our applications, serviced from a common data base, transparent to
each application, without the need for specific downloads. This effort is also a
necessary component in our product


                                       32
<PAGE>   34
acquisition strategy, and ensures that each newly acquired product will work
with our existing offerings and on our data base.

         Because of the open-architecture expected by the industry we have
expended efforts that permit our software to work on our competitors' data
bases, 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.

         SALES AND MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES

<TABLE>
<CAPTION>
(US $ millions)                                 1998         1999          2000
                                                ----         ----          ----

<S>                                             <C>          <C>          <C>
SALES AND MARKETING, GENERAL AND                $15.8        $20.6        $23.5
ADMINISTRATIVE
as % of Total Revenue                           35%          38%             37%
                                                ----         ----          ----
year-over-year increase                                      30%             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 expenses. In 1999,
selling, general and administrative expenses also included a one-time bad debt
write-off totaling $ 1.2 million which was associated with long overdue
receivables.

         On a year-over-year basis these expenses increased by 14% in 2000. In
1999, we adopted an expansion policy to ensure that the infrastructure would be
in place for the then expected early-2000 upturn in the market. Consequently
infrastructure was not further expanded in 2000, except in fast growing markets
in Russia and Latin America. The sales and marketing staff acquired as part of
the acquisition of the Flagship business in October 2000, enabled us to
establish the infrastructure to serve customers in Southern Europe and Africa
from Paris and Pau.

         DEPRECIATION  AND AMORTIZATION

<TABLE>
<CAPTION>
(US $ millions)                                  1998           1999         2000
                                                 ----           ----         ----
<S>                                           <C>               <C>          <C>
DEPRECIATION                                  $   2.3           $3.9         $4.7
as % Total Revenue                                  5%             7%           7%
                                                 ----           ----         ----
year-over-year increase                                           68%          23%
AMORTIZATION                                  $   2.3           $3.1         $3.4
as % Total Revenue                                  5%             6%           5%
                                                 ----           ----         ----
year-over-year                                                    30%          10%
increase/(decrease)
TOTAL DEPRECIATION AND                        $   4.6           $7.0         $8.1
AMORTIZATION
as % Total Revenue                                 10%            13%          13%
                                                 ----           ----         ----
year-over-year increase                                          49%           17%
</TABLE>


                                       33
<PAGE>   35
         The depreciation expense consists of the depreciation of capital
equipment. See note 2e of our consolidated financial statements for details of
our accounting policy on depreciation.

         The amortization expense consists of amortization of acquired developed
technology and capitalized research and development costs, and amortization of
goodwill. See note 2f of our consolidated financial statements for details of
our accounting policy on amortization of acquired developed technology and
goodwill, and note 2h for details of our accounting policy on amortization of
capitalized research and development costs.

         The main reason for the year over year increase in depreciation in 1999
was the investment in expanding computing capacity and equipment for the
services department which totaled $3.4 million in 1999.

         The increase in amortization in 1999 was primarily due to the addition
of goodwill and acquired developed technology attributable to the PTM
acquisition, offset by the effect of the impairment loss in relation to
developed technology following the PTM acquisition. Despite the acquisition of
the Flagship business, amortization did not rise significantly in 2000, as the
acquisition only took place in October resulting in only one quarter's impact on
the amortization charge.

         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 and goodwill attributable to such acquisitions.



         NON RECURRING EXPENSES

         In 1999, we recorded non recurring expenses totaling $2.7 million which
included $0.8 million related to lease termination costs from the elimination of
duplicate facilities, $1.6 million related to impairment costs of developed
technology, developed or acquired prior to the PTM acquisition, and $0.3 million
associated with personnel reductions.

         FINANCIAL EXPENSES, NET

<TABLE>
<CAPTION>
(US $ millions)                       1998               1999               2000
---------------                       ----               ----               ----
<S>                               <C>                <C>                <C>
FINANCIAL EXPENSES, NET           $   0.66           $   0.48           $   0.55
as % of Total Revenue                  1.5%               0.9%               0.9%
                                      ----               ----               ----
year-over-year increase                                   -27%                14%
</TABLE>


                                       34
<PAGE>   36
         The interest expense resulted from interest expenses from the use of
bank lines of credit and capital lease obligations and interest income resulted
from interest earned on our cash and cash balances.

         OPERATING INCOME, AND NET INCOME

<TABLE>
<CAPTION>
         (US $ millions)                  1998           1999           2000
         ---------------                  ----           ----           ----
<S>                                      <C>            <C>             <C>
         OPERATING INCOME/(LOSS)         $5.6           ($3.3)          $3.3
         As % Total Revenue                12%            (6%)             5%
         ------------------              -----          ------          -----
         NET INCOME/(LOSS)               $4.6           ($3.8)          $2.4
         As % Total Revenue                10%            (7%)             4%
         ------------------              -----          ------          -----
</TABLE>

         The operating loss in 1999 before non-recurring items of $2.7 million,
was $0.6 million. Operating income in 2000, compared to 1999 (before
non-recurring items), reflects our decision to hold the infrastructure stable in
2000 until the recovery in expenditure by oil and gas companies.

         Net income recovered significantly in 2000 over 1999. Our cost
structure has a significant fixed cost component in the short term so that any
improvements in revenues have a disproportionately positive impact on the net
income.

B.       LIQUIDITY, CAPITAL RESOURCES AND FINANCING


<TABLE>
<CAPTION>
         (US $ millions)                                 1998           1999           2000
         ---------------                                 ----           ----           ----
<S>                                                     <C>           <C>             <C>
         CASH PROVIDED FROM/(USED IN) OPERATIONS        ($1.8)         ($0.9)         $ 12.6
         as % Total Revenue                                (4%)           (2%)            20%
         ------------------                             ------         ------         ------
         CASH (USED IN) INVESTMENTS                     ($4.5)        ($15.4)          ($9.4)
         CASH FROM FINANCING                            $ 1.7         $ 18.9           ($0.1)
         ------------------                             ------         ------         ------
         CASH YEAR END                                  $ 3.5         $  5.5           $ 8.6
         year-over-year increase                                          58%             58%
         ------------------                             ------         ------         ------
</TABLE>

         We finance our operations and capital requirements mainly through
equity funding, bridge funding and bank credit facilities. At December 31, 2000,
cash and cash equivalents were $ 8.6 million, compared to $ 5.5 million as of
December 31, 1999. At December 31, 2000, short term bank debt, including current
maturities of long term loans, was $7.6 million and long term bank loans was $
1.3 million, compared to $ 4.6 million and $ 3.9 million, respectively, as of
December 31, 1999. As of December 31, 2000, our aggregate obligations under
equipment leases were $1.3 million, compared to $1.9 million as of December 31,
1999.


                                       35
<PAGE>   37
         As of March 31, 2001, cash and cash equivalents were $8.4 million,
short term bank debt, including current maturities of long term loans, was $ 6.6
million, long term bank loans were $2.5 million and total lease obligations were
$1.1 million.

         In 2000, we increased our bank credit facilities for short-term and
long-term borrowings from $18 million to a total of $20 million, of which an
aggregate amount of $ 8.9 million was utilized as of December 31, 2000 and $9.1
million as of March 31, 2001. The current interest rate on these borrowings is
the London Inter Bank Offer Rate ("LIBOR") for three months, plus 1.0%. As
security for the bank credit facilities, we have registered a floating charge on
all of our assets in favor of the banks. In 2000, we increased short-term bank
debt by $2.5 million and repaid long term bank debt totaling $2.7 million.

         Our positive cash flow from operations resulted primarily from
increased revenues and improved customer collections. Our operating activities
provided cash in the amount of $12.6 million in 2000. Our operating activities
used cash in the amount of $1.8 million in 1998 and $0.9 million in 1999. As of
December 31, 2000, we had working capital of $10.9 million (of which $8.7 was in
cash and cash equivalents), compared to working capital of $15.3 million (of
which $ 5.5 million was in cash and cash equivalents) as of December 31, 1999.
This decrease in working capital is attributable to an increase in current
liabilities, primarily short term bank debt and trade payables.

         We used cash in investing activities of $4.5 million in 1998, $15.4
million in 1999 and $9.4 million in 2000. Our principal investing activities
were the purchase of computer hardware, and the acquisitions made by us in 1999
and 2000 including the PTM and Flagship acquisitions.

         In 1998, our financing activities provided approximately $1.7 million
(net), primarily attributable to our initial public offering, which raised $21.2
million. The proceeds of our public offering were primarily used to repay bridge
loans and notes in an aggregate amount of $20 million incurred in connection
with our acquisition of CogniSeis in October 1997. In 1999, our financing
activities provided approximately $13.0 million, primarily attributable to the
sale and issuance of our ordinary shares and warrants to acquire ordinary shares
of Paradigm in three private placements.

         As of May 31, 2001, we had a capital expenditure commitment for
computer hardware of $900,000. Our anticipated capital expenditure budget for
2001 for ongoing equipment replacement and intrinsic growth needs is estimated
at approximately $7.0 million, of which $2.0 million had been spent as of March
31, 2001. 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 and our unutilized 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 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.


                                       36
<PAGE>   38
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, 2001.





        NAME:                     AGE:                POSITION:
        -----                     ----                ---------
Eldad Weiss (2)                   45      Chairman of the Board and
                                          Chief Executive Officer
Yehezkel Marueli                  47      President and Chief Operating Officer
Brian W. Berman                   55      Chief Financial Officer
Elie Barr (1)                     54      Director
Jacob Dunietz                     45      Director
Michael Geiger (2)                63      Director
Thierry LeRoux                    47      Director
Jay Seid (1)                      40      Director
Gen. (Res.) Zvi Zamir (1)         76      External Director
Mary Safrai (1) (2)               57      External Director
Jonathan Keller                   49      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 Chief Executive Officer and a Director of the Company
since the commencement of its 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.
("Scitex"). Mr. Weiss holds a Bachelors and a Masters degree in Electrical
Engineering from Tel Aviv University.


                                       37
<PAGE>   39

YEHEZKEL MARUELI has served as the Company's 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's
Vice President of Corporate Logistics. Mr. Marueli holds a Bachelors degree in
Economics, with honors, from Tel Aviv University.

BRIAN W. BERMAN has served as the Chief Financial Officer of the Company 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, including
the Company. 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 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
the Board of Directors of the Company 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 Technologies 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., a publicly-traded holding company, which is quoted on the Tel Aviv Stock
Exchange. 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.
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.


                                       38
<PAGE>   40
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
is a director of Consotium Francais de Localisation S.A., and Interactive
Network Technologies Inc. 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 OutSource International. Inc.,
Vista Information Solutions, Inc. and 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 SAFRAI has served as an External Director since November 2000. From 1989
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 Corporate Secretary since January 1994. From
January 1994 until August 1997, Mr. Keller served as the Company's Financial
Controller. Prior to January 1994, Mr. Keller was a self employed Certified
Public Accountant and in this capacity provided financial services to the
Company. 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.



                                       39



<PAGE>   41
AGREEMENTS FOR NOMINATION OF DIRECTORS

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

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

         Pursuant to our agreement with Compagnie Generale de Geophysigue
("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 will 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 it to then hold in the
       aggregate a percentage of the outstanding Ordinary Shares in excess of
       10.2% of our outstanding Ordinary Shares.





ALTERNATE DIRECTORS

         Our Articles of Association provide, as permitted under Israeli law,
that any director may, by written notice to us, appoint another person to serve
as an alternate director (subject to the approval of a majority of the other
directors in a written resolution or at the next meeting of the Board of
Directors) and may cancel such appointment. The term of appointment of an
alternate director may be for one meeting of the Board of Directors, or for a
specified period, or until notice is given of the termination of the specified
period, or of the appointment. A person may not act as an alternate director
for more than one director and a director cannot act as an alternate director
for another director.


                                       40
<PAGE>   42
No director currently intends to appoint any other person as an alternate
director.



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 years preceding the date, 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




                                       41
<PAGE>   43
to the company. Each committee of a company's Board of Directors must include
at least one external director, with the exception of the audit committee which
must include all of the company's external directors. 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 Gen.(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
two independent directors on our Board of Directors and to establish an audit
committee, at least a majority of whose members are independent directors. The
composition of our Board of Directors and our audit committee is in compliance
with the requirements of the Nasdaq National Market.



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, 2000.




<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 ..        $  662,000                $ 95,000
</TABLE>


         During the fiscal year ended December 31, 2000, the aggregate
remuneration paid to all persons who served in the capacity of executive officer
or director in 2000 was approximately $ 757,000. 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, 2001, we had granted options under various 1994 Stock
Option Plans to certain officers to purchase an aggregate of 139,439 ordinary
shares at exercise prices ranging from $.59 to $7.00 per share which are fully
vested, and under various 1997 Stock Option Plans to purchase an aggregate of
412,934 ordinary shares at exercise prices ranging from $5.00 to $7.00 per share
of which 369,207 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.




                                       42
<PAGE>   44
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 (i) information regarding the appropriateness of a given action
brought for his approval or performed by him by virtue of his position and (ii)
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 " -- 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




                                       43
<PAGE>   45
         -        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.




                                       44
<PAGE>   46
         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% 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.





                                       45
<PAGE>   47
         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 the external directors as detailed above) 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 above) 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. All eight
directors currently in office were elected by our shareholders at our annual
general meeting of shareholders in November 2000.





                                       46
<PAGE>   48
EMPLOYMENT AGREEMENTS

         We have not entered into employment or service agreements with
directors other than the 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
targets set by the Board of Directors. Furthermore, Mr. Weiss has received
options to purchase 353,440 Ordinary Shares of the Company. Mr. Weiss'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 180 days 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 50,000 Ordinary Shares of the Company. Mr. Berman's
employment agreement provides for a one-time reimbursement of certain relocation
costs and requires compliance with confidentiality and non-competition
provisions.

         The Company entered into an employment agreement with Mr. Hezi Marueli,
which is terminable by either party upon 180 days 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
targets set by the Board of Directors. Furthermore, Mr. Marueli has received
options to purchase 110,000 Ordinary Shares of the Company. Mr. Marueli's
employment agreement requires compliance with confidentiality and
non-competition provisions.


         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 the 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, Zamir,
Safrai and Seid. It is currently contemplated that the audit committee meet at
least four times each year.




                                       47
<PAGE>   49
         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

<TABLE>
<CAPTION>
                                   MAY 31, 2001     DECEMBER 31,     DECEMBER 31,
                                                        2000            1999
<S>                                <C>              <C>              <C>
    Research and Development            150             137              98
       Sales and Marketing              106             105              78
        Customer Support                 94              76              78
            Services                     88              69              41
         Management and
         Administration                  75              67              66
                                   ----------------------------------------------
              TOTAL                     513             454              361
                                   ----------------------------------------------

     North and South America            178             158              143
   Europe, Africa, Middle East          247             219              160
       Far East and China                88              77               58
                                   ----------------------------------------------
              TOTAL                     513             454              361
                                   ----------------------------------------------
</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, Russia, the United Kingdom, the United
States and Venezuela. To date, compliance with such laws has not been a material
burden for us. As the number of our employees increases over time, our
compliance with such regulations could become more burdensome.

         Our principal operating subsidiaries are not party to any collective
bargaining agreements. However, the Israeli parent company 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




                                       48
<PAGE>   50
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.

         In addition, all employees in France are represented by unions.



E.       SHARE OWNERSHIP

Beneficial Ownership of Executive Officers and Directors


         As of May 31, 2001, 14,891,902 Ordinary Shares of the Company were
issued and outstanding.

         The following table sets forth, as of May 31, 2001, certain information
with respect to the beneficial ownership of the Company's Ordinary Shares, as
well as options and warrants exercisable within 60 days of May 31, 2001, by all
directors and officers.


<TABLE>
<CAPTION>
      NAME             BENEFICIAL OWNERSHIP OF  PERCENTAGE  OPTIONS TO PURCHASE
                                SHARES                        ORDINARY SHARES

<S>                    <C>                      <C>         <C>              <C>
Eldad Weiss                    224,282           1.50%            347,214    (1)
Yehezkel Marueli                  *                               100,644    (2)
Brian W. Berman                   *                                33,531    (3)
Elie Barr                         --                                 --
Jacob Dunietz                     *                                  --
Michael Geiger                    --                                 --
Thierry LeRoux                    --                                 --
Jay Seid                          --                                 --
Gen. (Res.) Zvi Zamir             --                                 --
Mary Safrai                       --                                 --
Jonathan Keller                   *                                38,103    (4)
</TABLE>

*        Less than one percent

(1)      The exercise price of the options ranges between $4 and $7 per share
         and the options expire between 2004-2006.


(2)      The exercise price of the options ranges between $5 and $7 per share
         and the options expire between 2005-2006.

(3)      The exercise price of the options is $7 per share and the options
         expire between 2006-2008.

(4)      The exercise price of the options ranges between $0.59 and $7 per share
         and the options expire between 2004-2006.




                                       49
<PAGE>   51
         STOCK OPTION PLANS



THE 1994 STOCK OPTION PLANS

         In 1994, we approved a stock option plan for key employees (the "Key
Employee Plan"), the May 1994 Stock Option Plan (the "May 1994 Plan") and the
1994 General Stock Option Plan (the "1994 General Plan") (the Key Employee Plan,
the May 1994 Plan and the 1994 General Plan are collectively referred to as the
"1994 Plans").

         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.

         Under the May 1994 Plan and the 1994 General Plan, we have granted
options to purchase a total of 226,184 and 60,176 Ordinary Shares, respectively.
Both the May 1994 Plan and the 1994 General Plan are administered by either the
Board of Directors or our Compensation Committee. The option exercise price
under the May 1994 Plan for 114,678 Ordinary Shares is $2.50 per Ordinary Share,
and for 111,506 Ordinary Shares is $4.00 per Ordinary Share. The option exercise
price under the 1994 General Plan is $7.00 per Ordinary Share. Furthermore,
under each of such Plans, 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 our Compensation Committee and the Company may provide loans to employees to
assist them in purchasing shares upon exercise of the options. Under the May
1994 Plan, 200,696 options are vested and are exercisable immediately. Options
granted under the 1994 General Plan, 51,352 are all vested and are exercisable
immediately. Options granted under the May 1994 Plan and 1994 General Plan, if
unexercised, expire ten years from the date of grant.

         Options granted under the 1994 Plans are not transferable by the option
holder, other than by will or pursuant to the laws of descent and distribution.
Under the 1994 Plans, the options expire immediately upon the termination of the
option holder's employment, unless our Board of Directors or the Compensation
Committee authorizes an extension of the exercise term beyond the 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 of employment, 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 our 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.




                                       50
<PAGE>   52
         As of May 31, 2001, under the Key Employee Plan, the May 1994 Plan and
the 1994 General Plan, options to purchase a total of 63,336, 200,696 and 51,352
Ordinary Shares, respectively, were outstanding.

         As of May 31, 2001, options granted under the 1994 Plans to certain
officers of the Company to purchase an aggregate of 139,439 Ordinary Shares at
exercise prices ranging from $.59 to $7.00 per share were outstanding. 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 our Board of Directors.

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 are administered by our
Board of Directors or the Compensation Committee. The option exercise price per
Ordinary Share will be determined by the Board of Directors or the Compensation
Committee and will be set forth in an option agreement between us and each
optionee, with the option price not being less that 100% of 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. Fair market value is
defined in the 1997 Plans as the mean between the highest and lowest quoted
selling prices of our publicly traded shares listed on a stock exchange on such
date. If no sales occur on the desired date, then fair market value will be
determined by taking a weighted average of the mean between the highest and
lowest quoted selling prices for a reasonable period both before and after the
desired date. The option exercise price will be payable in cash, by check or by
any other form of payment that is satisfactory to our Board of Directors or
Compensation Committee. 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% vest in 12 equal quarterly
installments commencing from the end of the first 12 month vesting period. These
options expire eight years from the date of grant.

         Options granted under the 1997 Plans are not transferable by the option
holder, other than by will or pursuant to the laws of descent and distribution.
Additionally, the options expire immediately upon the termination of the option
holder's employment, unless our Board of Directors or Compensation Committee
authorizes an extension of the exercise term beyond the employee termination
date. In the event of termination of employment without cause, any unexpired
vested options may be exercised up to 90 days following the date of termination
of employment, 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 exercised up to six months following
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 our Board of
Directors or Compensation Committee, accelerate and become immediately
exercisable as of the later of the date of retirement or one year




                                       51
<PAGE>   53
following the date of the 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, 2001, options to purchase a total of 1,529,772 Ordinary
Shares under the 1997 Plans were outstanding.

     As of May 31, 2001, we had granted options under the 1997 Plans to certain
officers to purchase an aggregate of 412,934 Ordinary Shares at exercise prices
ranging from $5.00 to $7.00 per share; 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 our Board of Directors.

ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     A.   MAJOR SHAREHOLDERS

          As a result of the concentration of ownership of our voting 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, 2001 by each
     person who is known to own beneficially more than 5% of our outstanding
     Ordinary Shares.



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

     Mashov Computers  Ltd.                1,590,406                   10.7%
     3, Hagalim Boulevard,
     Herzlia, Israel 46766

     Compagnie Generale de Geophysique     1,500,000(3)                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 U.S.A.

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

     Jerusalem Venture Partners LP           793,293(4)                 5.3%
     1, Technology Park Bldg. Malha
     Jerusalem 91487
     Israel
</TABLE>




                                       52
<PAGE>   54

     (1) Unless otherwise indicated, the entities identified in this table have
     sole voting and investment power with respect to all voting Ordinary Shares
     shown as beneficially owned by them, subject to community property laws,
     where applicable.

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

     (4) As part of a private placement in April 1999, Jerusalem Venture
     Partners LP acquired 877,193 Ordinary Shares.

          As of May 31, 2001, 14,891,902 of our Ordinary Shares were
     outstanding, all of which carry equal voting rights. At such date, there
     were 11 record holders of our Ordinary Shares in the United States who
     collectively held 73.5% of our outstanding Ordinary Shares.




                                       53
<PAGE>   55
SHAREHOLDERS AGREEMENTS

         For a description of the agreements between the Company and certain
shareholders regarding the nomination of directors, see Item 6. "Directors and
Senior Management - Agreements for Nomination of Directors".

REGISTRATION RIGHTS


         Shareholders holding an aggregate of up to 7,412,370 Ordinary Shares of
the Company 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 an aggregate of three registrations of the Company, 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 one demand registration and
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 $3,000,000. Shareholders
holding 1,500,000 Ordinary Shares and warrants to purchase 250,000 Ordinary
Shares only have incidental registration rights.

         The demand registration rights are subject to an underwriter's right of
cutback, provided that all shares of shareholders other than the Registrable
Securities are first excluded from such registration. The Company has undertaken
not to cause any other registration of securities for its 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 the Company furnishes the holders of
Registrable Securities a certificate signed by the President or Chief Executive
officer of the Company stating that, in the good faith judgment of the Board of
Directors, it would be seriously detrimental to the Company or its shareholders
for such F-3 registration to be effected at that time, provided that the Company
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 any other shares of the Company (with the exception of shares issued by
the Company to the public). All expenses incurred in connection with such
registrations will be borne by the Company, except that participating
shareholders will be obligated to pay their proportionate share of the fees,
discounts or commissions payable to any underwriter.


B.       RELATED PARTY TRANSACTIONS

         LOANS TO OFFICERS

         We entered into two loan agreements with Mr. Yehezkel Marueli,
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




                                       54
<PAGE>   56
annum from June 1, 2000. These loans were originally repayable on December 31,
2000, but repayment has been extended to December 31, 2001.

C.       INTERESTS OF EXPERTS AND COUNSEL

              Not applicable

ITEM 8.  FINANCIAL INFORMATION

A.       CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION


         See Item 18.

         LEGAL PROCEEDINGS

         Geophysical Micro Computer Application (International) Ltd. ("GMA") is
appealing a final judgment entered by the trial court in the District Court of
Dallas County, Texas in the matter of Paradigm Geophysical Ltd. vs. Geophysical
Micro Computer Application (International) Ltd. On December 11, 1997, we filed
suit for a declaratory judgment in the District Court of Dallas County, Texas to
determine whether it has any obligation to 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
the above-referenced appeal. Oral arguments were presented before the Court of
Appeals in April 2001 and the decision of the Court of Appeals is now awaited.
We believe that the outcome of the above claim will not have an adverse effect
on our business or on our consolidated financial statements.

         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 their 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. We believe that the
outcome of the above claim will not have an adverse effect on our business or on
our consolidated financial statements.




                                       55
<PAGE>   57
         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 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

             1998
        Second Quarter   $ 7.375     $ 7.000
       (commencing June
           15, 1998)
         Third Quarter   $ 7.125     $ 4.500
        Fourth Quarter   $ 5.875     $ 4.190

             1999
         First Quarter   $ 5.125     $ 4.250
        Second Quarter   $ 7.250     $ 5.000
         Third Quarter   $ 6.750     $ 5.625
        Fourth Quarter   $ 5.875     $ 4.500
</TABLE>




                                       56
<PAGE>   58
<TABLE>
<CAPTION>
             2000
<S>                      <C>         <C>
         First Quarter   $ 10.063    $ 4.500
        Second Quarter   $ 7.813     $ 5.200
         Third Quarter   $ 6.875     $ 5.563
        Fourth Quarter   $ 7.000     $ 4.250
             2001
            January      $ 5.063     $ 4.250
           February      $ 6.000     $ 5.125
             March       $ 6.000     $ 5.063
             April       $ 5.770     $ 4.969
              May        $ 6.680     $ 5.470
</TABLE>


B.       PLAN OF DISTRIBUTION

         Not applicable.

C.       MARKETS

         Not applicable.

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 THE COMPANY'S 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


                                       57
<PAGE>   59
         Pursuant to Article 54(b) of our Articles of Association, a transaction
entered into by the Company in which a director of the Company has a personal
interest, directly or indirectly, will be valid in respect of the Company and
the given director only if approved by the Company's 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 the Company, its assets
and liabilities.

         The Israeli Companies Law provides that a director who has personal
interest in a given transaction of the Company, brought to the approval of the
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 the Company's 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 in 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 the Company's 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 legal quorum at our Board meetings the Israeli Companies Law
provides that, unless determined otherwise by the Company, 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 meeting will
consist of the majority of the Board members.

         Any transaction concerning compensation to a director requires the
approval of both the Board of Directors and the shareholders of the Company at
the Company's General Meeting.

         The Board of Directors may from time to time, in its discretion, cause
the Company to borrow or secure the payment of any sum or sums of money for the
purpose of the Company, 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 the
Company, 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.




                                       58
<PAGE>   60
         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, the profits of the Company available for dividend and resolved to be
distributed shall be applied in payment of dividends upon the shares of the
Company 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 the shareholders on account
of the next forthcoming dividend such interim dividends as, in their judgment,
the position of the Company 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 specific assets of the Company or by
distribution of paid-up shares, debentures or debenture stock or any other
securities of the Company 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 the voting rights in the Company 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.


                                       59
<PAGE>   61
Votes may be given either personally or by proxy. A proxy need not be a
shareholder of the Company.

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 the Company's 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-third of the total voting rights in the Company. A company being a
shareholder shall be deemed to be personally present for the purpose of the
Company's Articles of Association if represented by its representative duly
authorized in accordance with Article 42 of the Company's 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 meeting any


                                       60
<PAGE>   62
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 the issued
share capital of the Company and at least 1% of the voting rights in the Company
or one or more shareholders who hold in the aggregate at least 5% of the voting
rights in the Company.

8.  RESTRICTION ON NON-RESIDENTS

         The Memorandum and Articles of Association of the Company 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 merged Company will not be able to
meet the company's obligations to its creditors.

         In addition, the Company's current Articles of Association provide that
the Company 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 the
outstanding voting shares of the Company 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:

(a)      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

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

         A business combination includes:

(a)      any merger or consolidation involving the Company and the interested
         shareholder;

(b)      any sale, transfer, pledge or other disposition of 10% or more of the
         assets of the Company in a transaction involving the interested
         shareholder;

(c)      subject to certain exceptions, any transaction that results in the
         issuance or transfer by the Company of any shares of the Company to the
         interested shareholder;

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


                                       61
<PAGE>   63
(e)      the receipt by the interested shareholder of the benefit of any loans,
         advances, guarantees, pledges or other financial benefits provided by
         or through the Company.

         The Company has 2,000,000 Special Preferred Shares authorized ("Special
Preferred Shares"). 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 the Company 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. The Company has not issued, and currently has 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 Ordinary Shares of the Company, 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, the approval of the Board of Directors
is required only 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


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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.

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 will hold 90% or more of the company's shares or 90% of any class of
the 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. This rule does not apply if the acquisition is made by way of a
merger. 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


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remaining shares will be obligated to transfer such shares to the acquiror at
the tender offer price. This entails the possibility of additional delay and the
imposition of further approval requirements at the court's discretion. 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, at a shareholders' meeting called on at least 21 days prior
notice. In addition, the Israeli Companies Law does not generally require court
approval of a merger. Pursuant to the Israeli Companies Law the articles of
association of companies such as ours, which have been incorporated prior to
February 1, 2000, are deemed to include a provision whereby the approval of a
merger requires approval of the transaction by the majority of the shareholders
present and voting on the proposed transaction who hold at least 75% of the
shares present and voting at such meeting. 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.

         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 25% of the
voting rights in the company. This rule does not apply if there already is
another holder of 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 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 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.


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<PAGE>   66
         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 acquisition transaction agreements and related documents
discussed in Item 4. "Information on the Company - History and Development of
the Company " and in Item 5. "Operating and Financial Review and Prospects -
Acquisitions," 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 the Company, its shareholders and
ownership and disposition of its 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 the
Company's outstanding voting shares). The following also includes a discussion
of certain Israeli government programs benefiting various Israeli businesses
such as the Company. To the extent that the discussion is based on new
legislation


                                       65
<PAGE>   67
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

         On May 4, 2000, a committee chaired by the Director General of the
Israeli Ministry of Finance issued a report recommending a sweeping reform in
the Israeli system of taxation. The proposed reform would significantly alter
the taxation of individuals and would also affect corporate taxation. In
particular, the proposed reform would reduce but not eliminate, the tax benefits
available to approved enterprises such as ours. The Israeli cabinet of the
previous government has approved the recommendation in principle. The new
Israeli government has declared that it intends to recommend tax reforms but has
not approved the May 4, 2000 report or any other alternate reform.
Implementation of any reform requires legislation by Israel's Knesset
(Parliament). We cannot be certain whether the proposed reform will be adopted,
when it will be adopted or what form any reform will ultimately take or what
effect it will have on our company.

GENERAL CORPORATE TAX STRUCTURE

         Israeli companies are generally subject to "Company Tax" at the rate of
36.0% 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


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<PAGE>   68
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 the
Company might be that the Company's taxable income, as determined for Israeli
corporate tax purposes, would be different from the Company's U.S. dollar
income, as reflected in its financial statements, due to the difference between
the annual changes in the CPI and in the NIS exchange rate with respect to the
U.S. 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 the 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 the company continues to
qualify as an Industrial Company under Israeli law and that the individual does
not hold such shares for business purposes. If the Company does not maintain its
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 shareholders of the Company. 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) at the rate of up to 25%.

         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 had dividend income derived or accrued
in Israel from which the applicable tax was withheld at source is currently
exempt from the duty to file an annual


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<PAGE>   69
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

         The Company currently qualifies 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 the Company 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.


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<PAGE>   70
         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. The Tax Reform Committee has proposed that
the company tax rate be increased from 0% to 10% during the exemption period. 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. The Company 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
the Company 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.

         The Company has been granted "Approved Enterprise" status under the
Investment Law with respect to four projects. Pursuant to the provisions of the
Investment Law, the Company 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 25%, 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.


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<PAGE>   71
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. the Company 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 (3.5% for the year 2000 only), 4% of revenues
during the following three years, and 5% of revenues in the seventh year and
thereafter, with the total royalties not to exceed 100% 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, 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.


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         In order to meet certain conditions in connection with the grants and
programs of the OCS, the Company has made certain representations to the Israeli
government about the Company's future plans for its Israeli operations. From
time to time, the extent of the Company's Israeli operations has differed and
may in the future differ, from the Company's representations. If, after
receiving grants under certain programs, the Company fails 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 the Company to the Israeli
government, the Company could be required to refund to the State of Israel tax
or other benefits previously received (including interest and CPI linkage
difference) and would likely be denied receipt of such grants or benefits, and
participation of such programs, thereafter.

         The Company participates 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

         The Company has received grants relating to its overseas marketing
expenses from the Marketing Fund. These grants are awarded for specific expenses
incurred by the Company for overseas marketing and are based upon the expenses
reported by the Company 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 the Company from the Marketing Fund. Grants recorded beginning January 1,
1998 bear royalties of 4% plus interest at LIBOR rates. The Company 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 the Company's consolidated financial statements as
offsets to marketing expenses. Through December 31, 2000, the Company had
received grants from the Marketing Fund in the amount of approximately $430,000.
At March 31, 2001, the aggregate contingent liability was approximately
$418,000.

 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",


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"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, 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 the Company's outstanding voting stock. The
following discussion does not address the effect of any applicable state, local
or foreign 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 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.


                                       72
<PAGE>   74
         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 financial services income for United States foreign tax credit
purposes. Foreign income taxes exceeding the credit limitation for the year of
payment or accrual may be carried back for two taxable years and forward for
five taxable years in order to reduce U.S. Federal income taxes, subject to the
credit limitation applicable in each of such years. Other restrictions on the
foreign tax credit include a prohibition on the use of the credit to reduce
liability for the U.S. individual and corporation alternative minimum taxes by
more than 90%. A U.S. Holder will be denied a foreign tax credit with respect to
Israeli income tax withheld from dividends received on the Ordinary Shares to
the extent such U.S. Holder has not held the Ordinary Shares for at least 16
days of the 30-day period beginning on the date which is 15 days before the
ex-dividend date or to the extent such U.S. Holder is under an obligation to
make related payments with respect to substantially similar or related property.
Any days during which a U.S. Holder has substantially diminished its risk of
loss on the Ordinary Shares are not counted toward meeting the 16-day holding
period required by the statute. 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


                                       73
<PAGE>   75
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 market price
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 dividends 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 dividend payment
                  or disposition would be subject to tax at the highest
                  individual or corporate tax rate, as the case may be, 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 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.


                                       74
<PAGE>   76
         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.

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 a 31 percent 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.

U.S. GIFT AND ESTATE TAX

         An individual U.S. Holder of Ordinary Shares will be subject to U.S.
gift and estate taxes with respect to Ordinary Shares in the same manner and to
the same extent as with respect to other types of personal property.


F.       DIVIDEND AND PAYING AGENTS

         Not applicable.


                                       75
<PAGE>   77
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 Exchange Act may be inspected without charge and copied at
prescribed rates at the following Securities and Exchange Commission public
reference rooms: 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington,
D.C. 20549; Seven World Trade Center, Suite 1300, New York, NY 10048; Room 3190,
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661. 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 our company 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 US dollars, or linked to the US
dollar, and therefore the dollar is our functional currency. Approximately 50%
of our operating expenses are paid in US dollars or are linked to US dollars.
Other significant currencies in which we receive revenue or pay expenses are
Australian dollars, British pounds, Canadian dollars, the European Monetary
Union currency ("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 US 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, 2000, we had entered into hedging
transactions only in regard to our New Israeli Shekel/ US 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.


                                       76
<PAGE>   78
         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, 2000, our total outstanding
indebtedness in regard to short-term debt and current maturities of long term
bank loans was approximately $ 7.6 million, in regard to medium term bank loans
was $ 1.3 million, and in connection with capital lease obligations was $ 1.3
million. In the aggregate, this indebtedness 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

         In November 2000, our shareholders approved the adoption of an amended
and restated Articles of Association (the "Amended Articles"). The principal
amendments modifying shareholder rights and which are not mandated by law can be
summarized as follows:

         -        The Board of Directors has the authority to declare dividends
                  to our shareholders (our previous Articles of Association
                  required shareholder approval).

         -        All decisions which under the previous Articles of Association
                  and the Israeli law in force until February 1, 2000, required
                  that the amendments to the Articles of Associations and a
                  number of other decisions such as the increase of share
                  capital, share splits and other recapitalizations required the
                  approval of at least 75% of our shareholders present and
                  voting at a special meeting of shareholders. As permitted
                  under the new Israeli Companies Law, the Amended Articles
                  provide that these decisions require a simple majority of
                  shareholders present and voting at any shareholders meeting
                  (with the


                                       77
<PAGE>   79
                  exception of Article 100 which deals with certain business
                  combinations the amendment of which requires the affirmative
                  vote of at least 75% of our shareholders present (in person or
                  by proxy) at the Meeting and voting on the resolution) .

         -        We are permitted to purchase our own shares in certain
                  circumstances (this was previously prohibited).

                                    PART III

ITEM 17.  FINANCIAL STATEMENTS

     Not applicable.



ITEM 18 - FINANCIAL STATEMENTS AND EXHIBITS


The following consolidated financial statements and related auditors report 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 the Financial Statements...................          F-9



ITEM 19 - EXHIBITS

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

    EXHIBITS NO.                         EXHIBIT

         1.1++*     Memorandum of Association.

         1.2#       Amended and Restated Articles of Association.

         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*       Form of 1994 Warrant issued in connection with a private
                    placement of Paradigm Geophysical Ltd.'s securities.

         2.4***     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.

         2.5***     Registration Rights Agreement, dated April 14, 1999, 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.


                                       78
<PAGE>   80


         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, dated
                    February 3,1999, 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, dated October 4, 2000, 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.

         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.

         8.1#       Subsidiaries of Paradigm Geophysical Ltd.

        10.1#       Consent of Kost Forer and Gabbay.
--------------------
         ++         English translations from Hebrew original.


                                       79


<PAGE>   81


         *          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
                    June 30, 1999.

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

         #          Filed herewith.



                                   SIGNATURES

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



                                            PARADIGM GEOPHYSICAL LTD.

                                         By: /s/ Brian Berman
                                            -----------------------
                                            Brian Berman
                                            Chief Financial Officer



Date: June 29, 2001


                                       80


<PAGE>   82
                 PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2000

                                 IN U.S. DOLLARS

                                      INDEX

<TABLE>
<CAPTION>
                                                                             PAGE
                                                                           ---------
<S>                                                                      <C>
REPORT OF INDEPENDENT AUDITORS                                               F-2

CONSOLIDATED BALANCE SHEETS                                               F-3 - F-4

CONSOLIDATED STATEMENTS OF OPERATIONS                                        F-5

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY                                F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS                                     F-7 - F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                F-9 - F-34
</TABLE>
<PAGE>   83
                           [ERNST & YOUNG LETTERHEAD]



                         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, 1999 and 2000, 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, 2000. 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 Paradigm Geophysical (U.K), a wholly-owned subsidiary,
which statements reflect total assets constituting 13% of total consolidated
assets as of December 31, 1999, and total revenues constituting 26% and 22% of
total consolidated revenues for the years ended December 31, 1998 and 1999,
respectively. 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 Paradigm Geophysical (U.K.) is based solely on the reports of the other
auditors. We did not audit the financial statements of Paradigm Geophysical
(Singapore) Pte Ltd., a wholly-owned subsidiary which statements reflect total
revenues constituting 13% of total consolidated revenues for the year ended
December 31, 1998. Those statements were audited by other auditors whose reports
have been furnished to us, and our opinion, insofar as it relates to the amounts
included for Paradigm (Singapore) Pte. Ltd., is based solely on the reports of
the 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, 1999 and 2000, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.

Tel-Aviv, Israel                                   KOST FORER & GABBAY
January 22, 2001                         A Member of Ernst & Young International

                                     F - 2
<PAGE>   84
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,
                                                                                        -------------------------------
                                                                                           1999                 2000
                                                                                        ----------           ----------
<S>                                                                                     <C>                  <C>
      ASSETS

CURRENT ASSETS:
Cash and cash equivalents                                                               $    5,457           $    8,647
Trade receivables (net of allowance for doubtful accounts of
    $ 1,666 in 1999 and $ 2,950 in 2000)                                                    21,612               22,707
Accrued income                                                                               9,012                4,077
Other receivables and prepaid expenses                                                       2,443                4,110
                                                                                        ----------           ----------

Total current assets                                                                        38,524               39,541
                                                                                        ----------           ----------

LONG-TERM TRADE RECEIVABLES                                                                     54                  221
                                                                                        ----------           ----------

SEVERANCE PAY FUND                                                                             861                1,076
                                                                                        ----------           ----------

PROPERTY AND EQUIPMENT, NET                                                                 12,007               13,318
                                                                                        ----------           ----------

OTHER ASSETS, NET                                                                           14,719               25,605
                                                                                        ----------           ----------

                                                                                         $  66,165            $  79,761
                                                                                         =========            =========
</TABLE>

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

                                     F - 3
<PAGE>   85
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
                                                     CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA

<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                         -----------------------------
                                                                                           1999                 2000
                                                                                         --------             --------
<S>                                                                                      <C>                  <C>
   LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term bank loans                                                                    $  2,000             $  4,528
Current maturities of long-term bank loans                                                  2,639                3,112
Current maturities of capital lease obligations                                               434                  546
Trade payables                                                                              2,774                6,045
Other payables and accrued expenses                                                         8,792                9,931
Deferred revenues                                                                           6,539                4,519
                                                                                         --------             --------

Total current liabilities                                                                  23,178               28,681
                                                                                         --------             --------

LONG TERM LIABILITIES:
Long-term bank loans, net of current maturities                                             3,923                1,277
Capital lease obligations, net of current maturities                                          742                  206
Other lease obligations                                                                       759                  517
Accrued severance pay                                                                       1,650                2,338
Deferred income tax liability                                                                 445                  273
                                                                                         --------             --------

Total long-term liabilities                                                                 7,519                4,611
                                                                                         --------             --------
SHAREHOLDERS' EQUITY:
Share capital:
  Authorized - 18,000,000 Ordinary shares of NIS 0.5 par value; 2,000,000
   Preferred shares of NIS 0.5 par value as of December 31, 1999 and 2000

  Issued and outstanding - 13,026,336 Ordinary shares as of December 31, 1999
   and 14,691,904 Ordinary shares as of

   December 31, 2000                                                                        2,064                2,273
Additional paid-in capital                                                                 51,903               60,954
Accumulated other comprehensive loss                                                       (1,166)              (1,784)
Accumulated deficit                                                                       (17,333)             (14,974)

                                                                                         --------             --------
Total shareholders' equity                                                                 35,468               46,469
                                                                                         --------             --------

                                                                                         $ 66,165             $ 79,761
                                                                                         ========             ========
</TABLE>

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


                                     F - 4
<PAGE>   86
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                           --------------------------------------------------
                                                             1998                 1999                 2000
                                                           --------             --------             --------
<S>                                                       <C>                  <C>                   <C>
Revenues:
Products                                                   $ 38,074             $ 43,023             $ 46,390
Services                                                      7,288               11,483               16,908
                                                           --------             --------             --------

Total revenues                                               45,362               54,506               63,298
                                                           --------             --------             --------
Operating expenses:
Cost of products                                              8,559               12,418               10,816
Cost of services                                              3,107                5,804                6,352
Research and development                                      7,660                9,306               11,215
Sales and marketing, general and administrative              15,822               20,638               23,518
Depreciation                                                  2,298                3,865                4,746
Amortization of intangible assets                             2,347                3,064                3,360
Non recurring expenses                                           --                2,705                   --
                                                           --------             --------             --------

Total operating expenses                                     39,793               57,800               60,007
                                                           --------             --------             --------

Operating income (loss)                                       5,569               (3,294)               3,291
Financial expenses, net                                        (661)                (484)                (552)
                                                           --------             --------             --------

Income (loss) before taxes on income                          4,908               (3,778)               2,739
Taxes on income                                                 356                   --                  380
                                                           --------             --------             --------

Net income (loss)                                          $  4,552             $ (3,778)            $  2,359
                                                           ========             ========             ========

Basic net earnings (loss) per share                        $   0.66             $  (0.31)            $   0.17
                                                           ========             ========             ========

Diluted net earnings (loss) per share                      $   0.49             $  (0.31)            $   0.17
                                                           ========             ========             ========
</TABLE>

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


                                     F - 5
<PAGE>   87
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
                                   STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA

<TABLE>
<CAPTION>


                                                       PREFERRED SHARES                 ORDINARY SHARES
                                                    SHARES           AMOUNT           SHARES        AMOUNT
                                                   ---------         ------         ----------     --------
<S>                                                <C>               <C>             <C>           <C>
Balance as of January 1, 1998                      4,735,802         $  765          2,328,682     $    521
Comprehensive income (loss):
  Net income                                               -              -                  -            -
  Foreign currency translation
   adjustments                                             -              -                  -            -
Total comprehensive income
Issuance of Ordinary shares, net                           -              -          3,350,000          458
Exercise of over-allotment                                 -              -            100,000           14
Conversion of Preferred shares
  into Ordinary shares                            (4,735,802)          (765)         4,735,802          765
                                                   ---------         ------         ----------     --------
Balance as of December 31, 1998                            -              -         10,514,484        1,758
Comprehensive loss:
  Net loss                                                 -              -                  -            -
  Foreign currency translation
   adjustments                                             -              -                  -            -
Total comprehensive loss
Issuance of Ordinary shares, net                           -              -          2,017,544          246
Issuance of shares upon exercise of warrants               -              -            479,908           58
Issuance of shares upon exercise of stock options          -              -             14,400            2
                                                   ---------         ------         ----------     --------

Balance as of December 31, 1999                            -              -         13,026,336        2,064
Comprehensive income (loss):
  Net income                                               -              -                  -            -
  Foreign currency translation
   adjustments                                             -              -                  -            -
Total comprehensive income
Issuance of shares upon acquisition of                     -              -          1,500,000          186
   Flagship

Issuance of shares upon exercise
  of warrants                                              -              -            119,782           15
Issuance of shares upon exercise
  of stock options, net                                    -              -             45,786            8
                                                   ---------         ------         ----------     --------
Balance as of December 31, 2000                            -         $    -         14,691,904      $ 2,273
                                                   =========         ======         ==========     ========
</TABLE>

<TABLE>
<CAPTION>
                                                                    ACCUMULATED
                                                    ADDITIONAL         OTHER                               TOTAL
                                                     PAID-IN       COMPREHENSIVE      ACCUMULATED      SHAREHOLDERS'
                                                     CAPITAL            LOSS            DEFICIT            EQUITY
                                                   ----------          -------         ---------          ---------
<S>                                                <C>                <C>            <C>                  <C>
Balance as of January 1, 1998                      $   19,707         $   (246)      $   (18,107)         $   2,640
Comprehensive income (loss):
  Net income                                                -                -             4,552              4,552
  Foreign currency translation
   adjustments                                              -             (496)                -               (496)
                                                                                                          ---------
Total comprehensive income                                                                                    4,056
                                                                                                          =========
Issuance of Ordinary shares, net                       18,892                -                 -             19,350
Exercise of over-allotment                                637                -                 -                651
Conversion of Preferred shares
  into Ordinary shares                                      -                -                 -                  -
                                                   ----------          -------         ---------          ---------
Balance as of December 31, 1998                        39,236             (742)          (13,555)            26,697
Comprehensive loss:
  Net loss                                                  -                -            (3,778)            (3,778)
  Foreign currency translation
   adjustments                                              -             (424)                -               (424)
                                                                                                          ---------
Total comprehensive loss                                                                                     (4,202)
                                                                                                          =========
Issuance of Ordinary shares, net                       10,736                -                 -             10,982
Issuance of shares upon exercise of warrants            1,861                -                 -              1,919
Issuance of shares upon exercise of stock options          70                -                 -                 72
                                                   ----------          -------         ---------          ---------

Balance as of December 31, 1999                        51,903           (1,166)          (17,333)            35,468
Comprehensive income (loss):
  Net income                                                -                -             2,359              2,359
  Foreign currency translation
   adjustments                                              -             (618)                -               (618)
                                                                                                          ---------
Total comprehensive income                                                                                    1,741
                                                                                                          =========
Issuance of shares upon acquisition of                  8,889                -                 -              9,075
   Flagship

Issuance of shares upon exercise
  of warrants                                               -                -                 -                 15
Issuance of shares upon exercise
  of stock options, net                                   162                -                 -                170
                                                   ----------          -------         ---------          ---------
Balance as of December 31, 2000                      $ 60,954          $(1,784)        $ (14,974)          $ 46,469
                                                   ==========          =======         =========          =========
</TABLE>

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


                                     F - 6
<PAGE>   88
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                              ----------------------------------------------
                                                                                1998               1999               2000
                                                                              ---------         ----------           -------
<S>                                                                           <C>               <C>                  <C>
Cash flows from operating activities:

Net income (loss)                                                             $   4,552         $   (3,778)          $ 2,359
Adjustments to reconcile net income (loss) to net cash
   provided by (used in) operating activities:
   Depreciation and amortization                                                  4,778              6,929             8,106
   Impairment of development technology                                               -              1,595                 -
   Decrease (increase) in trade receivables, accrued income
      and long-term trade receivables                                            (5,035)            (8,866)           10,081
   Decrease (increase) in other receivables and prepaid expenses                  1,432                (98)              441
   Increase (decrease) in deferred income
      tax assets and liabilities, net                                              (202)               203              (171)
   Decrease (increase) in other assets                                                -                 84                 -
   Increase (decrease) in trade and other payables and
      accrued expenses                                                           (5,384)             1,795            (4,561)
   Increase (decrease) in deferred revenues                                      (1,929)             1,004            (2,522)
   Accrued severance pay, net                                                        15                243            (1,083)
   Other                                                                              -                  -               (22)
                                                                              ---------         ----------           -------
Net cash provided by (used in) operating activities                             *(1,773)             *(889)           12,628
                                                                              ---------         ----------           -------

Cash flows from investing activities:

Purchase of property and equipment                                               (4,516)            (5,847)           (5,331)
Proceeds from sale of property and equipment                                          -                  -                39
Purchase of developed technology                                                      -             (1,175)             (170)
Payment for acquisition of a consolidated subsidiary, PTM  (1)                        -             (8,379)                -
Payment for acquisition of a consolidated subsidiary, Flagship (2)                    -                  -            (3,980)
                                                                              ---------         ----------           -------
Net cash used in investing activities                                            (4,516)           (15,401)           (9,442)
                                                                              ---------         ----------           -------
Cash flows from financing activities:

Proceeds from short-term bank loans                                              *1,584             *2,000             7,506
Principal payment of short-term bank loans                                        *(517)           *(1,778)           (4,978)
Principal payment of note payable                                                (8,457)                 -                 -
Principal payments of capital lease obligations                                       -               (200)             (424)
Proceeds from long-term loans                                                         -              6,500                 -
Principal payment of long-term loans                                               (571)              (427)           (2,173)
Principal payment of bridge loan                                                (12,000)                 -                 -
Payment of other lease obligations                                                    -               (200)             (242)
Issuance of share capital, net                                                   21,160             10,982                 -
Proceeds from exercise of warrants and stock options                                  -              1,991               185
Amortization of debt issuance costs from warrants issued                            475                  -                 -
                                                                              ---------         ----------           -------

Net cash provided by financing activities                                        *1,674            *18,868              (126)
                                                                              ---------         ----------           -------

Effect of exchange rate changes on cash and cash equivalents                       (151)              (584)              130
                                                                              ---------         ----------           -------

Increase (decrease) in cash and cash equivalents                                 (4,766)             1,994             3,190
Cash and cash equivalents at the beginning of the year                            8,229              3,463             5,457
                                                                              ---------         ----------           -------

Cash and cash equivalents at the end of the year                              $   3,463          $   5,457           $ 8,647
                                                                              =========          =========           =======
</TABLE>

* Reclassified

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


                                     F - 7
<PAGE>   89
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                                                                                              YEAR ENDED DECEMBER 31,
                                                                                      -----------------------------------------
                                                                                        1998            1999             2000
                                                                                      --------        --------         --------
<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
                                                                                      ========        ========         ========
Supplemental disclosure of cash flow activities:
Cash paid during the year for:

Interest                                                                              $    721        $     42         $    949
                                                                                      ========        ========         ========

Income taxes                                                                          $     --        $    379         $     --
                                                                                      ========        ========         ========
Non-cash activities:

Purchase of leased property and equipment in a capital lease                          $    863        $  1,376         $     --
                                                                                      ========        ========         ========

Offering expenses                                                                     $  1,159        $     --         $     --
                                                                                      ========        ========         ========
Write-off of note payable in connection with an acquisition of a consolidated
subsidiary in 1997, as a result of reevaluation of certain assets purchased           $  1,043        $     --         $     --
                                                                                      ========        ========         ========
Additional acquired technology associated with an acquisition of a
consolidated subsidiary in 1997                                                       $  2,343        $     --         $     --
                                                                                      ========        ========         ========

Conversion of Preferred shares into Ordinary shares                                   $    765        $     --         $     --
                                                                                      ========        ========         ========

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

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


                                     F - 8
<PAGE>   90
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 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.

              The Company's global sales, users' support and services network
              serves all major oil-and gas-producing companies in the world.

b.            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 in the total amount of $
              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>


                                     F - 9
<PAGE>   91
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------



The acquired assembled work-force and the acquired technology are being
amortized over their expected useful period, which is estimated at ten years,
customer base and goodwill are being amortized over a twenty years period.

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:

<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>

c.            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>


                                     F - 10
<PAGE>   92

PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


The acquired assembled work-force and the acquired technology are being
amortized over their expected useful period 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 Note 5c).

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 years ended
December 31, 1998 and 1999, assuming that the PTM acquisition had been
consummated as of January 1, 1998 and January 1, 1999:

<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                               ------------
                                                                         1998               1999
                                                                         ----               ----
                                                                               IN THOUSANDS,
                                                                           EXCEPT PER SHARE DATA
                                                                           ---------------------
<S>                                                                     <C>               <C>
                     Revenues                                           $ 51,337          $ 56,105
                                                                        ========          ========

                     Net income (loss)                                  $ 4,190           $ (3,867)
                                                                        ========          ========

                     Basic net earnings (loss) per share                $  0.61           $  (0.32)
                                                                        ========          ========

                     Diluted net earnings (loss) per share              $  0.45           $  (0.32)
                                                                        ========          ========
</TABLE>


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.

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 ("SFAS")
         52, "Foreign Currency Translation". 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.


                                      F-11
<PAGE>   93
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


         Total foreign currency translation net income (expenses) amounted to $
         313,000, $ (6,000) and $ (53,000) for the years ended December 31,
         1998, 1999 and 2000, respectively.

         The functional and reporting currency of all 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 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.       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              20 - 33
                        Office furniture and equipment                   6 - 15
                        Motor vehicles                                     15
                        Leasehold improvements                over the term of the lease
</TABLE>

         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 SFAS No. 121
         "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
         Assets to be Disposed Of". As of December 31, 2000, no impairment
         losses have been identified.

f.       Other assets:

         Other assets include goodwill, developed technology and other
         identified intangibles and are stated at amortized cost. Amortization
         is calculated using the straight-line method over their estimated
         useful life, which ranges from five to twenty years.


                                      F-12
<PAGE>   94
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


         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 the Company did not recognize
         an impairment loss in relation to intangible assets.

g.       Revenue recognition:

         The Company and its subsidiaries generate revenues mainly from
         licensing the rights to use its software products, from software
         licenses that require significant customization, 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
         support, training, installation and hardware sales. The Company and its
         subsidiaries sell their products primarily through their direct sales
         force.

         The Company and its subsidiaries implement Statement of Position (SOP)
         97-2, "Software Revenue Recognition", 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 and persuasive evidence of an arrangement exists. 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 SOP 98-9,
         "Modification of SOP 97-2, Software Revenue Recognition with Respect to
         Certain Transactions," 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, training and
         installation is based on the price charged 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 does not grant a right
         of return to its customers.

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

         Revenues from training and installation included in multiple element
         arrangement and from consulting services are recognized at the time
         they are rendered.

         Revenues from hardware sales are recognized when persuasive evidence of
         an agreement exists, delivery has occurred, the fee is fixed or
         determinable and collectibility is probable.


                                      F-13
<PAGE>   95
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


         Revenues from software licenses that require significant customization
         and from seismic data processing, interpretation and reservoir-studies
         services are recognized based on SOP 81-1 "Accounting for Performance
         of Construction Type and Certain Production Type Contracts", 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, 2000 no provision for losses have been recorded.

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

         In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
         101) "Revenue Recognition in Financial Statements" as amended in June
         2000, which summarizes the Staff's views in applying generally accepted
         accounting principles to revenue recognition in financial statements.
         The Company adopted SAB 101 during the fourth quarter of 2000. The
         adoption did not have a significant effect on the Company's
         consolidated results of operations or financial position.

h.       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, net of participation of the Office of the Chief Scientist
         in the Israeli Ministry of Industry and Trade.

         Statement of Financial Accounting Standards ("SFAS") No. 86 "Accounting
         for the Costs of Computer Software to be Sold, Leased or Otherwise
         Marketed", 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 (three to five 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.


                                      F-14
<PAGE>   96
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


i.       Income taxes:

         The Company and its subsidiaries accounts for income taxes in
         accordance with Statement of Financial Accounting Standards ("SFAS")
         109, "Accounting for Income Taxes". 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.

j.       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, long term receivables and
         accrued income.

         Cash and cash equivalents 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's investments are financially sound
         and, accordingly, minimal credit risk exists with respect to these
         investments.

         The Company's trade receivables, long-term 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"), the United States, and the Far East.
         The Company performs 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 to date the Company has not incurred significant loss.

         The Company and its subsidiaries have no significant off-balance-sheet
         concentration of credit risk such as foreign exchange contracts,
         option contracts or other foreign hedging arrangements.


                                      F-15
<PAGE>   97
k.       Accounting for stock-based compensation:

         The Company has elected to follow Accounting Principles Board Opinion
         No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and
         Interpretation No. 44 "Accounting for Certain Transactions Involving
         Stock Compensation" ("FIN 44") in accounting for its employee stock
         option plans. Under APB 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 123"), are provided in Note 8f.

l.       Severance pay:

         The Company's liability for severance pay 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 its employees, is fully provided by monthly
         deposits with severance pay funds, insurance policies and by an
         accrual.

         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.

m.       Fair value of financial instruments:

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

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

         Long-term trade receivables, long-term bank loans and lease obligations
         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 and lease obligations approximates their fair
         value.

n.       Advertising expenses:

         Advertising expenses are charged to the statements of operations as
         incurred. Advertising expenses for the years ended December 31, 1998,
         1999 and 2000 were $ 419,000, $ 587,000 and $ 536,000, respectively.


                                      F-16
<PAGE>   98
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


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

         Basic net earnings (loss) per share is 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 ("SFAS")
         128, "Earnings Per Share".

         The total 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 0, 46,000 and 1,230,590
         for the years ended December 31, 1998, 1999 and 2000, respectively.

p.       Impact of recently issued accounting standards:

         The Financial Accounting Standards Board issued SFAS No. 133 ("SFAS
         133"), "Accounting for Derivative Instruments and Hedging Activities"
         ("SFAS No. 133") in June 1999 and its amendments, statements 137 and
         138, in June 1999 and June 2000, respectively. These statements
         establish accounting and reporting standards requiring that every
         derivative instrument (including certain derivative instruments
         embedded in other contracts) be recorded on the balance sheet as either
         an asset or liability measured at its fair value. These statements also
         require that changes in the derivative's fair value be recognized
         currently in earnings unless specific hedge accounting criteria are
         met. Special accounting for qualifying hedges allows a derivative's
         gains and losses to offset related results on the hedged item in the
         income statement, and requires that a company must formally document,
         designate, and assess the effectiveness of transactions that receive
         hedge accounting. The FASB has issued SFAS No. 137, "Accounting for
         Derivative Instruments and Hedging Activities-Deferral of the Effective
         Date of FASB Statement No. 133". The Statement defers for one year the
         effective date of SFAS No. 133. The rule will apply to all fiscal
         quarters of all fiscal years beginning after June 15, 2000. The Company
         does not expect the impact of this new statement on the Company's
         consolidated balance sheets or results of operations to be material.

q.       Reclassification:

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


                                      F-17
<PAGE>   99
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 3:- OTHER RECEIVABLES AND PREPAID EXPENSES

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                           ------------
                                                  1999                     2000
                                                  ----                     ----
                                                    U.S. DOLLARS IN THOUSANDS
                                                    -------------------------
<S>                                             <C>                     <C>
              Government authorities            $    274                $    495
              Prepaid expenses                       777                   1,350
              Other (1)                            1,392                   2,265
                                                --------                --------
                                                $  2,443                $  4,110
                                                ========                ========
</TABLE>

(1)      Includes two loans to the Company's officer, one in March 1999 and the
         second in July 1999. The loans are 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, but repayment has been
         extended to December 31, 2001.


NOTE 4:- PROPERTY AND EQUIPMENT, NET

a.       Comprised as follows:

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                           ------------
                                                    1999                 2000
                                                    ----                 ----
                                                    U.S. DOLLARS IN THOUSANDS
                                                    -------------------------
<S>                                                 <C>               <C>
         Cost:
         Computers and peripheral equipment          $17,130          $26,180
         Office furniture and equipment                1,925            2,604
         Motor vehicles                                  173               48
         Leasehold improvements                        2,382            3,301
                                                     -------          -------

                                                      21,610           32,133
                                                     -------          -------

         Accumulated depreciation                      9,603           18,815
                                                     -------          -------

         Depreciated cost                            $12,007          $13,318
                                                     =======          =======
</TABLE>


b.       Depreciation expenses amounted to $ 2,298,000, $ 3,865,000 and $
         4,746,000 for the years ended December 31, 1998, 1999 and 2000,
         respectively.

c.       The equipment acquired under capital lease in accordance with Statement
         of Financial Accounting Standards ("SFAS") 13, "Accounting for Leases",
         in the amount of $ 1,300,000 is included in property and equipment.
         Depreciation expense relating to this equipment was approximately $
         115,000 and $ 275,000 for the years ended December 31, 1999 and 2000,
         respectively (see also Note 10c).

d.       As for charges, see Note 10e.


                                      F-18

<PAGE>   100
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 5: - OTHER ASSETS, NET

a.       Comprised as follows:

<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                            ------------
                                                                                      1999                2000
                                                                                      ----                ----
                                                                                      U.S. DOLLARS IN THOUSANDS
                                                                                      -------------------------
<S>                                                                                  <C>               <C>
              Acquired technology (net of accumulated amortization
                of $ 1,490 in 1999 and $ 3,724 in 2000)                              $  9,805          $ 11,171

              Assembled work-force (net of accumulated amortization
                of $ 644 in 1999 and $ 1,012 in 2000)                                   1,595             2,408

              Computer software development costs (net of
                accumulated amortization of $ 1,545 in 1999 and $ 1,720
                in 2000)                                                                  175                --

              Customer base (net of accumulated amortization of $ 0
                 in 1999 and $ 30 in 2000)                                                 --             2,380

              Goodwill (net of accumulated amortization of $ 527 in
                 1999 and $ 992 in 2000)                                                2,909             9,499

              Other (net of accumulated amortization of $ 0 in 1999 and
                 $ 88 in 2000)                                                            235               147
                                                                                     --------          --------
                                                                                     $ 14,719          $ 25,605
                                                                                     ========          ========
</TABLE>


b.       Amortization expenses amounted to $ 2,347,000, $ 3,064,000 and $
         3,360,000 for the years ended December 31, 1998, 1999 and 2000,
         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 ten to twenty 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.

         The expected effect of this change of estimate for the following eight
         years is an increase of approximately $ 200,000, and $0.01 on net
         income and on net earnings per share per annum, respectively.


NOTE 6: - OTHER PAYABLES AND ACCRUED EXPENSES

<TABLE>
<CAPTION>
                                                                                                   DECEMBER 31,
                                                                                                   ------------
                                                                                             1999                2000
                                                                                             ----                ----
                                                                                             U.S. DOLLARS IN THOUSANDS
                                                                                             -------------------------
<S>                                                                                         <C>                <C>
              Accrued expenses                                                              $ 2,195            $ 2,493
              Employees and payroll accruals                                                  2,583              2,585
              Royalties                                                                       1,421              1,473
              Employees termination expense                                                      54                136
              Income and other taxes                                                          1,632              2,093
              Other                                                                             907              1,151
                                                                                            -------            -------
                                                                                            $ 8,792            $ 9,931
                                                                                            =======            =======
</TABLE>


                                      F-19
<PAGE>   101
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 7:- FINANCING ARRANGEMENTS

a.       Short-term loans consist of bank loans. 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, 1999 and 2000, was approximately 6.5% and 7.5% respectively.

b.       Long-term loans 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%.

Aggregate maturities of long-term loans:

<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                                                           ------------
                                                                    1999                 2000
                                                                    ----                 ----
                                                                    U.S. DOLLARS IN THOUSANDS
                                                                    -------------------------
<S>                                                                <C>                <C>
                           First year (current maturities)         $ 2,639            $ 3,112
                           Second year                               3,145              1,277
                           Third year                                  778                 --
                                                                   -------            -------
                                                                   $ 6,562            $ 4,389
                                                                   =======            =======
</TABLE>

c.       In 2000, the Company increased its credit arrangements and now has
         authorized short- and long-term credit lines in the amount of
         approximately $ 20 million (there is no fee for the unused portion of
         the credit facilities).

         This amount includes its bank loans as of December 31, 2000, of
         approximately $ 9 million, and the remaining $ 11 million can be used
         as either short-term or long-term debt.


NOTE 8:- SHARE CAPITAL

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.

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 U.S.

c.       In October 2000, the Company issued 1,500,000 shares to CGG as part of
         the consideration in regarding to the Flagship acquisition (see Note
         1b).

d.       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-20
<PAGE>   102
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


e.       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 subsidiary.
         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. Options which are canceled or
         forfeited before expiration become available for future grants.

         Total amount of options available for future grants as of December 31,
         2000 amounted to 394,658.

         The following is a summary of the options granted among the various
         Plans.

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                       -----------------------------------------------------------------------------------------
                                                 1998                            1999                            2000
                                                 ----                            ----                            ----
                                                         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                        1,043,104           $  4.88      1,592,616          $ 5.65      1,603,216           $  5.67
         Granted                       629,000           $  7.00        121,500          $    7        598,350           $     7
         Canceled or
         forfeited                     (79,488)          $  6.31        (96,500)         $    7       (310,624)          $  6.49
         Exercised                          --                --        (14,400)         $    5        (45,786)          $  3.84
                                    ----------           -------     ----------          ------     ----------           -------
         Outstanding at the
         end of the year             1,592,616           $  5.65      1,603,216          $ 5.67      1,845,156           $  6.01
                                    ==========           =======     ==========          ======     ==========           =======

         Exercisable at the
         end of the year               644,430           $  5.15      1,013,064          $ 5.18      1,079,435           $  5.31
                                    ==========           =======     ==========          ======     ==========           =======
         </TABLE>


         The options outstanding as of December 31, 2000, 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                2000         LIFE (YEARS)       PRICE          2000        EXERCISABLE
                             -----                ----         ------------       -----          ----        -----------
<S>                                           <C>              <C>              <C>          <C>             <C>
                           $  0.59                63,336            1.33         $ 0.59          63,336        $ 0.59
                           $  2.50                89,190            1.33         $ 2.50          89,190        $ 2.50
                           $  4.00-6.00          462,040            4.05         $ 4.80         461,232        $ 4.80
                           $  7.00             1,230,590            5.99         $ 7.00         465,677        $ 7.00
                                               ---------                         ------         -------        ------

                                               1,845,156                         $ 6.01       1,079,435        $ 5.31
                                               =========                         ======       =========        ======
</TABLE>


                                      F-21
<PAGE>   103
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


         In June 1998, the Company re-priced certain options to an exercise
         price of $ 7, the fair market value at the date of the re-pricing,
         following which the exercise price of the options outstanding as of
         December 31, 2000 was between $ 0.59 and $ 7.

f.       Pro-forma information regarding net income and net earnings 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, 1998, 1999 and 2000,
         respectively: risk-free interest rates of 6% for each year; dividend
         yields of 0% for each year; a volatility factor of the expected market
         price of the Company's Ordinary shares of 0.5-0.561, 0.567 and 0.621; a
         weighted-average expected life of the option of eight years for each
         year.

         The Black and Scholes option valuation model was developed for use in
         estimating the fair value of traded options that have no vesting
         restrictions and are fully transferable. In addition, option valuation
         models require the input of highly subjective assumptions, including
         the expected stock price volatility. Because the Company's employee
         stock options have characteristics significantly different from those
         of traded options, and because changes in the subjective input
         assumptions can materially affect the fair value estimate, in
         management's opinion, the existing models do not necessarily provide a
         reliable single measure of the fair value of its employee stock
         options.

         The weighted average fair value of the options at their dates of grant
         in 1998, 1999 and 2000 was $ 3.99, $ 4.38 and $ 4.82, respectively. All
         options were granted with an exercise price equal to the fair market
         value at the date of grant.

         Pro-forma information under SFAS No. 123 (in thousands, except per
         share data):

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                                -----------------------
                                                                      1998              1999               2000
                                                                      ----              ----               ----
<S>                                                                 <C>               <C>                <C>
         Net income (loss) as reported                              $   4,552         $  (3,778)         $   2,359
                                                                    =========         =========          =========
         Pro-forma net income (loss)                                $   3,488         $  (5,035)         $     744
                                                                    =========         =========          =========
         Pro-forma basic net earnings (loss) per share              $    0.51         $   (0.41)         $    0.06
                                                                    =========         =========          =========
         Pro-forma diluted net earnings (loss)
         per share                                                  $    0.37         $   (0.41)         $    0.06
                                                                    =========         =========          =========
</TABLE>

Because SFAS No. 123 is applicable only to stock options granted subsequent to
December 31, 1994, its pro-forma effect will not be fully realized until the
year 2004.


                                      F-22
<PAGE>   104
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


g.       Warrants:

         In October 1997, the Company issued 720,000 warrants in connection with
         bridge loans received in relation to the acquisition of CogniSeis
         Development Inc. ("CogniSeis"), 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.

         In 1999, as compensation for services provided to the Company in
         connection with the share issuance (see d), 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, 2000, 250,000
         warrants are exercisable.

h.       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.


NOTE 9:- INCOME TAXES

a.       Measurement of taxable income under the Income Tax (Inflationary
         Adjustments) Law, 1985:

         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.

b.       Tax benefits under the Law for the Encouragement of Capital
         Investments, 1959:

         Four investment programs of the Company have been granted the status of
         an "Approved Enterprise". The Company's production facilities in Israel
         have been granted an "Approved Enterprise" status under the above law.
         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 years of tax exempt and five years of reduced tax
         rate (25%).


                                      F-23
<PAGE>   105
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


         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 three 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, 2000, 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, 2000, the accumulated
         deficit of the Company does not include 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%.

c.       Tax benefits under the Law for the Encouragement of Industry (Taxes),
         1969:

         The Company is an "Industrial Company", as defined by this law 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 patents and other
         intangible property rights as a deduction for tax purposes.


                                      F-24
<PAGE>   106
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


d.       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,
                                                                                           ------------
                                                                                     1999              2000
                                                                                     ----              ----
                                                                                   U.S. DOLLARS IN THOUSANDS
                                                                                   -------------------------
<S>                                                                                <C>               <C>
         Deferred income tax assets:
         Operating loss carryforward                                               $ 1,700           $ 1,200
         Other                                                                          --               300
                                                                                   -------           -------
         Net deferred income tax asset before valuation allowance                    1,700             1,500
         Valuation allowance                                                        (1,700)            (1500)
                                                                                   -------           -------

         Net deferred income tax asset                                             $    --           $    --
                                                                                   =======           =======

         Deferred income tax liabilities:
         Amortization of acquired technology (foreign)                             $   445           $   273
                                                                                   =======           =======
         </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. During 2000, the Company decreased its valuation allowance by
         approximately $ 200,000.

e.       Net operating losses carryforwards:

         The Company has accumulated losses for tax purposes as of December 31,
         2000, in the amount of approximately $ 6 million, which may be carried
         forward and offset against taxable income in the future for an
         indefinite period.

         Through December 31, 2000, the Company have accumulated losses for tax
         purposes in the amounts of approximately $ 2 million in the U.K.
         subsidiary, $ 1 million in the Australian subsidiary, and $ 0.3 million
         in other subsidiaries. These losses can be carried forward
         indefinitely.


                                      F-25
<PAGE>   107
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------



f.       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 (in thousands):

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                                      -----------------------
                                                             1998              1999             2000
                                                             ----              ----             ----
<S>                                                        <C>               <C>               <C>
         Theoretical tax (benefit) computed
         at the statutory rate of 36%                      $ 1,767           $(1,360)          $ 986

         Increase (decrease) in income
         taxes resulting from:

         Tax adjustment in respect of
         inflation in Israel                                  (309)             (710)            (55)

         Non-deductible expenses                                61               211              72

         Carryforward losses for which a
         valuation allowance was provided                       --                --            (500)

         Losses for which benefits
         are not recognized                                    189             2,878              --

         Prior year income tax (benefit)                        --              (258)             --
         Temporary differences                                  --                --             (32)

         Accrued restructuring from 1997                      (623)             (180)             --

         Amortization of prior year's write-off
         of in-process research and development
         relating to CogniSeis acquisition                    (474)             (474)            (91)

         Amortization of deferred tax liabilities
         recorded upon acquisition of CogniSeis               (255)             (107)             --
                                                           -------           -------           -----
         Taxes on income expense                           $   356           $    --           $ 380
                                                           =======           =======           =====
</TABLE>


g.       Income taxes consist of the following:

<TABLE>
<CAPTION>
                                 YEAR ENDED DECEMBER 31,
                                 -----------------------
                            1998          1999          2000
                            ----          ----          ----
                               U.S. DOLLARS IN THOUSANDS
                               -------------------------
<S>                        <C>           <C>           <C>
         Current           $ 558         $ 725         $ 552
         Deferred           (202)         (467)         (172)
         Prior year           --          (258)           --
                           -----         -----         -----
                           $ 356         $  --         $ 380
                           =====         =====         =====
         Domestic          $ 137         $  --         $ 123
         Foreign             219            --           257
                           -----         -----         -----
                           $ 356         $  --         $ 380
                           =====         =====         =====
</TABLE>


                                      F-26
<PAGE>   108
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


h.       Income (loss) before income taxes from continued operation consists of
         the following:

<TABLE>
<CAPTION>
                                  YEAR ENDED DECEMBER 31,
                                  -----------------------
                           1998            1999             2000
                           ----            ----             ----
                                 U.S. DOLLARS IN THOUSANDS
                                 -------------------------
<S>                      <C>             <C>             <C>
         Domestic        $ 2,412         $(3,255)        $(13,948)
         Foreign           2,496            (523)          16,687
                         -------         -------         --------
                         $ 4,908         $(3,778)        $  2,739
                         =======         =======         ========
</TABLE>


NOTE 10:- 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 has paid or accrued royalties in the amounts of $ 400,000,
         $ 100,000 and $ 100,000 for the years ended December 31, 1998, 1999 and
         2000, respectively, relating to the repayment of such grants.

         As of December 31, 2000, the Company had a contingent obligation to pay
         royalties in the amount of approximately $ 603,000.

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, 1998, 1999 and 2000.

         The Company has paid or accrued royalties in the amounts of $ 49,000,
         $0 and $0 for the years ended December 31, 1998, 1999 and 2000,
         respectively, relating to the repayment of such grants.

         As of December 31, 2000, the Company had a contingent obligation to pay
         royalties in the amount of approximately $ 418,000.


                                      F-27
<PAGE>   109
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


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 "Accounting for Leases".

         Future minimum rental commitments under non-cancelable operating and
         capital leases as of December 31, 2000, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                OPERATING         CAPITAL
                     YEAR ENDED DECEMBER 31,                      LEASES          LEASES
                                                                  ------          ------
<S>                                                             <C>               <C>
         2001                                                     $  2,821        $ 600
         2002                                                        2,899          267
         2003                                                        2,925           --
         2004                                                        2,603           --
         2005 and thereafter                                         6,032           --
                                                                  --------         ----

         Total minimum lease payments                             $ 17,281          867
                                                                  ========

         Less - amount representing interest                                       (115)
                                                                                   ----

         Present value of capital lease obligation                                  752
         Less - current portion                                                     546
                                                                                   ----
         Long-term portion                                                        $ 206
                                                                                   ====
</TABLE>

         Total rent expenses for the years ended December 31, 1998, 1999 and
         2000, amounted to $ 1,753,000, $ 2,020,000 and $ 2,930,000,
         respectively.

d.       Legal:

         Geophysical Micro Computer Application (international) Ltd. ("GMA") is
         appealing a final judgment entered by the trial court in the matter of
         Paradigm Geophysical Micro Computer Application (international) Ltd. On
         December 11, 1997, the Company filed a lawsuit for a declaratory
         judgment to determine whether it has any obligation to 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


                                      F-28
<PAGE>   110
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


         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
         above-referenced appeal, which has not yet been heard by the court,
         although briefing has been complete.

         The Company's management and the legal advisers of the Company believe
         that the outcome of the above claim will not have an adverse effect on
         the Company's consolidated financial statements. Accordingly, no
         provision has been recorded in the consolidated financial statements.

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
         loans, and credit lines in favor of two individual banks.

2.       All financed equipment is pledged in favor of the related financial
         institution.


                                      F-29
<PAGE>   111
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 11:- 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.

         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 assets as presented is 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 are in accordance with the
         requirements of Statement of Financial Accounting Standards ("SFAS")
         131 "Disclosure about Segments of an Enterprise and Related
         Information".

         Segment revenues, cost of revenues, depreciation, assets and other
         data are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31, 2000
                                                                           ----------------------------
                                                         PRODUCTS        SERVICES       RECONCILIATION       CONSOLIDATED
                                                         --------        --------       --------------       ------------
<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>


                                      F-30
<PAGE>   112
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31, 1999
                                                             ----------------------------------------------------------------
                                                              PRODUCTS        SERVICES       RECONCILIATION      CONSOLIDATED
                                                             ---------        ---------      --------------      ------------
<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>

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31, 1998
                                                                ----------------------------------------------------------------
                                                                PRODUCTS         SERVICES       RECONCILIATION      CONSOLIDATED
                                                                --------         --------       --------------      ------------
<S>                                                             <C>              <C>            <C>                 <C>
                  Revenues                                      $38,074          $ 7,288         $        -         $  45,362
                  Cost of revenues                                8,559            3,107                  -            11,666
                  Depreciation                                      385              972                941             2,298
                                                                -------          -------         ----------         ---------

                  Segment profit                                $29,130          $ 3,209         $     (941)        $  31,398
                                                                =======          =======         ==========         =========
</TABLE>

                                      F-31
<PAGE>   113
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


Segments assets are as follows (in thousands):

<TABLE>
<CAPTION>
                                           DECEMBER 31,
                                  -----------------------------
                                   1998       1999       2000
                                  -------    -------    -------
<S>                               <C>        <C>        <C>
Products                          $ 1,584    $ 2,264    $ 2,622
Services                            4,284      6,692      8,520
   Other                            3,391      3,051      2,176
                                  -------    -------    -------
Total segment assets              $ 9,259    $12,007    $13,318
                                  =======    =======    =======
</TABLE>

b.       Geographic operational information:

Net revenues attributed to countries based on the location of the end customers
are as follows (in thousands):

<TABLE>
<CAPTION>
                                           YEAR ENDED DECEMBER 31,
                                 -------------------------------------------
                                   1998             1999             2000
                                 --------         --------         ---------
<S>                              <C>              <C>              <C>

North and South America          $21,721          $24,219          $32,104
EMEA                              12,962           14,604           19,240
Far East                          10,679           15,683           11,954
                                 -------          -------          -------

                                 $45,362          $54,506          $63,298
                                 =======          =======          =======
</TABLE>
Long-lived assets are as follows (in thousands):


<TABLE>
<CAPTION>
                                           DECEMBER 31,
                              --------------------------------------
                                1998           1999           2000
                              --------       --------       --------
<S>                           <C>            <C>            <C>
North and South America       $  7,858       $  7,932       $  7,232
EMEA                             1,709          1,704         17,270
Far East                         1,003          1,074          1,029
Israel                           8,794         16,016         13,392
                              --------       --------       --------
                              $ 19,364       $ 26,726       $ 38,923
                              ========       ========       ========
</TABLE>

c.       Major customers:

The Company had one major customer, which accounted for approximately 0%, 12%
and 3% of the Company's revenues, for the years ended December 31, 1998, 1999
and 2000, respectively.

                                      F-32
<PAGE>   114
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 12:- SELECTED STATEMENTS OF OPERATIONS DATA

a.   Non recurring expenses (in thousands):

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                  -----------------------------
                                                   1998       1999        2000
                                                  ------    --------    -------
<S>                                               <C>       <C>         <C>
Lease termination costs                           $   --    $    763    $    --
Impairment of development technology                  --       1,595         --
Other                                                 --         347         --
                                                  ------    --------    -------
                                                  $   --    $  2,705    $    --
                                                  ======    ========    =======

b.   The following table sets forth the reconciliation of basic and diluted net
     earnings (loss) per share (in thousands except share and per share data):

Numerator:

Net earnings (loss) to shareholders of
  Ordinary shares                                 $4,552    $ (3,778)   $ 2,359
                                                  ======    ========    =======
Numerator for diluted net earnings (loss)
  per share -
Net earning (loss) available to
  shareholders of Ordinary shares                 $4,552    $ (3,778)   $ 2,359
                                                  ======    ========    =======

Denominator:

Weighted average number of Ordinary
  shares (denominator for basic net
  earnings(loss) per share)                        6,850      12,205     13,504
                                                  ------    --------    -------

Effect of securities:

Employee stock options                               145     *)   --        225
Warrants issued to third parties                     196     *)   --         60
Convertible Preferred shares for the
  period outstanding prior to conversion
  into Ordinary shares                             2,115     *)   --         --
                                                  ------    --------    -------
Dilutive potential of Ordinary shares              2,456     *)   --       285
                                                  ------    --------    -------
Denominator for diluted net earnings
  (loss) per share -                               9,306      12,205     13,789
                                                  ======    ========    =======
</TABLE>


*)       Anti-dilutive.


                                      F-33
<PAGE>   115
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 13:- SUBSEQUENT EVENTS (UNAUDITED)

a.       In April 2001, the Company acquired all the rights of a product line
         and related customer services from Oilfield Systems Limited.

b.       In May 2001, the Company acquired Sysdrill Limited, a Scottish company,
         for a cash consideration and issuance of the Company's Ordinary shares.
         The acquired company provides software and service of drilling
         engineering and well operations solutions.

c.       In May 2001, the Company entered into a capital expenditure commitment
         for computer hardware of $900,000.

                            - - - - - - - - - - - - -

                                      F-34

<PAGE>   116

                                 EXHIBIT INDEX

    EXHIBIT  NO.                         EXHIBIT                            PAGE

         1.2        Amended and Restated Articles of Association.

         4.18       Securities Purchase Agreement, dated October 4, 2000, 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.

         8.1        Subsidiaries of Paradigm Geophysical Ltd.

        10.1        Consent of Kost Forer and Gabbay.
[{"type": "20-F", "sequence": "1", "filename": "y50410e20-f.txt", "description": "PARADIGM GEOPHYSICAL LTD.", "secsgml_size_bytes": 370441}]
{"company-data": {"conformed-name": "PARADIGM GEOPHYSICAL LTD", "cik": "0000931131", "assigned-sic": "7372", "irs-number": "000000000", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "20-F", "act": "34", "file-number": "000-29538", "film-number": "1670956"}, "business-address": {"street1": "GAV-YAM CENTER NO.3", "street2": "9 SHENKAR STREET", "city": "ISRAEL", "state": "L3", "zip": "46120", "phone": "2818763473"}, "mail-address": {"street1": "TWO ALLEN CENTER", "street2": "1200 SMITH STREET STE 2100", "city": "HOUSTON", "state": "TX", "zip": "77002"}}
1

                       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, 2000

                                       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 offices)

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, 2000, the Registrant had outstanding 14,691,902 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 preceeding 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
2
                                     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.

ITEM 1.        IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

         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, 1996, 1997, 1998, 1999 and 2000 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."

                                       1
3
CONSOLIDATED INCOME STATEMENT DATA
YEARS ENDED DECEMBER 31,
                                                               ------------------------
                                                    1996        1997          1998        1999         2000
                                                    ----        ----          ----        ----         ----
REVENUES:                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
Products ...................................   $  7,718    $ 19,979     $ 38,074     $ 43,023     $ 46,390
   Services ...................................      3,884       4,886        7,288       11,483       16,908
                                                  --------    --------     --------     --------     --------
           TOTAL REVENUES .....................   $ 11,602    $ 24,865     $ 45,362     $ 54,506     $ 63,298
                                                  --------    --------     --------     --------     --------
             YEAR-TO-YEAR % CHANGE ..........                   114.3%        82.4%        20.2%        16.1%

OPERATING EXPENSES:

   Cost of products ...........................   $  2,450    $  5,070     $  8,559     $ 12,418     $ 10,816
   Cost of services ...........................      1,539       1,849        3,107        5,804        6,352
   Research and development ...................      1,466       4,728        7,660        9,306       11,215
   Selling, general and administrative ........      9,536       9,744       15,822       20,638       23,518
   Depreciation ...............................        997       2,012        2,298        3,865        4,746
   Amortization ...............................      1,040       1,185        2,347        3,064        3,360
   Non recurring expenses .....................         --      10,676           --        2,705           --
                                                  --------    --------     --------     --------     --------
     TOTAL OPERATING EXPENSES .................   $ 17,028    $ 35,264     $ 39,793     $ 57,800     $ 60,007
                                                  --------    --------     --------     --------     --------

  OPERATING INCOME (LOSS) .....................     (5,426)    (10,399)       5,569       (3,294)       3,291
   Financial income (expenses), net ...........         57        (446)        (661)        (484)        (552)
                                                  --------    --------     --------     --------     --------
  INCOME (LOSS) BEFORE INCOME TAXES ...........     (5,369)    (10,845)       4,908       (3,778)       2,739
   Income tax .................................         --          --          356           --          380
                                                  --------    --------     --------     --------     --------
  NET INCOME(LOSS) ............................   $ (5,369)   $(10,845)    $  4,552     $ (3,778)    $  2,359
                                                  --------    --------     --------     --------     --------

BASIC EARNINGS (LOSS) PER SHARE ...............   $  (2.33)   $  (4.66)    $   0.66     $  (0.31)    $  (0.17)
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES USED
 IN COMPUTATION OF BASIC EARNINGS (LOSS)
 PER SHARE ....................................      2,300       2,328        6,850       12,205       13,504

DILUTED EARNINGS (LOSS) PER SHARE .............   $  (2.33)   $  (4.66)    $   0.49     $  (0.31)    $  (0.17)
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES
 USED IN COMPUTATION OF DILUTED EARNINGS(LOSS)
 PER SHARE ....................................      2,300       2,328        9,306       12,205       13,789
2
4
SELECTED CONSOLIDATED BALANCE SHEET DATA
AS OF DECEMBER 31,
                                                                             ------------------
                                                         1996          1997          1998          1999          2000
                                                         ----          ----          ----          ----          ----
                                                                               (IN THOUSANDS)
CASH AND CASH EQUIVALENTS ......................     $  7,113      $  8,229      $  3,463      $  5,457      $  8,647
  WORKING CAPITAL(DEFICIENCY) ....................     $  7,958      $   (692)     $  9,154      $ 15,346      $ 10,860
  TOTAL ASSETS ...................................     $ 19,383      $ 47,883      $ 46,135      $ 66,165      $ 79,761
  CURRENT DEBT ...................................     $  1,193      $  1,288      $  2,228      $  5,073      $  8,186
  NOTE PAYABLE ...................................     $      0      $  9,500      $      0      $      0      $      0
  BRIDGE LOAN  PAYABLE ...........................     $      0      $ 12,000      $      0      $      0      $      0
  LONG TERM DEBT (EXCLUDING CURRENT MATURITIES) ..     $    367      $    483      $     39      $  4,665      $  1,483
  TOTAL SHAREHOLDERS' EQUITY .....................     $ 12,885      $  2,640      $ 26,697      $ 35,468      $ 46,469

CASH FLOW  DATA

  CASH  PROVIDED BY (USED IN) OPERATING ACTIVITIES     $ (1,658)     $  1,633      $ (1,773)     $   (889)     $ 12,628
  CASH  PROVIDED BY (USED IN) INVESTING ACTIVITIES     $ (2,436)     $(11,594)     $ (4,516)     $(15,401)     $ (9,442)
  CASH  PROVIDED BY (USED IN) FINANCING ACTIVITIES     $ 10,734      $ 11,077      $  1,674      $ 18,868      $   (126)
3
5
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.

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, political
requirements of national governments, coordination by the Organization of
Petroleum Exporting Countries ("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, 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 may also
affect the planned budget expenditures of our customers. Consequently, there may
be significant variations in time lags of our customers in adjusting the level
of expenditure to correspond to their short- and medium-term outlook regarding
the impact of the international oil price 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.

                                       4
6
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 recognition, and
more extensive and diversified operations than we do. We compete with Geoquest,
a division of Schlumberger Ltd. and Landmark Graphics Corporation, a subsidiary
of Halliburton Co. in regard to the provision of software solutions and
products. In addition, we compete with Western Geco, a joint-venture between
Schlumberger Ltd. and Baker Hughes Inc. and Compagnie Generale de Geophyisique,
one of our major shareholders, and Veritas DGC Inc. and others in the seismic
data processing and analysis services industry. We also face competition from a
number of much smaller companies that provide products that serve niche portions
of our markets and from small service bureaus providing seismic data processing
and analysis services. 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 and 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 EXTRA EXPENSES, WHICH COULD DISRUPT OUR BUSINESS AND
HARM OUR FINANCIAL CONDITION.

         We have pursued, and may continue to pursue, acquisitions of business,
products and technologies, or the establishment of joint venture arrangements,
that could expand our business. For example, in October 2000, we acquired the
Flagship software division from Compagnie Generale de Geophysique, and in April
2001 we acquired the GeoScene(R) product line from

                                       5
7
Oilfield Systems Limited. In addition, in May 2001, we acquired Sysdrill
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 or product
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 goodwill and other intangibles;

          -    research and development write-offs; 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 Flagship, GeoScene(R) or
Sysdrill acquisitions will significantly enhance our products or strengthen our
competitive position.

         Acquired business 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.

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 products require highly qualified personnel for research and
development, sales and marketing, software programming and technical customer
support and services. 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 efforts. 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.

                                       6
8
         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.

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 on the oil and gas industry expenditure
               decisions; and

          -    general economic and political factors.

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

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 2000, approximately 60% of our revenues were generated from
customers in North America, Europe, the Middle East and Africa and the balance
of our revenues were 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. The expansion of our existing
international operations and entry into additional international markets will
require significant management attention and financial resources. We 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, Latin America, China and the
Asia-Pacific region.

         In addition, conducting our business internationally subjects us to
certain risks including:

                                       7
9
          -    legal and cultural differences in the conduct of business;

          -    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;

          -    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 U.S. dollars,
approximately 70% 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 counties 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 could in the future have a material
adverse effect on our results of operations and financial condition.

         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 depend substantially upon our
internally developed technology. Any misappropriation of our technology could
seriously harm our business. We

                                       8
10
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 includes license manager mechanisms to prevent or inhibit
unauthorized use but these can be violated by sophisticated users. We generally
enter into confidentiality agreements with our employees, consultants, customers
and potential customers 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 to 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 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 receive benefits from certain Israeli government investment
incentive programs and tax benefits. For example, we 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 affect 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;

                                       9
11
          -    these programs and tax benefits may be unavailable in the future,
               either at all, or at their current levels; or

          -    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 or we may
               be required to refund previously accredited tax benefits 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
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 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 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.

         We are organized under the laws of the State of Israel. However, as of
December 31, 2000, only approximately 17% of the Company's total staff, our
principal research and development facility and the Company's 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. We could be adversely affected if
major hostilities break out in the Middle East or if trade involving Israeli
origin goods and services is curtailed. Any future armed conflicts or political
instability in the region could negatively affect our business or harm our
results of operations. We cannot predict whether a full resolution of these
problems will be achieved, the nature of any such resolution or any consequences
that any of these factors may have on us. The peace process between Israel and
the Palestinian Authority has seriously deteriorated due to the recent increased
violence between Palestinians and Israelis. Continued hostilities between the
Palestinian community and Israel and any failure to settle the conflict may have
a material adverse effect on our business. Further deterioration of hostilities

                                       10
12
into a full scale conflict might require more widespread military services by
some of our employees which may have a material adverse effect on our business.

          Israeli companies and companies doing business with them have been
subject to an economic boycott initiated by the Arab countries. Some of the
companies that are significant suppliers of hydrocarbon products are located in
countries that may very well participate in boycotts of products and service of
Israeli origin. This boycott and policies may harm our operating results or 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;

          -    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 subjected 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 within the United States.

                                       11
13
         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 judgement;

          -    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 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.

                                       12
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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 Allen Center, 1200 Smith Street, Suite
2100, Houston, TX 77002.

         Our global 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, 2000

         In October 2000, we acquired the Flagship reservoir interpretation and
characterization software business division of Compagnie Generale de Geophysique
for a purchase price of approximately $14 million comprising cash and ordinary
shares of Paradigm. The acquisition of the Flagship business included Integral
Plus and Stratimagic products, which are widely installed worldwide and provide
significant additions to Paradigm's reservoir interpretation and
characterization product line.

         In April 2001, we acquired all the rights to the GeoScene(R) product
line and related customer services from Oilfield Systems Limited. This product
suite strengthens the range of products and services that we offer in the field
of geological interpretation.

         In May 2001, we acquired Sysdrill Limited, a Scottish company, for a
cash consideration and ordinary shares of Paradigm. Sysdrill is one of the
leading software and service providers of drilling engineering and well
operations solutions.

         Our principal capital expenditures for 2000 was for computer and
peripheral equipment, resulting in a significant expansion in computer capacity
for services.

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:

                                       13
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          -    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 SERVICES - Advanced reservoir characterization
               and simulations services and integrated studies based on our
               software solutions and our interpretation and reservoir
               characterization experts.

         We operate a global network of sales, users' support and services with
21 offices in 17 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, political
requirements of national governments, coordination by the Organization of
Petroleum Exporting Countries ("OPEC"), 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 at or near record highs throughout 2000. As
oil and gas prices were significantly above the price levels assumed for their
budgets, oil companies achieved higher profits and greater cash flows than
expected. This did not fully translate into additional capital investment.
Investments made by oil and gas companies were predominantly to improve
production efficiency on existing prospects, or on the purchase of producing
assets and reserves, primarily gas opportunities in North America.

         The merger and consolidation activities of a number of large customers
over the past two years has affected the demand for products and services. The
companies that have merged continue to evaluate their oil and gas properties,
refining and distribution facilities, and organizations. This evaluation process
has translated into a short-term reluctance to undertake new investments in non
core-business activities.

         However, the second half of 2000 reflected increased exploration and
production investment , particularly in North America. Although there can be no
assurances, we believe that this trend will continue in 2001 on an international
scale. Over the longer term we believe

                                       14
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that rising populations in many countries and greater industrialization efforts
will continue to propel worldwide economic expansion, especially in developing
nations and that these factors will result in increasing demand for oil and gas
needed for refined products and petrochemicals.

         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 2000, we redefined our solutions
based on our existing product modules and the product modules acquired by us 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 acquisition,
               and new petrophysical and geological modules from Chevron and
               TotalFinaElf.

          -    MORE KNOWLEDGE FROM EXISTING DATA: We have introduced 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.

          -    EXPANDED GLOBAL SERVICE CAPACITY: We have expanded our global
               service capacity with additional super computer power in Houston
               and expanded staff in Asia Pacific, the CIS 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 and Probe
               products.

          -    SEISMIC DATA ANALYSIS AND QUALITY CONTROL SOLUTIONS for customers
               that are using our products for the analysis of seismic data and
               quality control of data processing, based on Geodepth(R) Power,
               Probe(TM), Vanguard(TM) and Earthstudy(TM) workflows and
               supplying workflows for interpretive AVO (amplitude with offset),
               attribute analysis, seismic modeling and velocity analysis in an
               integrated environment.

                                       15
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          -    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(TM), SeisX(TM) and
               Voxelgeo(TM), 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(TM), Voxelgeo(TM),
               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(TM),
               Stratimagic(R) and Voxelgeo(TM) based workflows.

          -    PETROPHYSICAL ANALYSIS & ROCK PHYSICS SOLUTIONS for customers
               that are using our products for analysis and modeling of rock
               properties based on Geolog(TM), 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(TM) 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 eleven service centers worldwide offer the skills and knowledge of
          specialist and experienced geoscientists in partnership with our
          customer's 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.

                                       16
18
         CUSTOMER SUPPORT

         We employ geoscientists and computer scientists to provide installation
and 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. We provide our customers with
optional post-contract maintenance and support agreements, which are renewable
annually. 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
professional and technical support.

         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 knowledge of local geology and
local hydrocarbon conditions and 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 -
               advertizing 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 $7.7 million, $9.3 million,
$11.2 million in 1998, 1999 and 2000, respectively.

                                       17
19
         Three major new products have been launched by us since October 1997 -
Probe, Vanguard and GeoSec3D - and all of our products have been enhanced and
upgraded to provide new analysis features and, in some cases, re-engineered, to
keep pace with changes in computing sciences and graphics manipulation. In
addition, our acquisitions have also added several new technologies and products
to our range of products and solutions.

         Because of the open-architecture expected by the industry we have
enabled our software to work on our competitors' data bases 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.

         Recent industry restructuring has resulted in a significant downsizing
of the research and development staff in several oil companies, many of whom now
look to companies like Paradigm for technology cooperation. In 2000, we signed
Technology Cooperation agreements with Chevron and TotalFinaElf. These two
agreements allow us to incorporate the results of Chevron and TotalFinaElf
research and field testing of specialized geological analysis and well-logging
into our software for the benefit of the entire industry.

         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 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 eight centers, Israel, Houston, Paris and Pau, Aberdeen,
Moscow, Brisbane and Calgary. Each center has its areas of specialization and
expertise whilst product commercialization, integration and delivery are the
responsibility of the research and development group in Israel. As of December
31, 2000, our research and development department consisted of 137 employees.

         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
will 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 which is integrated with Paradigm-developed software and
which we use in our service centers.

         CUSTOMERS AND COMPETITION

         Our installed base of customers consists of approximately 500 customers
and about 4,500 user licenses, representing a full range of the high-end users
in the industry. In 2000, no single customer represented more than 5% of our
revenues.

                                       18
20
         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 lead by three conglomerates,
Schlumberger, Halliburton and Baker Hughes which provide vertically-integrated
oilfield services including drilling, well completion and hardware
infrastructure. Schlumberger and Halliburton own and operate substantial
geoscience and data management software divisions, respectively, Geoquest, a
division of Schlumberger Ltd. and Landmark Graphics Corporation, a subsidiary of
Halliburton Co. We compete with these two companies and a number of smaller
niche technology providers in connection with providing geoscience software
solutions.

         Seismic data acquisition, processing and analysis are provided by
several large companies amongst whom are Westerngeco, a joint-venture of
Schlumberger and BakerHughes, Compagnie Generale Geophysique a major
shareholder in Paradigm and Veritas DGC Inc. We compete with these companies
and a range of smaller companies in relation to the provision of seismic data
processing services and, to a lesser extent, in connection with services related
to reservoir studies.

         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.

                                       19
21

         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                2000             1999             1998
                                                              $'000           $'000             $'000
North and South America             21,289           16,582           18,893
                       Europe, Africa, Middle East           14,804           11,881            9,116
                            Far East and China               10,297           14,560           10,065
                                                            -------          -------          -------
                                  TOTAL                     $46,390          $43,023          $38,074
                                                            -------          -------          -------

                           REVENUES - SERVICES
                         North and South America             10,815            7,637            2,828
                       Europe, Africa, Middle East            4,436            2,723            3,846
                            Far East and China                1,657            1,123              614
                                                            -------          -------          -------
                                  TOTAL                     $16,908          $11,483          $ 7,288
                                                            -------          -------          -------

                             REVENUES - TOTAL
                         North and South America             32,104           24,219           21,721
                       Europe, Africa, Middle East           19,240           14,604           12,962
                            Far East and China               11,954           15,683           10,679
                                                            -------          -------          -------
                                  TOTAL                     $63,298          $54,506          $45,362
                                                            -------          -------          -------
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

         -        Paradigm Geophysical Canada Ltd., incorporated in Canada

         -        Paradigm Geophysical Pty Ltd. incorporated in Australia

         -        PT Paradigm Geophysical (Indonesia), incorporated in Indonesia

         -        Paradigm Geophysical Pte Ltd., incorporated in Singapore

                                       20
22
         -        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

                                       21
23
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:
LOCATION                             ACTIVITIES                 FLOOR AREA
                                                                             SQ.FT
Herzlia, Israel                     Corporate HQ                  30,601
                                                   R&D

          Houston, Texas                      Sales office                  34,217
                                             Service center
                                                   R&D

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

          Massy, France                       Sales office                  12,471
                                                   R&D

          Moscow, Russia                      Sales office                   9,081
                                             Service center
                                                   R&D

          Calgary, Canada                     Sales office                   8,016
                                             Service center
                                                   R&D

          Perth, Australia                    Sales office                   6,553
                                             Service center

          Brisbane, Australia                      R&D                       6,004

          Aberdeen, Scotland                  Sales office                   5,000
                                                   R&D
In addition to the above principal facilities we also lease premises in
Beijing, Jakarta, Bahrain, Caracas, Buenos Aries, Rio de Janeiro, Pau and
Almaty. We believe that the facilities we currently occupy are suitable and
adequate for our current needs. If we expand our operations further than we
currently anticipate, we may need additional space.

                                       22
24
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,
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.

         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 solutions and our seismic data analysis experts.

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

         We operate a global network of sales, users' support and services with
21 offices in 17 countries, serving all major oil-and gas-producing countries in
the world.

                                       23
25
         MARKET CONDITIONS IN 2000

         Our results in 2000 should be viewed within the context of the
developments and trends in the market in which we operate, i.e. the oil field
services market. This market is, in turn, directly impacted by the overall
macroeconomics of oil and gas supply and demand, international oil prices, and
the spending patterns of oil and gas companies.

         Despite predictions by industry analysts that capital spending by oil
and gas companies on exploration and production would increase in early 2000,
expenditures in those areas only started to increase in the second half of 2000.
Spending by oil and gas companies during the first half of the year appears to
have been concentrated mostly on production enhancement investments and related
activities.

         International oil prices remained at or near record highs throughout
2000, resulting in higher profits and cash flows of oil and gas companies
than forecasted. Generally, these unanticipated profits and cash flows appear to
have been primarily allocated by the major oil and gas companies to items such
as the trading of hydrocarbon assets and investments that improve returns on
capital, such as improving production efficiency on existing prospects and on
the purchase of producing assets and reserves.

         IMPACT ON PARADIGM

         While there was a demand for our software products and services in
2000, it did not meet our anticipated forecast of orders for products and
services during the first half of 2000.

         Activity in the latter half of 2000 confirmed that the oil and gas
companies were extensively re-analyzing archive data for their planned 2001
and beyond field development programs, and reanalyzing newly purchased library
data. Our service operation benefited from this activity, as many oil and gas
companies outsourced the analysis of archive data to companies that provide
seismic data analysis services.

         INDUSTRY TRENDS AND THEIR SIGNIFICANCE FOR FUTURE MARKET DEVELOPMENT

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

         Within the seismic data processing market, the trend that is emerging
is a return to proprietary seismic surveys, and we believe that there will
consequently be an increase in seismic 4D and 4C surveys. This may increase the
demand for out-sourced services for analysis of seismic surveys, well-logs, and
for integrated reservoir studies.

         There is an increasing emphasis by oil exploration companies on looking
for "new oil" in existing fields, requiring "high resolution" structural
interpretation solutions. This may increase the demand for geological and
petrophysical solutions to complement geophysical analysis and integrated
reservoir studies.

         Higher oil and gas prices are expected to result in the allocation of
budget resources to improve returns on existing investments and investment in
new prospects based on high expected returns. This may increase capital
expenditure by oil and gas companies.

                                       24
26
         The scarcity of drillable prospects is an increasing concern to
operators, especially in North America. Consequently, we believe there will be a
corresponding increase in exploration spending in 2001, which is a continuation
of the trend seen in 2000. This is in contrast to the emphasis placed by oil and
gas companies in 1999 on production related investments. This trend may also
increase capital expenditure by oil and gas companies.

         We expect that exploration activity will increase in areas of difficult
geological structures such as sub-salt and ultra deep sea. Exploration in this
type of difficult geological terrain may increase the demand for high
value-added 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.

         Expected increases in seismic budgets and the increasing availability
of high-quality multi-client data may increase the demand by the operating
companies for this data. This could result in increased spending in 2001, and
beyond, on data analysis and interpretation services for data acquired in 2000
(or before) and for data from new surveys or data purchased during 2000 and
2001.

                                       25
27
         ACQUISITIONS

         The PTM acquisition - March 1999

         On March 31, 1999, we acquired the assets of the Petroleum Technologies
Division of Mincom, or "PTM", a privately held Australian company for $8.4
million in cash. The primary product asset is GeoLog(TM), a well-log and
petrophysics analysis program. PTM's financial results were consolidated with
those of Paradigm commencing in the second quarter of 1999.

         The Flagship Acquisition - October 2000

         On October 4, 2000, we acquired the Flagship reservoir interpretation
and characterization software business division of Compagnie Generale de
Geophysique ("CGG") for a purchase price of approximately $14.1 million,
comprised of cash and ordinary shares of Paradigm. As a consequence of the
transaction, CGG acquired approximately 10.1% of our outstanding shares and is
therefore an important strategic industry partner in our business.

         The Flagship business included the Integral Plus and Stratimagic
products, which are widely installed worldwide and provide significant additions
to Paradigm's reservoir interpretation and characterization product line. We
also took over a staff of 80 employees, mainly in France, which included
management, product development, sales, customer support and consulting
expertise for reservoir studies. We believe that the Flagship acquisition will
significantly expand our current customer base. We are in the process of
integrating the operations of Flagship with our business.

         ACQUISITIONS IN 2001

         In April 2001, we acquired all the rights to the GeoScene(R) product
line and related customer services from Oilfield Systems Limited. We believe
that this product suite will further strengthen our products and service
offerings in geological interpretation.

         In May 2001, we acquired Sysdrill Limited, a Scottish company, for cash
and ordinary shares of Paradigm. Sysdrill is one of the leading software and
service provider of drilling engineering and well operations solutions. We
believe that the acquisition of Sysdrill will allow us to combine our
technologies with those of Sysdrill in order to offer technical solutions that
integrate geoscience knowledge with drilling and well operations solutions.

         THE FINANCIAL IMPACT OF THE FLAGSHIP ACQUISITION

         The acquisition was accounted for using the purchase method of
accounting. The fair market value of Flagship's assets and liabilities have been
included in our balance sheet as of October 4, 2000. Pursuant to an acquired
technology valuation obtained in connection with the acquisition, an independent
specialist valued the Flagship technology acquired from CGG at $3.4 million, by
applying the income approach method, which considers the present value of
prospective earnings that will be generated from the software. This amount is
being amortized over ten years. Pursuant to the acquired technology valuation,
the customer base of Flagship was valued at $ 2.4 million by applying the
avoided cost approach, and is being amortized over twenty years. The
workforce-in-place was valued at $1.2 million using the cost approach, and is

                                       26
28
being amortized over ten years. The goodwill in connection with the Flagship
business is valued at $ 7.1 million and is being amortized over twenty years. .

         Flagship's financial results were consolidated into our financial
results, commencing in the fourth quarter of 2000. The Flagship financial
results had a negative impact on our net income for the fourth quarter of 2000.
The full impact of efficiency gains through the integration of various regional
operations is expected to take up to twelve months from the date of the
acquisition.

         The following table sets forth for the fiscal years ended December 31,
2000, 1999 and 1998, our consolidated statements of operations reflected as a
percentage of total revenues:
1998           1999          2000
                                                            ----           ----          ----
REVENUES:

 Products                                                   83.9%          78.9%         73.3%
 Services                                                   16.1%          21.1%         26.7%
                                                           -----          -----         -----
      TOTAL REVENUES                                       100.0%         100.0%        100.0%
                                                           -----          -----         -----

OPERATING EXPENSES:

 Cost of products                                           18.9%          22.8%         17.1%
 Cost of services                                            6.8%          10.6%         10.0%
 Research and development                                   16.9%          17.1%         17.7%
 Selling, general and administrative                        34.9%          37.9%         37.2%
 Depreciation                                                5.1%           7.1%          7.5%
 Amortization                                                5.2%           5.6%          5.3%
 Non recurring expenses                                      0.0%           5.0%          0.0%
                                                           -----          -----         -----
  TOTAL OPERATING EXPENSES                                  87.8%         106.1%         94.8%
                                                           -----          -----         -----

OPERATING INCOME (LOSS)                                     12.3%          (6.0%)         5.2%
 Financial income (expenses), net                           (1.5%)         (0.9%)        (0.9%)
                                                           -----          -----         -----
INCOME (LOSS) BEFORE INCOME TAXES                           10.8%          (6.9%)         4.3%
 Income tax                                                  0.8%           0.0%          0.6%
                                                           -----          -----         -----
NET INCOME(LOSS)                                            10.0%          (6.9%)         3.7%
                                                           -----          -----         -----
The results of operations for the year ended December 31, 2000
described above and elsewhere in this annual report include 12 months of
operations of Paradigm, consolidated with 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.

         We believe that the contribution of 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

                                       27
29
periods are not directly comparable. Note 1 to our audited financial statements
for the year ended December 31, 2000 includes the pro-forma unaudited results of
operations of Paradigm and Flagship for the year ended December 31, 1999 and
2000 assuming that the Flagship acquisition had been completed on January 1,
1999 and January 2000, respectively, and pro-forma unaudited combined results of
operations of Paradigm and PTM for the years ended December 31, 1998 and 1999,
as if the PTM acquisition had been completed on January 1, 1998 and 1999,
respectively. Where we have considered it relevant to an understanding of our
results of operations for the years ended December 31, 1998, 1999 and 2000, we
have referred to the consolidated pro forma results.

         REVENUES

         Our revenues are derived mainly from the sale of software licenses and
related maintenance and support contracts and 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. Maintenance and support revenues also provide
a predictable revenue stream.

         Total revenues in 2000 increased by 16% over 1999. Assuming that the
Flagship acquisition had not been completed on October 4, 2000, total revenues
in 2000 would have increased by 11% over 1999. If the pro-forma total revenues
in 1999 (i.e. assuming that the PTM acquisition had been completed as of January
1, 1999) are compared to the total revenues in 2000 (without taking into account
Flagship), total revenues increased by 7% over 1999.

         Total revenues in 1999 increased by 20% over 1998. This increase is 9%
when comparing pro-forma 1999 total revenues to pro-forma 1998 total revenues
(assuming that the PTM acquisition had been completed as of January 1 1999 and
1998, respectively).

         In 2000, the relative proportion of revenues derived from services
increased to 27% of total revenues compared to 21% of total revenue in 1999 and
16% in 1998. This increase was due both to the organic growth in service
revenues on a year-over-year basis, and the relative slowdown in growth in
product revenues in 2000 and 1999.

         PRODUCTS

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

         Product revenues in 2000 increased by 8% over 1999. Within the limits
of the analysis of pro-forma estimates and assuming that the Flagship
acquisition had not been completed as of December 31, 2000 and assuming that the
PTM acquisition had been completed as of January 1, 1999, pro-forma product
revenues would have decreased by 2% in 2000 over 1999. Product revenues in 1999
increased by 13% over 1998. Within the limits of the analysis of pro-forma
estimates and assuming that the PTM acquisition had been completed as of January
1, 1998, pro-forma product revenues would have increased by 2% in 1999 over
1998.

                                       28
30
         Both 1999 and 2000 product revenues are influenced to different extents
by the impact of the one-time turnkey project, which included hardware and
software and on-going maintenance revenues. Turnkey project revenues were $1.7
million in 2000 and $6.7 million in 1999.

         Product sales in 2000 were characterized by the increase in purchases
of advanced interpretation, visualization, and reservoir characterization
solutions as stand-alone solutions and also as add-ons to the existing installed
base of our products and those of our competitors. In 2000, there was a decline
in purchases of seismic data processing software, which we attribute to the
industry's move to increased outsourcing of high-end processing.

         The Flagship business acquired in October 2000 contributed $ 2.8
million of total product revenues in 2000, constituting 6% of total product
revenues for the year.

         SERVICES

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

         Revenues from services increased by 47% over 1999, which was 58% higher
than in 1998. In 2000, we continued to capture a significant share of the
outsourcing demand for high-end seismic data processing services in the US and
other international markets.

         To meet the increase in demand for high-end seismic data processing
services and to provide for faster turn-around time for large surveys, in 2000,
we continued to invest in our service business, increasing computer capacity and
expertise in the US, Latin America, the former Soviet Union and the Asia Pacific
region. We currently operate 13 service centers worldwide.

         REGIONAL DISTRIBUTION OF REVENUES

         The following table presents the geographic distribution of our
revenues:
% Segment Revenue                           1998          1999          2000
                                            ----          ----          ----
PRODUCTS
North and South America                       50%           39%           46%
Europe, Middle East and Africa                24%           28%           32%
Asia and Pacific                              26%           33%           22%
                                             ---           ---           ---
                                             100%          100%          100%
SERVICES
North and South America                       39%           67%           64%
Europe, Middle East and Africa                53%           23%           26%
Asia and Pacific                               8%           10%           10%
                                             ---           ---           ---
                                             100%          100%          100%
29
31
         The changes in regional distribution of revenues for the period 1998 to
2000 for our two revenue segments reflects the changing regional economic
situation, the oil price crisis, the merger activity in oil companies, and the
regionally differential growth in outsourcing demand.

         The table 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 and a wide
customer spread.

         REGIONAL PRODUCTS REVENUE DISTRIBUTION

         In 1998, regional product revenues were affected by the Asia and
Russian economic crises. In 1999, and to some extent in 2000, regional revenues
in North America and Europe were impacted by the downturn in the spending of the
major oil companies, while in relative terms, the regional markets where the
national oil companies dominate, recovered earlier than did the home markets of
the majors. The relatively higher proportion of revenues in 1999 derived from
Asia reflects the impact of the large turn-key project for a seismic data
processing center discussed above.

         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 this center in 1999 and 2000.The 1998 economic crisis
impacted on revenues derived from the Asia-Pacific region and the former Soviet
Union, while the North Sea remained a comparatively strong market. With the
purchase of the super computer at the commencement of 1999, our position in the
U.S. market improved substantially, at the time when the oil price crisis
impacted most severely on demand for services in the North Sea and Asia-Pacific
region. Recovery of energy prices (and particularly gas prices in the U.S.) had
a positive impact on the growth of our services revenues derived from customers
in the U.S. and also contributed to the relative growth of our services revenues
in Latin America and the former Soviet Union.

         OPERATING COSTS

         COST OF REVENUES:
(US $ millions)                        1998              1999              2000
                                     -------           -------           -------
PRODUCT COSTS                        $   8.6           $  12.4           $  10.8
year-over-year increase                                     45%              -13%
                                     -------           -------           -------
SERVICES COSTS                       $   3.1           $   5.8           $   6.4
year-over-year increase                                     87%               10%
                                     -------           -------           -------
TOTAL COSTS                          $  11.7           $  18.2           $  17.1
year-over-year increase                                     56%              -6%
                                     -------           -------           -------
30
32
GROSS MARGINS
(US $ millions)                        1998              1999              2000
                                     -------           -------           -------
PRODUCT MARGIN                       $  29.5           $  30.6           $  35.6
% margin                                                    71%               77%
                                     -------           -------           -------
SERVICES MARGIN                      $   4.2           $   5.7           $  10.5
% margin                                                    49%               62%
                                     -------           -------           -------
GROSS MARGIN                         $  33.7           $  36.3           $  46.1
% margin                                                    67%               73%
                                     -------           -------           -------
Product costs is comprised of software production and distribution
costs, personnel costs associated with providing maintenance and support,
hardware costs for turnkey solutions and the maintenance of production
equipment.

         Service costs is comprised of personnel costs associated with providing
services, cost of materials and the maintenance of equipment.

         The material differences between 2000 and 1999 in connection with the
components of our cost of revenues are attributable to:

         -    PRODUCTS: the lower levels of hardware expenses in 2000 ($0.5
              million compared to $4.3 million in 1999) due to the completion of
              the turnkey project in early 2000, which resulted in a favorable
              improvement in product margins; and

         -    SERVICES: improved services margins, reflecting the improved
              staff efficiency and data throughput resulting from larger
              capacity computing installations.

         Looking forward, we expect that product margins to continue at about
the 2000 level, in the absence of further turnkey projects. However, as our
installed base of customers grow, we expect a larger proportion of our revenues
to be generated from maintenance and customer support and a resulting increase
in the direct cost of supporting this installed base. Consequently, in the
future, we expect a reduction of product margins, taking into account the
growing installed base's support costs in the product cost structure.

         We expect future service margins to be impacted by two factors:

-    the expected difficult labor markets for high caliber geoscience staff that
     we need to recruit in order to deliver our service solutions; and

-    the lowering of costs of computing hardware, which permits increased
     computing power and wider deployment with increased staff efficiency.

                                       31
33
       RESEARCH AND DEVELOPMENT EXPENSES
(US $ millions)                                 1998         1999          2000
                                                ----         ----          ----
RESEARCH AND DEVELOPMENT EXPENSES               $7.7         $9.3         $11.2
As % of Total Revenue                             17%          17%           18%
year-over-year increase                                        21%           20%
                                                ----         ----          ----
YEAR-END RESEARCH AND DEVELOPMENT                 90           98           137
STAFF
year-over-year increase                                        9%           40%
Research and development expenses consist primarily of salaries and
other related expenses and the cost of facilities. In 2000, expenditures on
research and development were held to almost the same proportion of total
revenues as in 1999 and 1998, with minimal expansion of the core staff, and the
addition in the fourth quarter of 2000 of additional research and development
staff as part of our acquisition of the Flagship business.

         Research and development continues to be managed as an integrated
global team with centers in our Israel headquarters, Houston, Aberdeen, Paris
and Pau, Moscow, Brisbane and Calgary. 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.

         1999 and 2000 were characterized by increasing costs of highly skilled
research and development staff worldwide, although to varying degrees. This was
most evident in Israel, where we compete with other technology companies in
order to attract highly skilled employees.

         Competition for high caliber research and development staff is likely
to be a permanent feature of the various labor markets in which we operates. We
face labor market pressures on computing engineering skills and similar
pressures on retaining and recruiting high caliber geoscience staff. The present
moderation in the labor market (due to the recent decline of the high-tech
sector, and the layoffs by the major oil companies) 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 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 anticipated
increase in oil exploration and production expenditures.

         We believe that high levels of reinvestment in new product development
is essential to maintain our competitive position, and to continue to deliver
innovative technologically advanced products. The expected demands of the
industry for an expanded set of solutions also sets the level of our product
development expenditures. Looking forward, we expect to continue the levels of
research and development expenditures at similar proportions to our total
revenues.

         Major efforts have been expended to provide truly integrated software
across all our applications, serviced from a common data base, transparent to
each application, without the need for specific downloads. This effort is also a
necessary component in our product

                                       32
34
acquisition strategy, and ensures that each newly acquired product will work
with our existing offerings and on our data base.

         Because of the open-architecture expected by the industry we have
expended efforts that permit our software to work on our competitors' data
bases, 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.

         SALES AND MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES
(US $ millions)                                 1998         1999          2000
                                                ----         ----          ----
SALES AND MARKETING, GENERAL AND                $15.8        $20.6        $23.5
ADMINISTRATIVE
as % of Total Revenue                           35%          38%             37%
                                                ----         ----          ----
year-over-year increase                                      30%             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. In 1999,
selling, general and administrative expenses also included a one-time bad debt
write-off totaling $ 1.2 million which was associated with long overdue
receivables.

         On a year-over-year basis these expenses increased by 14% in 2000. In
1999, we adopted an expansion policy to ensure that the infrastructure would be
in place for the then expected early-2000 upturn in the market. Consequently
infrastructure was not further expanded in 2000, except in fast growing markets
in Russia and Latin America. The sales and marketing staff acquired as part of
the acquisition of the Flagship business in October 2000, enabled us to
establish the infrastructure to serve customers in Southern Europe and Africa
from Paris and Pau.

         DEPRECIATION  AND AMORTIZATION
(US $ millions)                                  1998           1999         2000
                                                 ----           ----         ----
DEPRECIATION                                  $   2.3           $3.9         $4.7
as % Total Revenue                                  5%             7%           7%
                                                 ----           ----         ----
year-over-year increase                                           68%          23%
AMORTIZATION                                  $   2.3           $3.1         $3.4
as % Total Revenue                                  5%             6%           5%
                                                 ----           ----         ----
year-over-year                                                    30%          10%
increase/(decrease)
TOTAL DEPRECIATION AND                        $   4.6           $7.0         $8.1
AMORTIZATION
as % Total Revenue                                 10%            13%          13%
                                                 ----           ----         ----
year-over-year increase                                          49%           17%
33
35
         The depreciation expense consists of the depreciation of capital
equipment. See note 2e of our consolidated financial statements for details of
our accounting policy on depreciation.

         The amortization expense consists of amortization of acquired developed
technology and capitalized research and development costs, and amortization of
goodwill. See note 2f of our consolidated financial statements for details of
our accounting policy on amortization of acquired developed technology and
goodwill, and note 2h for details of our accounting policy on amortization of
capitalized research and development costs.

         The main reason for the year over year increase in depreciation in 1999
was the investment in expanding computing capacity and equipment for the
services department which totaled $3.4 million in 1999.

         The increase in amortization in 1999 was primarily due to the addition
of goodwill and acquired developed technology attributable to the PTM
acquisition, offset by the effect of the impairment loss in relation to
developed technology following the PTM acquisition. Despite the acquisition of
the Flagship business, amortization did not rise significantly in 2000, as the
acquisition only took place in October resulting in only one quarter's impact on
the amortization charge.

         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 and goodwill attributable to such acquisitions.

         NON RECURRING EXPENSES

         In 1999, we recorded non recurring expenses totaling $2.7 million which
included $0.8 million related to lease termination costs from the elimination of
duplicate facilities, $1.6 million related to impairment costs of developed
technology, developed or acquired prior to the PTM acquisition, and $0.3 million
associated with personnel reductions.

         FINANCIAL EXPENSES, NET
(US $ millions)                       1998               1999               2000
---------------                       ----               ----               ----
FINANCIAL EXPENSES, NET           $   0.66           $   0.48           $   0.55
as % of Total Revenue                  1.5%               0.9%               0.9%
                                      ----               ----               ----
year-over-year increase                                   -27%                14%
34
36
         The interest expense resulted from interest expenses from the use of
bank lines of credit and capital lease obligations and interest income resulted
from interest earned on our cash and cash balances.

         OPERATING INCOME, AND NET INCOME
(US $ millions)                  1998           1999           2000
         ---------------                  ----           ----           ----
OPERATING INCOME/(LOSS)         $5.6           ($3.3)          $3.3
         As % Total Revenue                12%            (6%)             5%
         ------------------              -----          ------          -----
         NET INCOME/(LOSS)               $4.6           ($3.8)          $2.4
         As % Total Revenue                10%            (7%)             4%
         ------------------              -----          ------          -----
The operating loss in 1999 before non-recurring items of $2.7 million,
was $0.6 million. Operating income in 2000, compared to 1999 (before
non-recurring items), reflects our decision to hold the infrastructure stable in
2000 until the recovery in expenditure by oil and gas companies.

         Net income recovered significantly in 2000 over 1999. Our cost
structure has a significant fixed cost component in the short term so that any
improvements in revenues have a disproportionately positive impact on the net
income.

B.       LIQUIDITY, CAPITAL RESOURCES AND FINANCING
(US $ millions)                                 1998           1999           2000
         ---------------                                 ----           ----           ----
CASH PROVIDED FROM/(USED IN) OPERATIONS        ($1.8)         ($0.9)         $ 12.6
         as % Total Revenue                                (4%)           (2%)            20%
         ------------------                             ------         ------         ------
         CASH (USED IN) INVESTMENTS                     ($4.5)        ($15.4)          ($9.4)
         CASH FROM FINANCING                            $ 1.7         $ 18.9           ($0.1)
         ------------------                             ------         ------         ------
         CASH YEAR END                                  $ 3.5         $  5.5           $ 8.6
         year-over-year increase                                          58%             58%
         ------------------                             ------         ------         ------
We finance our operations and capital requirements mainly through
equity funding, bridge funding and bank credit facilities. At December 31, 2000,
cash and cash equivalents were $ 8.6 million, compared to $ 5.5 million as of
December 31, 1999. At December 31, 2000, short term bank debt, including current
maturities of long term loans, was $7.6 million and long term bank loans was $
1.3 million, compared to $ 4.6 million and $ 3.9 million, respectively, as of
December 31, 1999. As of December 31, 2000, our aggregate obligations under
equipment leases were $1.3 million, compared to $1.9 million as of December 31,
1999.

                                       35
37
         As of March 31, 2001, cash and cash equivalents were $8.4 million,
short term bank debt, including current maturities of long term loans, was $ 6.6
million, long term bank loans were $2.5 million and total lease obligations were
$1.1 million.

         In 2000, we increased our bank credit facilities for short-term and
long-term borrowings from $18 million to a total of $20 million, of which an
aggregate amount of $ 8.9 million was utilized as of December 31, 2000 and $9.1
million as of March 31, 2001. The current interest rate on these borrowings is
the London Inter Bank Offer Rate ("LIBOR") for three months, plus 1.0%. As
security for the bank credit facilities, we have registered a floating charge on
all of our assets in favor of the banks. In 2000, we increased short-term bank
debt by $2.5 million and repaid long term bank debt totaling $2.7 million.

         Our positive cash flow from operations resulted primarily from
increased revenues and improved customer collections. Our operating activities
provided cash in the amount of $12.6 million in 2000. Our operating activities
used cash in the amount of $1.8 million in 1998 and $0.9 million in 1999. As of
December 31, 2000, we had working capital of $10.9 million (of which $8.7 was in
cash and cash equivalents), compared to working capital of $15.3 million (of
which $ 5.5 million was in cash and cash equivalents) as of December 31, 1999.
This decrease in working capital is attributable to an increase in current
liabilities, primarily short term bank debt and trade payables.

         We used cash in investing activities of $4.5 million in 1998, $15.4
million in 1999 and $9.4 million in 2000. Our principal investing activities
were the purchase of computer hardware, and the acquisitions made by us in 1999
and 2000 including the PTM and Flagship acquisitions.

         In 1998, our financing activities provided approximately $1.7 million
(net), primarily attributable to our initial public offering, which raised $21.2
million. The proceeds of our public offering were primarily used to repay bridge
loans and notes in an aggregate amount of $20 million incurred in connection
with our acquisition of CogniSeis in October 1997. In 1999, our financing
activities provided approximately $13.0 million, primarily attributable to the
sale and issuance of our ordinary shares and warrants to acquire ordinary shares
of Paradigm in three private placements.

         As of May 31, 2001, we had a capital expenditure commitment for
computer hardware of $900,000. Our anticipated capital expenditure budget for
2001 for ongoing equipment replacement and intrinsic growth needs is estimated
at approximately $7.0 million, of which $2.0 million had been spent as of March
31, 2001. 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 and our unutilized 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 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.

                                       36
38
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, 2001.

        NAME:                     AGE:                POSITION:
        -----                     ----                ---------
Eldad Weiss (2)                   45      Chairman of the Board and
                                          Chief Executive Officer
Yehezkel Marueli                  47      President and Chief Operating Officer
Brian W. Berman                   55      Chief Financial Officer
Elie Barr (1)                     54      Director
Jacob Dunietz                     45      Director
Michael Geiger (2)                63      Director
Thierry LeRoux                    47      Director
Jay Seid (1)                      40      Director
Gen. (Res.) Zvi Zamir (1)         76      External Director
Mary Safrai (1) (2)               57      External Director
Jonathan Keller                   49      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 Chief Executive Officer and a Director of the Company
since the commencement of its 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.
("Scitex"). Mr. Weiss holds a Bachelors and a Masters degree in Electrical
Engineering from Tel Aviv University.

                                       37
39

YEHEZKEL MARUELI has served as the Company's 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's
Vice President of Corporate Logistics. Mr. Marueli holds a Bachelors degree in
Economics, with honors, from Tel Aviv University.

BRIAN W. BERMAN has served as the Chief Financial Officer of the Company 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, including
the Company. 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 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
the Board of Directors of the Company 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 Technologies 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., a publicly-traded holding company, which is quoted on the Tel Aviv Stock
Exchange. 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.
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.

                                       38
40
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
is a director of Consotium Francais de Localisation S.A., and Interactive
Network Technologies Inc. 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 OutSource International. Inc.,
Vista Information Solutions, Inc. and 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 SAFRAI has served as an External Director since November 2000. From 1989
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 Corporate Secretary since January 1994. From
January 1994 until August 1997, Mr. Keller served as the Company's Financial
Controller. Prior to January 1994, Mr. Keller was a self employed Certified
Public Accountant and in this capacity provided financial services to the
Company. 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.

                                       39
41
AGREEMENTS FOR NOMINATION OF DIRECTORS

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

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

         Pursuant to our agreement with Compagnie Generale de Geophysigue
("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 will 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 it to then hold in the
       aggregate a percentage of the outstanding Ordinary Shares in excess of
       10.2% of our outstanding Ordinary Shares.

ALTERNATE DIRECTORS

         Our Articles of Association provide, as permitted under Israeli law,
that any director may, by written notice to us, appoint another person to serve
as an alternate director (subject to the approval of a majority of the other
directors in a written resolution or at the next meeting of the Board of
Directors) and may cancel such appointment. The term of appointment of an
alternate director may be for one meeting of the Board of Directors, or for a
specified period, or until notice is given of the termination of the specified
period, or of the appointment. A person may not act as an alternate director
for more than one director and a director cannot act as an alternate director
for another director.

                                       40
42
No director currently intends to appoint any other person as an alternate
director.

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 years preceding the date, 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

                                       41
43
to the company. Each committee of a company's Board of Directors must include
at least one external director, with the exception of the audit committee which
must include all of the company's external directors. 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 Gen.(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
two independent directors on our Board of Directors and to establish an audit
committee, at least a majority of whose members are independent directors. The
composition of our Board of Directors and our audit committee is in compliance
with the requirements of the Nasdaq National Market.

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, 2000.
Salaries, fees,       Pension, retirement
                                         commissions and bonuses   and similar benefits
                                         -----------------------   --------------------
All directors and executive officers
 as a group consisting of 11 persons ..        $  662,000                $ 95,000
During the fiscal year ended December 31, 2000, the aggregate
remuneration paid to all persons who served in the capacity of executive officer
or director in 2000 was approximately $ 757,000. 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, 2001, we had granted options under various 1994 Stock
Option Plans to certain officers to purchase an aggregate of 139,439 ordinary
shares at exercise prices ranging from $.59 to $7.00 per share which are fully
vested, and under various 1997 Stock Option Plans to purchase an aggregate of
412,934 ordinary shares at exercise prices ranging from $5.00 to $7.00 per share
of which 369,207 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.

                                       42
44
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 (i) information regarding the appropriateness of a given action
brought for his approval or performed by him by virtue of his position and (ii)
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 " -- 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

                                       43
45
         -        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.

                                       44
46
         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% 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.

                                       45
47
         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 the external directors as detailed above) 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 above) 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. All eight
directors currently in office were elected by our shareholders at our annual
general meeting of shareholders in November 2000.

                                       46
48
EMPLOYMENT AGREEMENTS

         We have not entered into employment or service agreements with
directors other than the 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
targets set by the Board of Directors. Furthermore, Mr. Weiss has received
options to purchase 353,440 Ordinary Shares of the Company. Mr. Weiss'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 180 days 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 50,000 Ordinary Shares of the Company. Mr. Berman's
employment agreement provides for a one-time reimbursement of certain relocation
costs and requires compliance with confidentiality and non-competition
provisions.

         The Company entered into an employment agreement with Mr. Hezi Marueli,
which is terminable by either party upon 180 days 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
targets set by the Board of Directors. Furthermore, Mr. Marueli has received
options to purchase 110,000 Ordinary Shares of the Company. Mr. Marueli's
employment agreement requires compliance with confidentiality and
non-competition provisions.

         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 the 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, Zamir,
Safrai and Seid. It is currently contemplated that the audit committee meet at
least four times each year.

                                       47
49
         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, 2001     DECEMBER 31,     DECEMBER 31,
                                                        2000            1999
Research and Development            150             137              98
       Sales and Marketing              106             105              78
        Customer Support                 94              76              78
            Services                     88              69              41
         Management and
         Administration                  75              67              66
                                   ----------------------------------------------
              TOTAL                     513             454              361
                                   ----------------------------------------------

     North and South America            178             158              143
   Europe, Africa, Middle East          247             219              160
       Far East and China                88              77               58
                                   ----------------------------------------------
              TOTAL                     513             454              361
                                   ----------------------------------------------
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, Russia, the United Kingdom, the United
States and Venezuela. To date, compliance with such laws has not been a material
burden for us. As the number of our employees increases over time, our
compliance with such regulations could become more burdensome.

         Our principal operating subsidiaries are not party to any collective
bargaining agreements. However, the Israeli parent company 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

                                       48
50
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.

         In addition, all employees in France are represented by unions.

E.       SHARE OWNERSHIP

Beneficial Ownership of Executive Officers and Directors

         As of May 31, 2001, 14,891,902 Ordinary Shares of the Company were
issued and outstanding.

         The following table sets forth, as of May 31, 2001, certain information
with respect to the beneficial ownership of the Company's Ordinary Shares, as
well as options and warrants exercisable within 60 days of May 31, 2001, by all
directors and officers.
NAME             BENEFICIAL OWNERSHIP OF  PERCENTAGE  OPTIONS TO PURCHASE
                                SHARES                        ORDINARY SHARES
Eldad Weiss                    224,282           1.50%            347,214    (1)
Yehezkel Marueli                  *                               100,644    (2)
Brian W. Berman                   *                                33,531    (3)
Elie Barr                         --                                 --
Jacob Dunietz                     *                                  --
Michael Geiger                    --                                 --
Thierry LeRoux                    --                                 --
Jay Seid                          --                                 --
Gen. (Res.) Zvi Zamir             --                                 --
Mary Safrai                       --                                 --
Jonathan Keller                   *                                38,103    (4)
*        Less than one percent

(1)      The exercise price of the options ranges between $4 and $7 per share
         and the options expire between 2004-2006.

(2)      The exercise price of the options ranges between $5 and $7 per share
         and the options expire between 2005-2006.

(3)      The exercise price of the options is $7 per share and the options
         expire between 2006-2008.

(4)      The exercise price of the options ranges between $0.59 and $7 per share
         and the options expire between 2004-2006.

                                       49
51
         STOCK OPTION PLANS

THE 1994 STOCK OPTION PLANS

         In 1994, we approved a stock option plan for key employees (the "Key
Employee Plan"), the May 1994 Stock Option Plan (the "May 1994 Plan") and the
1994 General Stock Option Plan (the "1994 General Plan") (the Key Employee Plan,
the May 1994 Plan and the 1994 General Plan are collectively referred to as the
"1994 Plans").

         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.

         Under the May 1994 Plan and the 1994 General Plan, we have granted
options to purchase a total of 226,184 and 60,176 Ordinary Shares, respectively.
Both the May 1994 Plan and the 1994 General Plan are administered by either the
Board of Directors or our Compensation Committee. The option exercise price
under the May 1994 Plan for 114,678 Ordinary Shares is $2.50 per Ordinary Share,
and for 111,506 Ordinary Shares is $4.00 per Ordinary Share. The option exercise
price under the 1994 General Plan is $7.00 per Ordinary Share. Furthermore,
under each of such Plans, 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 our Compensation Committee and the Company may provide loans to employees to
assist them in purchasing shares upon exercise of the options. Under the May
1994 Plan, 200,696 options are vested and are exercisable immediately. Options
granted under the 1994 General Plan, 51,352 are all vested and are exercisable
immediately. Options granted under the May 1994 Plan and 1994 General Plan, if
unexercised, expire ten years from the date of grant.

         Options granted under the 1994 Plans are not transferable by the option
holder, other than by will or pursuant to the laws of descent and distribution.
Under the 1994 Plans, the options expire immediately upon the termination of the
option holder's employment, unless our Board of Directors or the Compensation
Committee authorizes an extension of the exercise term beyond the 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 of employment, 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 our 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.

                                       50
52
         As of May 31, 2001, under the Key Employee Plan, the May 1994 Plan and
the 1994 General Plan, options to purchase a total of 63,336, 200,696 and 51,352
Ordinary Shares, respectively, were outstanding.

         As of May 31, 2001, options granted under the 1994 Plans to certain
officers of the Company to purchase an aggregate of 139,439 Ordinary Shares at
exercise prices ranging from $.59 to $7.00 per share were outstanding. 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 our Board of Directors.

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 are administered by our
Board of Directors or the Compensation Committee. The option exercise price per
Ordinary Share will be determined by the Board of Directors or the Compensation
Committee and will be set forth in an option agreement between us and each
optionee, with the option price not being less that 100% of 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. Fair market value is
defined in the 1997 Plans as the mean between the highest and lowest quoted
selling prices of our publicly traded shares listed on a stock exchange on such
date. If no sales occur on the desired date, then fair market value will be
determined by taking a weighted average of the mean between the highest and
lowest quoted selling prices for a reasonable period both before and after the
desired date. The option exercise price will be payable in cash, by check or by
any other form of payment that is satisfactory to our Board of Directors or
Compensation Committee. 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% vest in 12 equal quarterly
installments commencing from the end of the first 12 month vesting period. These
options expire eight years from the date of grant.

         Options granted under the 1997 Plans are not transferable by the option
holder, other than by will or pursuant to the laws of descent and distribution.
Additionally, the options expire immediately upon the termination of the option
holder's employment, unless our Board of Directors or Compensation Committee
authorizes an extension of the exercise term beyond the employee termination
date. In the event of termination of employment without cause, any unexpired
vested options may be exercised up to 90 days following the date of termination
of employment, 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 exercised up to six months following
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 our Board of
Directors or Compensation Committee, accelerate and become immediately
exercisable as of the later of the date of retirement or one year

                                       51
53
following the date of the 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, 2001, options to purchase a total of 1,529,772 Ordinary
Shares under the 1997 Plans were outstanding.

     As of May 31, 2001, we had granted options under the 1997 Plans to certain
officers to purchase an aggregate of 412,934 Ordinary Shares at exercise prices
ranging from $5.00 to $7.00 per share; 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 our Board of Directors.

ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     A.   MAJOR SHAREHOLDERS

          As a result of the concentration of ownership of our voting 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, 2001 by each
     person who is known to own beneficially more than 5% of our outstanding
     Ordinary Shares.
Ordinary Shares
     Name And Address of                            Beneficially owned
     Beneficial Owners                       Number(1)                Percent
================================================================================
Shamrock Holdings Inc.                1,649,943(2)                11.1%
     4444 Lakeside Drive
     Burbank, California 91510-7774
     U.S.A.

     Mashov Computers  Ltd.                1,590,406                   10.7%
     3, Hagalim Boulevard,
     Herzlia, Israel 46766

     Compagnie Generale de Geophysique     1,500,000(3)                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 U.S.A.

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

     Jerusalem Venture Partners LP           793,293(4)                 5.3%
     1, Technology Park Bldg. Malha
     Jerusalem 91487
     Israel
52
54

     (1) Unless otherwise indicated, the entities identified in this table have
     sole voting and investment power with respect to all voting Ordinary Shares
     shown as beneficially owned by them, subject to community property laws,
     where applicable.

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

     (4) As part of a private placement in April 1999, Jerusalem Venture
     Partners LP acquired 877,193 Ordinary Shares.

          As of May 31, 2001, 14,891,902 of our Ordinary Shares were
     outstanding, all of which carry equal voting rights. At such date, there
     were 11 record holders of our Ordinary Shares in the United States who
     collectively held 73.5% of our outstanding Ordinary Shares.

                                       53
55
SHAREHOLDERS AGREEMENTS

         For a description of the agreements between the Company and certain
shareholders regarding the nomination of directors, see Item 6. "Directors and
Senior Management - Agreements for Nomination of Directors".

REGISTRATION RIGHTS

         Shareholders holding an aggregate of up to 7,412,370 Ordinary Shares of
the Company 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 an aggregate of three registrations of the Company, 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 one demand registration and
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 $3,000,000. Shareholders
holding 1,500,000 Ordinary Shares and warrants to purchase 250,000 Ordinary
Shares only have incidental registration rights.

         The demand registration rights are subject to an underwriter's right of
cutback, provided that all shares of shareholders other than the Registrable
Securities are first excluded from such registration. The Company has undertaken
not to cause any other registration of securities for its 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 the Company furnishes the holders of
Registrable Securities a certificate signed by the President or Chief Executive
officer of the Company stating that, in the good faith judgment of the Board of
Directors, it would be seriously detrimental to the Company or its shareholders
for such F-3 registration to be effected at that time, provided that the Company
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 any other shares of the Company (with the exception of shares issued by
the Company to the public). All expenses incurred in connection with such
registrations will be borne by the Company, except that participating
shareholders will be obligated to pay their proportionate share of the fees,
discounts or commissions payable to any underwriter.

B.       RELATED PARTY TRANSACTIONS

         LOANS TO OFFICERS

         We entered into two loan agreements with Mr. Yehezkel Marueli,
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

                                       54
56
annum from June 1, 2000. These loans were originally repayable on December 31,
2000, but repayment has been extended to December 31, 2001.

C.       INTERESTS OF EXPERTS AND COUNSEL

              Not applicable

ITEM 8.  FINANCIAL INFORMATION

A.       CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

         See Item 18.

         LEGAL PROCEEDINGS

         Geophysical Micro Computer Application (International) Ltd. ("GMA") is
appealing a final judgment entered by the trial court in the District Court of
Dallas County, Texas in the matter of Paradigm Geophysical Ltd. vs. Geophysical
Micro Computer Application (International) Ltd. On December 11, 1997, we filed
suit for a declaratory judgment in the District Court of Dallas County, Texas to
determine whether it has any obligation to 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
the above-referenced appeal. Oral arguments were presented before the Court of
Appeals in April 2001 and the decision of the Court of Appeals is now awaited.
We believe that the outcome of the above claim will not have an adverse effect
on our business or on our consolidated financial statements.

         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 their 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. We believe that the
outcome of the above claim will not have an adverse effect on our business or on
our consolidated financial statements.

                                       55
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         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 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

             1998
        Second Quarter   $ 7.375     $ 7.000
       (commencing June
           15, 1998)
         Third Quarter   $ 7.125     $ 4.500
        Fourth Quarter   $ 5.875     $ 4.190

             1999
         First Quarter   $ 5.125     $ 4.250
        Second Quarter   $ 7.250     $ 5.000
         Third Quarter   $ 6.750     $ 5.625
        Fourth Quarter   $ 5.875     $ 4.500
56
58
2000
First Quarter   $ 10.063    $ 4.500
        Second Quarter   $ 7.813     $ 5.200
         Third Quarter   $ 6.875     $ 5.563
        Fourth Quarter   $ 7.000     $ 4.250
             2001
            January      $ 5.063     $ 4.250
           February      $ 6.000     $ 5.125
             March       $ 6.000     $ 5.063
             April       $ 5.770     $ 4.969
              May        $ 6.680     $ 5.470
B.       PLAN OF DISTRIBUTION

         Not applicable.

C.       MARKETS

         Not applicable.

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 THE COMPANY'S 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

                                       57
59
         Pursuant to Article 54(b) of our Articles of Association, a transaction
entered into by the Company in which a director of the Company has a personal
interest, directly or indirectly, will be valid in respect of the Company and
the given director only if approved by the Company's 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 the Company, its assets
and liabilities.

         The Israeli Companies Law provides that a director who has personal
interest in a given transaction of the Company, brought to the approval of the
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 the Company's 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 in 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 the Company's 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 legal quorum at our Board meetings the Israeli Companies Law
provides that, unless determined otherwise by the Company, 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 meeting will
consist of the majority of the Board members.

         Any transaction concerning compensation to a director requires the
approval of both the Board of Directors and the shareholders of the Company at
the Company's General Meeting.

         The Board of Directors may from time to time, in its discretion, cause
the Company to borrow or secure the payment of any sum or sums of money for the
purpose of the Company, 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 the
Company, 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.

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60
         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, the profits of the Company available for dividend and resolved to be
distributed shall be applied in payment of dividends upon the shares of the
Company 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 the shareholders on account
of the next forthcoming dividend such interim dividends as, in their judgment,
the position of the Company 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 specific assets of the Company or by
distribution of paid-up shares, debentures or debenture stock or any other
securities of the Company 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 the voting rights in the Company 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.

                                       59
61
Votes may be given either personally or by proxy. A proxy need not be a
shareholder of the Company.

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 the Company's 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-third of the total voting rights in the Company. A company being a
shareholder shall be deemed to be personally present for the purpose of the
Company's Articles of Association if represented by its representative duly
authorized in accordance with Article 42 of the Company's 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 meeting any

                                       60
62
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 the issued
share capital of the Company and at least 1% of the voting rights in the Company
or one or more shareholders who hold in the aggregate at least 5% of the voting
rights in the Company.

8.  RESTRICTION ON NON-RESIDENTS

         The Memorandum and Articles of Association of the Company 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 merged Company will not be able to
meet the company's obligations to its creditors.

         In addition, the Company's current Articles of Association provide that
the Company 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 the
outstanding voting shares of the Company 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:

(a)      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

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

         A business combination includes:

(a)      any merger or consolidation involving the Company and the interested
         shareholder;

(b)      any sale, transfer, pledge or other disposition of 10% or more of the
         assets of the Company in a transaction involving the interested
         shareholder;

(c)      subject to certain exceptions, any transaction that results in the
         issuance or transfer by the Company of any shares of the Company to the
         interested shareholder;

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

                                       61
63
(e)      the receipt by the interested shareholder of the benefit of any loans,
         advances, guarantees, pledges or other financial benefits provided by
         or through the Company.

         The Company has 2,000,000 Special Preferred Shares authorized ("Special
Preferred Shares"). 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 the Company 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. The Company has not issued, and currently has 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 Ordinary Shares of the Company, 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, the approval of the Board of Directors
is required only 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

                                       62
64
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.

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 will hold 90% or more of the company's shares or 90% of any class of
the 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. This rule does not apply if the acquisition is made by way of a
merger. 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

                                       63
65
remaining shares will be obligated to transfer such shares to the acquiror at
the tender offer price. This entails the possibility of additional delay and the
imposition of further approval requirements at the court's discretion. 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, at a shareholders' meeting called on at least 21 days prior
notice. In addition, the Israeli Companies Law does not generally require court
approval of a merger. Pursuant to the Israeli Companies Law the articles of
association of companies such as ours, which have been incorporated prior to
February 1, 2000, are deemed to include a provision whereby the approval of a
merger requires approval of the transaction by the majority of the shareholders
present and voting on the proposed transaction who hold at least 75% of the
shares present and voting at such meeting. 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.

         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 25% of the
voting rights in the company. This rule does not apply if there already is
another holder of 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 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 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.

                                       64
66
         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 acquisition transaction agreements and related documents
discussed in Item 4. "Information on the Company - History and Development of
the Company " and in Item 5. "Operating and Financial Review and Prospects -
Acquisitions," 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 the Company, its shareholders and
ownership and disposition of its 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 the
Company's outstanding voting shares). The following also includes a discussion
of certain Israeli government programs benefiting various Israeli businesses
such as the Company. To the extent that the discussion is based on new
legislation

                                       65
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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

         On May 4, 2000, a committee chaired by the Director General of the
Israeli Ministry of Finance issued a report recommending a sweeping reform in
the Israeli system of taxation. The proposed reform would significantly alter
the taxation of individuals and would also affect corporate taxation. In
particular, the proposed reform would reduce but not eliminate, the tax benefits
available to approved enterprises such as ours. The Israeli cabinet of the
previous government has approved the recommendation in principle. The new
Israeli government has declared that it intends to recommend tax reforms but has
not approved the May 4, 2000 report or any other alternate reform.
Implementation of any reform requires legislation by Israel's Knesset
(Parliament). We cannot be certain whether the proposed reform will be adopted,
when it will be adopted or what form any reform will ultimately take or what
effect it will have on our company.

GENERAL CORPORATE TAX STRUCTURE

         Israeli companies are generally subject to "Company Tax" at the rate of
36.0% 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

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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 the
Company might be that the Company's taxable income, as determined for Israeli
corporate tax purposes, would be different from the Company's U.S. dollar
income, as reflected in its financial statements, due to the difference between
the annual changes in the CPI and in the NIS exchange rate with respect to the
U.S. 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 the 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 the company continues to
qualify as an Industrial Company under Israeli law and that the individual does
not hold such shares for business purposes. If the Company does not maintain its
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 shareholders of the Company. 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) at the rate of up to 25%.

         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 had dividend income derived or accrued
in Israel from which the applicable tax was withheld at source is currently
exempt from the duty to file an annual

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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

         The Company currently qualifies 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 the Company 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.

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         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. The Tax Reform Committee has proposed that
the company tax rate be increased from 0% to 10% during the exemption period. 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. The Company 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
the Company 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.

         The Company has been granted "Approved Enterprise" status under the
Investment Law with respect to four projects. Pursuant to the provisions of the
Investment Law, the Company 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 25%, 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.

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71
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. the Company 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 (3.5% for the year 2000 only), 4% of revenues
during the following three years, and 5% of revenues in the seventh year and
thereafter, with the total royalties not to exceed 100% 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, 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.

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72
         In order to meet certain conditions in connection with the grants and
programs of the OCS, the Company has made certain representations to the Israeli
government about the Company's future plans for its Israeli operations. From
time to time, the extent of the Company's Israeli operations has differed and
may in the future differ, from the Company's representations. If, after
receiving grants under certain programs, the Company fails 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 the Company to the Israeli
government, the Company could be required to refund to the State of Israel tax
or other benefits previously received (including interest and CPI linkage
difference) and would likely be denied receipt of such grants or benefits, and
participation of such programs, thereafter.

         The Company participates 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

         The Company has received grants relating to its overseas marketing
expenses from the Marketing Fund. These grants are awarded for specific expenses
incurred by the Company for overseas marketing and are based upon the expenses
reported by the Company 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 the Company from the Marketing Fund. Grants recorded beginning January 1,
1998 bear royalties of 4% plus interest at LIBOR rates. The Company 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 the Company's consolidated financial statements as
offsets to marketing expenses. Through December 31, 2000, the Company had
received grants from the Marketing Fund in the amount of approximately $430,000.
At March 31, 2001, the aggregate contingent liability was approximately
$418,000.

 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",

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"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, 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 the Company's outstanding voting stock. The
following discussion does not address the effect of any applicable state, local
or foreign 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 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.

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         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 financial services income for United States foreign tax credit
purposes. Foreign income taxes exceeding the credit limitation for the year of
payment or accrual may be carried back for two taxable years and forward for
five taxable years in order to reduce U.S. Federal income taxes, subject to the
credit limitation applicable in each of such years. Other restrictions on the
foreign tax credit include a prohibition on the use of the credit to reduce
liability for the U.S. individual and corporation alternative minimum taxes by
more than 90%. A U.S. Holder will be denied a foreign tax credit with respect to
Israeli income tax withheld from dividends received on the Ordinary Shares to
the extent such U.S. Holder has not held the Ordinary Shares for at least 16
days of the 30-day period beginning on the date which is 15 days before the
ex-dividend date or to the extent such U.S. Holder is under an obligation to
make related payments with respect to substantially similar or related property.
Any days during which a U.S. Holder has substantially diminished its risk of
loss on the Ordinary Shares are not counted toward meeting the 16-day holding
period required by the statute. 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

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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 market price
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 dividends 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 dividend payment
                  or disposition would be subject to tax at the highest
                  individual or corporate tax rate, as the case may be, 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 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.

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         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.

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 a 31 percent 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.

U.S. GIFT AND ESTATE TAX

         An individual U.S. Holder of Ordinary Shares will be subject to U.S.
gift and estate taxes with respect to Ordinary Shares in the same manner and to
the same extent as with respect to other types of personal property.

F.       DIVIDEND AND PAYING AGENTS

         Not applicable.

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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 Exchange Act may be inspected without charge and copied at
prescribed rates at the following Securities and Exchange Commission public
reference rooms: 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington,
D.C. 20549; Seven World Trade Center, Suite 1300, New York, NY 10048; Room 3190,
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661. 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 our company 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 US dollars, or linked to the US
dollar, and therefore the dollar is our functional currency. Approximately 50%
of our operating expenses are paid in US dollars or are linked to US dollars.
Other significant currencies in which we receive revenue or pay expenses are
Australian dollars, British pounds, Canadian dollars, the European Monetary
Union currency ("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 US 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, 2000, we had entered into hedging
transactions only in regard to our New Israeli Shekel/ US 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.

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         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, 2000, our total outstanding
indebtedness in regard to short-term debt and current maturities of long term
bank loans was approximately $ 7.6 million, in regard to medium term bank loans
was $ 1.3 million, and in connection with capital lease obligations was $ 1.3
million. In the aggregate, this indebtedness 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

         In November 2000, our shareholders approved the adoption of an amended
and restated Articles of Association (the "Amended Articles"). The principal
amendments modifying shareholder rights and which are not mandated by law can be
summarized as follows:

         -        The Board of Directors has the authority to declare dividends
                  to our shareholders (our previous Articles of Association
                  required shareholder approval).

         -        All decisions which under the previous Articles of Association
                  and the Israeli law in force until February 1, 2000, required
                  that the amendments to the Articles of Associations and a
                  number of other decisions such as the increase of share
                  capital, share splits and other recapitalizations required the
                  approval of at least 75% of our shareholders present and
                  voting at a special meeting of shareholders. As permitted
                  under the new Israeli Companies Law, the Amended Articles
                  provide that these decisions require a simple majority of
                  shareholders present and voting at any shareholders meeting
                  (with the

                                       77
79
                  exception of Article 100 which deals with certain business
                  combinations the amendment of which requires the affirmative
                  vote of at least 75% of our shareholders present (in person or
                  by proxy) at the Meeting and voting on the resolution) .

         -        We are permitted to purchase our own shares in certain
                  circumstances (this was previously prohibited).

                                    PART III

ITEM 17.  FINANCIAL STATEMENTS

     Not applicable.

ITEM 18 - FINANCIAL STATEMENTS AND EXHIBITS

The following consolidated financial statements and related auditors report 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 the Financial Statements...................          F-9

ITEM 19 - EXHIBITS

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

    EXHIBITS NO.                         EXHIBIT

         1.1++*     Memorandum of Association.

         1.2#       Amended and Restated Articles of Association.

         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*       Form of 1994 Warrant issued in connection with a private
                    placement of Paradigm Geophysical Ltd.'s securities.

         2.4***     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.

         2.5***     Registration Rights Agreement, dated April 14, 1999, 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.

                                       78
80

         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, dated
                    February 3,1999, 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, dated October 4, 2000, 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.

         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.

         8.1#       Subsidiaries of Paradigm Geophysical Ltd.

        10.1#       Consent of Kost Forer and Gabbay.
--------------------
         ++         English translations from Hebrew original.

                                       79
81

         *          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
                    June 30, 1999.

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

         #          Filed herewith.

                                   SIGNATURES

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

                                            PARADIGM GEOPHYSICAL LTD.

                                         By: /s/ Brian Berman
                                            -----------------------
                                            Brian Berman
                                            Chief Financial Officer

Date: June 29, 2001

                                       80
82
                 PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2000

                                 IN U.S. DOLLARS

                                      INDEX
PAGE
                                                                           ---------
REPORT OF INDEPENDENT AUDITORS                                               F-2

CONSOLIDATED BALANCE SHEETS                                               F-3 - F-4

CONSOLIDATED STATEMENTS OF OPERATIONS                                        F-5

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY                                F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS                                     F-7 - F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                F-9 - F-34
83
                           [ERNST & YOUNG LETTERHEAD]

                         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, 1999 and 2000, 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, 2000. 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 Paradigm Geophysical (U.K), a wholly-owned subsidiary,
which statements reflect total assets constituting 13% of total consolidated
assets as of December 31, 1999, and total revenues constituting 26% and 22% of
total consolidated revenues for the years ended December 31, 1998 and 1999,
respectively. 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 Paradigm Geophysical (U.K.) is based solely on the reports of the other
auditors. We did not audit the financial statements of Paradigm Geophysical
(Singapore) Pte Ltd., a wholly-owned subsidiary which statements reflect total
revenues constituting 13% of total consolidated revenues for the year ended
December 31, 1998. Those statements were audited by other auditors whose reports
have been furnished to us, and our opinion, insofar as it relates to the amounts
included for Paradigm (Singapore) Pte. Ltd., is based solely on the reports of
the 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, 1999 and 2000, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.

Tel-Aviv, Israel                                   KOST FORER & GABBAY
January 22, 2001                         A Member of Ernst & Young International

                                     F - 2
84
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
                                                                                        -------------------------------
                                                                                           1999                 2000
                                                                                        ----------           ----------
ASSETS

CURRENT ASSETS:
Cash and cash equivalents                                                               $    5,457           $    8,647
Trade receivables (net of allowance for doubtful accounts of
    $ 1,666 in 1999 and $ 2,950 in 2000)                                                    21,612               22,707
Accrued income                                                                               9,012                4,077
Other receivables and prepaid expenses                                                       2,443                4,110
                                                                                        ----------           ----------

Total current assets                                                                        38,524               39,541
                                                                                        ----------           ----------

LONG-TERM TRADE RECEIVABLES                                                                     54                  221
                                                                                        ----------           ----------

SEVERANCE PAY FUND                                                                             861                1,076
                                                                                        ----------           ----------

PROPERTY AND EQUIPMENT, NET                                                                 12,007               13,318
                                                                                        ----------           ----------

OTHER ASSETS, NET                                                                           14,719               25,605
                                                                                        ----------           ----------

                                                                                         $  66,165            $  79,761
                                                                                         =========            =========
The accompanying notes are an integral part of the consolidated financial
statements.

                                     F - 3
85
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
                                                     CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
DECEMBER 31,
                                                                                         -----------------------------
                                                                                           1999                 2000
                                                                                         --------             --------
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term bank loans                                                                    $  2,000             $  4,528
Current maturities of long-term bank loans                                                  2,639                3,112
Current maturities of capital lease obligations                                               434                  546
Trade payables                                                                              2,774                6,045
Other payables and accrued expenses                                                         8,792                9,931
Deferred revenues                                                                           6,539                4,519
                                                                                         --------             --------

Total current liabilities                                                                  23,178               28,681
                                                                                         --------             --------

LONG TERM LIABILITIES:
Long-term bank loans, net of current maturities                                             3,923                1,277
Capital lease obligations, net of current maturities                                          742                  206
Other lease obligations                                                                       759                  517
Accrued severance pay                                                                       1,650                2,338
Deferred income tax liability                                                                 445                  273
                                                                                         --------             --------

Total long-term liabilities                                                                 7,519                4,611
                                                                                         --------             --------
SHAREHOLDERS' EQUITY:
Share capital:
  Authorized - 18,000,000 Ordinary shares of NIS 0.5 par value; 2,000,000
   Preferred shares of NIS 0.5 par value as of December 31, 1999 and 2000

  Issued and outstanding - 13,026,336 Ordinary shares as of December 31, 1999
   and 14,691,904 Ordinary shares as of

   December 31, 2000                                                                        2,064                2,273
Additional paid-in capital                                                                 51,903               60,954
Accumulated other comprehensive loss                                                       (1,166)              (1,784)
Accumulated deficit                                                                       (17,333)             (14,974)

                                                                                         --------             --------
Total shareholders' equity                                                                 35,468               46,469
                                                                                         --------             --------

                                                                                         $ 66,165             $ 79,761
                                                                                         ========             ========
The accompanying notes are an integral part of the consolidated financial
statements.

                                     F - 4
86
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
YEAR ENDED DECEMBER 31,
                                                           --------------------------------------------------
                                                             1998                 1999                 2000
                                                           --------             --------             --------
Revenues:
Products                                                   $ 38,074             $ 43,023             $ 46,390
Services                                                      7,288               11,483               16,908
                                                           --------             --------             --------

Total revenues                                               45,362               54,506               63,298
                                                           --------             --------             --------
Operating expenses:
Cost of products                                              8,559               12,418               10,816
Cost of services                                              3,107                5,804                6,352
Research and development                                      7,660                9,306               11,215
Sales and marketing, general and administrative              15,822               20,638               23,518
Depreciation                                                  2,298                3,865                4,746
Amortization of intangible assets                             2,347                3,064                3,360
Non recurring expenses                                           --                2,705                   --
                                                           --------             --------             --------

Total operating expenses                                     39,793               57,800               60,007
                                                           --------             --------             --------

Operating income (loss)                                       5,569               (3,294)               3,291
Financial expenses, net                                        (661)                (484)                (552)
                                                           --------             --------             --------

Income (loss) before taxes on income                          4,908               (3,778)               2,739
Taxes on income                                                 356                   --                  380
                                                           --------             --------             --------

Net income (loss)                                          $  4,552             $ (3,778)            $  2,359
                                                           ========             ========             ========

Basic net earnings (loss) per share                        $   0.66             $  (0.31)            $   0.17
                                                           ========             ========             ========

Diluted net earnings (loss) per share                      $   0.49             $  (0.31)            $   0.17
                                                           ========             ========             ========
The accompanying notes are an integral part of the consolidated financial
statements.

                                     F - 5
87
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
                                   STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
PREFERRED SHARES                 ORDINARY SHARES
                                                    SHARES           AMOUNT           SHARES        AMOUNT
                                                   ---------         ------         ----------     --------
Balance as of January 1, 1998                      4,735,802         $  765          2,328,682     $    521
Comprehensive income (loss):
  Net income                                               -              -                  -            -
  Foreign currency translation
   adjustments                                             -              -                  -            -
Total comprehensive income
Issuance of Ordinary shares, net                           -              -          3,350,000          458
Exercise of over-allotment                                 -              -            100,000           14
Conversion of Preferred shares
  into Ordinary shares                            (4,735,802)          (765)         4,735,802          765
                                                   ---------         ------         ----------     --------
Balance as of December 31, 1998                            -              -         10,514,484        1,758
Comprehensive loss:
  Net loss                                                 -              -                  -            -
  Foreign currency translation
   adjustments                                             -              -                  -            -
Total comprehensive loss
Issuance of Ordinary shares, net                           -              -          2,017,544          246
Issuance of shares upon exercise of warrants               -              -            479,908           58
Issuance of shares upon exercise of stock options          -              -             14,400            2
                                                   ---------         ------         ----------     --------

Balance as of December 31, 1999                            -              -         13,026,336        2,064
Comprehensive income (loss):
  Net income                                               -              -                  -            -
  Foreign currency translation
   adjustments                                             -              -                  -            -
Total comprehensive income
Issuance of shares upon acquisition of                     -              -          1,500,000          186
   Flagship

Issuance of shares upon exercise
  of warrants                                              -              -            119,782           15
Issuance of shares upon exercise
  of stock options, net                                    -              -             45,786            8
                                                   ---------         ------         ----------     --------
Balance as of December 31, 2000                            -         $    -         14,691,904      $ 2,273
                                                   =========         ======         ==========     ========
ACCUMULATED
                                                    ADDITIONAL         OTHER                               TOTAL
                                                     PAID-IN       COMPREHENSIVE      ACCUMULATED      SHAREHOLDERS'
                                                     CAPITAL            LOSS            DEFICIT            EQUITY
                                                   ----------          -------         ---------          ---------
Balance as of January 1, 1998                      $   19,707         $   (246)      $   (18,107)         $   2,640
Comprehensive income (loss):
  Net income                                                -                -             4,552              4,552
  Foreign currency translation
   adjustments                                              -             (496)                -               (496)
                                                                                                          ---------
Total comprehensive income                                                                                    4,056
                                                                                                          =========
Issuance of Ordinary shares, net                       18,892                -                 -             19,350
Exercise of over-allotment                                637                -                 -                651
Conversion of Preferred shares
  into Ordinary shares                                      -                -                 -                  -
                                                   ----------          -------         ---------          ---------
Balance as of December 31, 1998                        39,236             (742)          (13,555)            26,697
Comprehensive loss:
  Net loss                                                  -                -            (3,778)            (3,778)
  Foreign currency translation
   adjustments                                              -             (424)                -               (424)
                                                                                                          ---------
Total comprehensive loss                                                                                     (4,202)
                                                                                                          =========
Issuance of Ordinary shares, net                       10,736                -                 -             10,982
Issuance of shares upon exercise of warrants            1,861                -                 -              1,919
Issuance of shares upon exercise of stock options          70                -                 -                 72
                                                   ----------          -------         ---------          ---------

Balance as of December 31, 1999                        51,903           (1,166)          (17,333)            35,468
Comprehensive income (loss):
  Net income                                                -                -             2,359              2,359
  Foreign currency translation
   adjustments                                              -             (618)                -               (618)
                                                                                                          ---------
Total comprehensive income                                                                                    1,741
                                                                                                          =========
Issuance of shares upon acquisition of                  8,889                -                 -              9,075
   Flagship

Issuance of shares upon exercise
  of warrants                                               -                -                 -                 15
Issuance of shares upon exercise
  of stock options, net                                   162                -                 -                170
                                                   ----------          -------         ---------          ---------
Balance as of December 31, 2000                      $ 60,954          $(1,784)        $ (14,974)          $ 46,469
                                                   ==========          =======         =========          =========
The accompanying notes are an integral part of the consolidated financial
statements.

                                     F - 6
88
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
                                                                              ----------------------------------------------
                                                                                1998               1999               2000
                                                                              ---------         ----------           -------
Cash flows from operating activities:

Net income (loss)                                                             $   4,552         $   (3,778)          $ 2,359
Adjustments to reconcile net income (loss) to net cash
   provided by (used in) operating activities:
   Depreciation and amortization                                                  4,778              6,929             8,106
   Impairment of development technology                                               -              1,595                 -
   Decrease (increase) in trade receivables, accrued income
      and long-term trade receivables                                            (5,035)            (8,866)           10,081
   Decrease (increase) in other receivables and prepaid expenses                  1,432                (98)              441
   Increase (decrease) in deferred income
      tax assets and liabilities, net                                              (202)               203              (171)
   Decrease (increase) in other assets                                                -                 84                 -
   Increase (decrease) in trade and other payables and
      accrued expenses                                                           (5,384)             1,795            (4,561)
   Increase (decrease) in deferred revenues                                      (1,929)             1,004            (2,522)
   Accrued severance pay, net                                                        15                243            (1,083)
   Other                                                                              -                  -               (22)
                                                                              ---------         ----------           -------
Net cash provided by (used in) operating activities                             *(1,773)             *(889)           12,628
                                                                              ---------         ----------           -------

Cash flows from investing activities:

Purchase of property and equipment                                               (4,516)            (5,847)           (5,331)
Proceeds from sale of property and equipment                                          -                  -                39
Purchase of developed technology                                                      -             (1,175)             (170)
Payment for acquisition of a consolidated subsidiary, PTM  (1)                        -             (8,379)                -
Payment for acquisition of a consolidated subsidiary, Flagship (2)                    -                  -            (3,980)
                                                                              ---------         ----------           -------
Net cash used in investing activities                                            (4,516)           (15,401)           (9,442)
                                                                              ---------         ----------           -------
Cash flows from financing activities:

Proceeds from short-term bank loans                                              *1,584             *2,000             7,506
Principal payment of short-term bank loans                                        *(517)           *(1,778)           (4,978)
Principal payment of note payable                                                (8,457)                 -                 -
Principal payments of capital lease obligations                                       -               (200)             (424)
Proceeds from long-term loans                                                         -              6,500                 -
Principal payment of long-term loans                                               (571)              (427)           (2,173)
Principal payment of bridge loan                                                (12,000)                 -                 -
Payment of other lease obligations                                                    -               (200)             (242)
Issuance of share capital, net                                                   21,160             10,982                 -
Proceeds from exercise of warrants and stock options                                  -              1,991               185
Amortization of debt issuance costs from warrants issued                            475                  -                 -
                                                                              ---------         ----------           -------

Net cash provided by financing activities                                        *1,674            *18,868              (126)
                                                                              ---------         ----------           -------

Effect of exchange rate changes on cash and cash equivalents                       (151)              (584)              130
                                                                              ---------         ----------           -------

Increase (decrease) in cash and cash equivalents                                 (4,766)             1,994             3,190
Cash and cash equivalents at the beginning of the year                            8,229              3,463             5,457
                                                                              ---------         ----------           -------

Cash and cash equivalents at the end of the year                              $   3,463          $   5,457           $ 8,647
                                                                              =========          =========           =======
* Reclassified

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

                                     F - 7
89
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
                                                                                      -----------------------------------------
                                                                                        1998            1999             2000
                                                                                      --------        --------         --------
(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
                                                                                      ========        ========         ========
Supplemental disclosure of cash flow activities:
Cash paid during the year for:

Interest                                                                              $    721        $     42         $    949
                                                                                      ========        ========         ========

Income taxes                                                                          $     --        $    379         $     --
                                                                                      ========        ========         ========
Non-cash activities:

Purchase of leased property and equipment in a capital lease                          $    863        $  1,376         $     --
                                                                                      ========        ========         ========

Offering expenses                                                                     $  1,159        $     --         $     --
                                                                                      ========        ========         ========
Write-off of note payable in connection with an acquisition of a consolidated
subsidiary in 1997, as a result of reevaluation of certain assets purchased           $  1,043        $     --         $     --
                                                                                      ========        ========         ========
Additional acquired technology associated with an acquisition of a
consolidated subsidiary in 1997                                                       $  2,343        $     --         $     --
                                                                                      ========        ========         ========

Conversion of Preferred shares into Ordinary shares                                   $    765        $     --         $     --
                                                                                      ========        ========         ========

Accrued prepaid acquisition expenses associated with the Flagship
acquisition                                                                           $     --        $     --         $    750
                                                                                      ======          ======           ========
The accompanying notes are an integral part of the consolidated financial
statements.

                                     F - 8
90
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 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.

              The Company's global sales, users' support and services network
              serves all major oil-and gas-producing companies in the world.

b.            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 in the total amount of $
              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
                                                            ==========
F - 9
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PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

The acquired assembled work-force and the acquired technology are being
amortized over their expected useful period, which is estimated at ten years,
customer base and goodwill are being amortized over a twenty years period.

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:
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
                                                           ==========         ==========
c.            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
                                                                         =======
F - 10
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PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

The acquired assembled work-force and the acquired technology are being
amortized over their expected useful period 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 Note 5c).

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 years ended
December 31, 1998 and 1999, assuming that the PTM acquisition had been
consummated as of January 1, 1998 and January 1, 1999:
DECEMBER 31,
                                                                               ------------
                                                                         1998               1999
                                                                         ----               ----
                                                                               IN THOUSANDS,
                                                                           EXCEPT PER SHARE DATA
                                                                           ---------------------
Revenues                                           $ 51,337          $ 56,105
                                                                        ========          ========

                     Net income (loss)                                  $ 4,190           $ (3,867)
                                                                        ========          ========

                     Basic net earnings (loss) per share                $  0.61           $  (0.32)
                                                                        ========          ========

                     Diluted net earnings (loss) per share              $  0.45           $  (0.32)
                                                                        ========          ========
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.

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 ("SFAS")
         52, "Foreign Currency Translation". 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.

                                      F-11
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PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         Total foreign currency translation net income (expenses) amounted to $
         313,000, $ (6,000) and $ (53,000) for the years ended December 31,
         1998, 1999 and 2000, respectively.

         The functional and reporting currency of all 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 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.       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              20 - 33
                        Office furniture and equipment                   6 - 15
                        Motor vehicles                                     15
                        Leasehold improvements                over the term of the lease
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 SFAS No. 121
         "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
         Assets to be Disposed Of". As of December 31, 2000, no impairment
         losses have been identified.

f.       Other assets:

         Other assets include goodwill, developed technology and other
         identified intangibles and are stated at amortized cost. Amortization
         is calculated using the straight-line method over their estimated
         useful life, which ranges from five to twenty years.

                                      F-12
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PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         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 the Company did not recognize
         an impairment loss in relation to intangible assets.

g.       Revenue recognition:

         The Company and its subsidiaries generate revenues mainly from
         licensing the rights to use its software products, from software
         licenses that require significant customization, 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
         support, training, installation and hardware sales. The Company and its
         subsidiaries sell their products primarily through their direct sales
         force.

         The Company and its subsidiaries implement Statement of Position (SOP)
         97-2, "Software Revenue Recognition", 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 and persuasive evidence of an arrangement exists. 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 SOP 98-9,
         "Modification of SOP 97-2, Software Revenue Recognition with Respect to
         Certain Transactions," 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, training and
         installation is based on the price charged 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 does not grant a right
         of return to its customers.

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

         Revenues from training and installation included in multiple element
         arrangement and from consulting services are recognized at the time
         they are rendered.

         Revenues from hardware sales are recognized when persuasive evidence of
         an agreement exists, delivery has occurred, the fee is fixed or
         determinable and collectibility is probable.

                                      F-13
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PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         Revenues from software licenses that require significant customization
         and from seismic data processing, interpretation and reservoir-studies
         services are recognized based on SOP 81-1 "Accounting for Performance
         of Construction Type and Certain Production Type Contracts", 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, 2000 no provision for losses have been recorded.

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

         In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
         101) "Revenue Recognition in Financial Statements" as amended in June
         2000, which summarizes the Staff's views in applying generally accepted
         accounting principles to revenue recognition in financial statements.
         The Company adopted SAB 101 during the fourth quarter of 2000. The
         adoption did not have a significant effect on the Company's
         consolidated results of operations or financial position.

h.       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, net of participation of the Office of the Chief Scientist
         in the Israeli Ministry of Industry and Trade.

         Statement of Financial Accounting Standards ("SFAS") No. 86 "Accounting
         for the Costs of Computer Software to be Sold, Leased or Otherwise
         Marketed", 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 (three to five 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.

                                      F-14
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PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

i.       Income taxes:

         The Company and its subsidiaries accounts for income taxes in
         accordance with Statement of Financial Accounting Standards ("SFAS")
         109, "Accounting for Income Taxes". 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.

j.       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, long term receivables and
         accrued income.

         Cash and cash equivalents 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's investments are financially sound
         and, accordingly, minimal credit risk exists with respect to these
         investments.

         The Company's trade receivables, long-term 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"), the United States, and the Far East.
         The Company performs 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 to date the Company has not incurred significant loss.

         The Company and its subsidiaries have no significant off-balance-sheet
         concentration of credit risk such as foreign exchange contracts,
         option contracts or other foreign hedging arrangements.

                                      F-15
97
k.       Accounting for stock-based compensation:

         The Company has elected to follow Accounting Principles Board Opinion
         No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and
         Interpretation No. 44 "Accounting for Certain Transactions Involving
         Stock Compensation" ("FIN 44") in accounting for its employee stock
         option plans. Under APB 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 123"), are provided in Note 8f.

l.       Severance pay:

         The Company's liability for severance pay 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 its employees, is fully provided by monthly
         deposits with severance pay funds, insurance policies and by an
         accrual.

         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.

m.       Fair value of financial instruments:

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

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

         Long-term trade receivables, long-term bank loans and lease obligations
         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 and lease obligations approximates their fair
         value.

n.       Advertising expenses:

         Advertising expenses are charged to the statements of operations as
         incurred. Advertising expenses for the years ended December 31, 1998,
         1999 and 2000 were $ 419,000, $ 587,000 and $ 536,000, respectively.

                                      F-16
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PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

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

         Basic net earnings (loss) per share is 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 ("SFAS")
         128, "Earnings Per Share".

         The total 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 0, 46,000 and 1,230,590
         for the years ended December 31, 1998, 1999 and 2000, respectively.

p.       Impact of recently issued accounting standards:

         The Financial Accounting Standards Board issued SFAS No. 133 ("SFAS
         133"), "Accounting for Derivative Instruments and Hedging Activities"
         ("SFAS No. 133") in June 1999 and its amendments, statements 137 and
         138, in June 1999 and June 2000, respectively. These statements
         establish accounting and reporting standards requiring that every
         derivative instrument (including certain derivative instruments
         embedded in other contracts) be recorded on the balance sheet as either
         an asset or liability measured at its fair value. These statements also
         require that changes in the derivative's fair value be recognized
         currently in earnings unless specific hedge accounting criteria are
         met. Special accounting for qualifying hedges allows a derivative's
         gains and losses to offset related results on the hedged item in the
         income statement, and requires that a company must formally document,
         designate, and assess the effectiveness of transactions that receive
         hedge accounting. The FASB has issued SFAS No. 137, "Accounting for
         Derivative Instruments and Hedging Activities-Deferral of the Effective
         Date of FASB Statement No. 133". The Statement defers for one year the
         effective date of SFAS No. 133. The rule will apply to all fiscal
         quarters of all fiscal years beginning after June 15, 2000. The Company
         does not expect the impact of this new statement on the Company's
         consolidated balance sheets or results of operations to be material.

q.       Reclassification:

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

                                      F-17
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PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 3:- OTHER RECEIVABLES AND PREPAID EXPENSES
DECEMBER 31,
                                                           ------------
                                                  1999                     2000
                                                  ----                     ----
                                                    U.S. DOLLARS IN THOUSANDS
                                                    -------------------------
Government authorities            $    274                $    495
              Prepaid expenses                       777                   1,350
              Other (1)                            1,392                   2,265
                                                --------                --------
                                                $  2,443                $  4,110
                                                ========                ========
(1)      Includes two loans to the Company's officer, one in March 1999 and the
         second in July 1999. The loans are 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, but repayment has been
         extended to December 31, 2001.

NOTE 4:- PROPERTY AND EQUIPMENT, NET

a.       Comprised as follows:
DECEMBER 31,
                                                           ------------
                                                    1999                 2000
                                                    ----                 ----
                                                    U.S. DOLLARS IN THOUSANDS
                                                    -------------------------
Cost:
         Computers and peripheral equipment          $17,130          $26,180
         Office furniture and equipment                1,925            2,604
         Motor vehicles                                  173               48
         Leasehold improvements                        2,382            3,301
                                                     -------          -------

                                                      21,610           32,133
                                                     -------          -------

         Accumulated depreciation                      9,603           18,815
                                                     -------          -------

         Depreciated cost                            $12,007          $13,318
                                                     =======          =======
b.       Depreciation expenses amounted to $ 2,298,000, $ 3,865,000 and $
         4,746,000 for the years ended December 31, 1998, 1999 and 2000,
         respectively.

c.       The equipment acquired under capital lease in accordance with Statement
         of Financial Accounting Standards ("SFAS") 13, "Accounting for Leases",
         in the amount of $ 1,300,000 is included in property and equipment.
         Depreciation expense relating to this equipment was approximately $
         115,000 and $ 275,000 for the years ended December 31, 1999 and 2000,
         respectively (see also Note 10c).

d.       As for charges, see Note 10e.

                                      F-18
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PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 5: - OTHER ASSETS, NET

a.       Comprised as follows:
DECEMBER 31,
                                                                                            ------------
                                                                                      1999                2000
                                                                                      ----                ----
                                                                                      U.S. DOLLARS IN THOUSANDS
                                                                                      -------------------------
Acquired technology (net of accumulated amortization
                of $ 1,490 in 1999 and $ 3,724 in 2000)                              $  9,805          $ 11,171

              Assembled work-force (net of accumulated amortization
                of $ 644 in 1999 and $ 1,012 in 2000)                                   1,595             2,408

              Computer software development costs (net of
                accumulated amortization of $ 1,545 in 1999 and $ 1,720
                in 2000)                                                                  175                --

              Customer base (net of accumulated amortization of $ 0
                 in 1999 and $ 30 in 2000)                                                 --             2,380

              Goodwill (net of accumulated amortization of $ 527 in
                 1999 and $ 992 in 2000)                                                2,909             9,499

              Other (net of accumulated amortization of $ 0 in 1999 and
                 $ 88 in 2000)                                                            235               147
                                                                                     --------          --------
                                                                                     $ 14,719          $ 25,605
                                                                                     ========          ========
b.       Amortization expenses amounted to $ 2,347,000, $ 3,064,000 and $
         3,360,000 for the years ended December 31, 1998, 1999 and 2000,
         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 ten to twenty 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.

         The expected effect of this change of estimate for the following eight
         years is an increase of approximately $ 200,000, and $0.01 on net
         income and on net earnings per share per annum, respectively.

NOTE 6: - OTHER PAYABLES AND ACCRUED EXPENSES
DECEMBER 31,
                                                                                                   ------------
                                                                                             1999                2000
                                                                                             ----                ----
                                                                                             U.S. DOLLARS IN THOUSANDS
                                                                                             -------------------------
Accrued expenses                                                              $ 2,195            $ 2,493
              Employees and payroll accruals                                                  2,583              2,585
              Royalties                                                                       1,421              1,473
              Employees termination expense                                                      54                136
              Income and other taxes                                                          1,632              2,093
              Other                                                                             907              1,151
                                                                                            -------            -------
                                                                                            $ 8,792            $ 9,931
                                                                                            =======            =======
F-19
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PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 7:- FINANCING ARRANGEMENTS

a.       Short-term loans consist of bank loans. 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, 1999 and 2000, was approximately 6.5% and 7.5% respectively.

b.       Long-term loans 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%.

Aggregate maturities of long-term loans:
DECEMBER 31,
                                                                           ------------
                                                                    1999                 2000
                                                                    ----                 ----
                                                                    U.S. DOLLARS IN THOUSANDS
                                                                    -------------------------
First year (current maturities)         $ 2,639            $ 3,112
                           Second year                               3,145              1,277
                           Third year                                  778                 --
                                                                   -------            -------
                                                                   $ 6,562            $ 4,389
                                                                   =======            =======
c.       In 2000, the Company increased its credit arrangements and now has
         authorized short- and long-term credit lines in the amount of
         approximately $ 20 million (there is no fee for the unused portion of
         the credit facilities).

         This amount includes its bank loans as of December 31, 2000, of
         approximately $ 9 million, and the remaining $ 11 million can be used
         as either short-term or long-term debt.

NOTE 8:- SHARE CAPITAL

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.

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 U.S.

c.       In October 2000, the Company issued 1,500,000 shares to CGG as part of
         the consideration in regarding to the Flagship acquisition (see Note
         1b).

d.       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-20
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NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

e.       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 subsidiary.
         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. Options which are canceled or
         forfeited before expiration become available for future grants.

         Total amount of options available for future grants as of December 31,
         2000 amounted to 394,658.

         The following is a summary of the options granted among the various
         Plans.
YEAR ENDED DECEMBER 31,
                                       -----------------------------------------------------------------------------------------
                                                 1998                            1999                            2000
                                                 ----                            ----                            ----
                                                         WEIGHTED                       WEIGHTED                        WEIGHTED
                                                          AVERAGE                        AVERAGE                        AVERAGE
                                                         EXERCISE                       EXERCISE                        EXERCISE
                                       NUMBER             PRICE        NUMBER             PRICE        NUMBER             PRICE
                                       ------             -----        ------             -----        ------             -----
Outstanding at the
         beginning of the
         year                        1,043,104           $  4.88      1,592,616          $ 5.65      1,603,216           $  5.67
         Granted                       629,000           $  7.00        121,500          $    7        598,350           $     7
         Canceled or
         forfeited                     (79,488)          $  6.31        (96,500)         $    7       (310,624)          $  6.49
         Exercised                          --                --        (14,400)         $    5        (45,786)          $  3.84
                                    ----------           -------     ----------          ------     ----------           -------
         Outstanding at the
         end of the year             1,592,616           $  5.65      1,603,216          $ 5.67      1,845,156           $  6.01
                                    ==========           =======     ==========          ======     ==========           =======

         Exercisable at the
         end of the year               644,430           $  5.15      1,013,064          $ 5.18      1,079,435           $  5.31
                                    ==========           =======     ==========          ======     ==========           =======
The options outstanding as of December 31, 2000, 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                2000         LIFE (YEARS)       PRICE          2000        EXERCISABLE
                             -----                ----         ------------       -----          ----        -----------
$  0.59                63,336            1.33         $ 0.59          63,336        $ 0.59
                           $  2.50                89,190            1.33         $ 2.50          89,190        $ 2.50
                           $  4.00-6.00          462,040            4.05         $ 4.80         461,232        $ 4.80
                           $  7.00             1,230,590            5.99         $ 7.00         465,677        $ 7.00
                                               ---------                         ------         -------        ------

                                               1,845,156                         $ 6.01       1,079,435        $ 5.31
                                               =========                         ======       =========        ======
F-21
103
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         In June 1998, the Company re-priced certain options to an exercise
         price of $ 7, the fair market value at the date of the re-pricing,
         following which the exercise price of the options outstanding as of
         December 31, 2000 was between $ 0.59 and $ 7.

f.       Pro-forma information regarding net income and net earnings 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, 1998, 1999 and 2000,
         respectively: risk-free interest rates of 6% for each year; dividend
         yields of 0% for each year; a volatility factor of the expected market
         price of the Company's Ordinary shares of 0.5-0.561, 0.567 and 0.621; a
         weighted-average expected life of the option of eight years for each
         year.

         The Black and Scholes option valuation model was developed for use in
         estimating the fair value of traded options that have no vesting
         restrictions and are fully transferable. In addition, option valuation
         models require the input of highly subjective assumptions, including
         the expected stock price volatility. Because the Company's employee
         stock options have characteristics significantly different from those
         of traded options, and because changes in the subjective input
         assumptions can materially affect the fair value estimate, in
         management's opinion, the existing models do not necessarily provide a
         reliable single measure of the fair value of its employee stock
         options.

         The weighted average fair value of the options at their dates of grant
         in 1998, 1999 and 2000 was $ 3.99, $ 4.38 and $ 4.82, respectively. All
         options were granted with an exercise price equal to the fair market
         value at the date of grant.

         Pro-forma information under SFAS No. 123 (in thousands, except per
         share data):
YEAR ENDED DECEMBER 31,
                                                                                -----------------------
                                                                      1998              1999               2000
                                                                      ----              ----               ----
Net income (loss) as reported                              $   4,552         $  (3,778)         $   2,359
                                                                    =========         =========          =========
         Pro-forma net income (loss)                                $   3,488         $  (5,035)         $     744
                                                                    =========         =========          =========
         Pro-forma basic net earnings (loss) per share              $    0.51         $   (0.41)         $    0.06
                                                                    =========         =========          =========
         Pro-forma diluted net earnings (loss)
         per share                                                  $    0.37         $   (0.41)         $    0.06
                                                                    =========         =========          =========
Because SFAS No. 123 is applicable only to stock options granted subsequent to
December 31, 1994, its pro-forma effect will not be fully realized until the
year 2004.

                                      F-22
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PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

g.       Warrants:

         In October 1997, the Company issued 720,000 warrants in connection with
         bridge loans received in relation to the acquisition of CogniSeis
         Development Inc. ("CogniSeis"), 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.

         In 1999, as compensation for services provided to the Company in
         connection with the share issuance (see d), 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, 2000, 250,000
         warrants are exercisable.

h.       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.

NOTE 9:- INCOME TAXES

a.       Measurement of taxable income under the Income Tax (Inflationary
         Adjustments) Law, 1985:

         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.

b.       Tax benefits under the Law for the Encouragement of Capital
         Investments, 1959:

         Four investment programs of the Company have been granted the status of
         an "Approved Enterprise". The Company's production facilities in Israel
         have been granted an "Approved Enterprise" status under the above law.
         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 years of tax exempt and five years of reduced tax
         rate (25%).

                                      F-23
105
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         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 three 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, 2000, 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, 2000, the accumulated
         deficit of the Company does not include 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%.

c.       Tax benefits under the Law for the Encouragement of Industry (Taxes),
         1969:

         The Company is an "Industrial Company", as defined by this law 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 patents and other
         intangible property rights as a deduction for tax purposes.

                                      F-24
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PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

d.       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,
                                                                                           ------------
                                                                                     1999              2000
                                                                                     ----              ----
                                                                                   U.S. DOLLARS IN THOUSANDS
                                                                                   -------------------------
Deferred income tax assets:
         Operating loss carryforward                                               $ 1,700           $ 1,200
         Other                                                                          --               300
                                                                                   -------           -------
         Net deferred income tax asset before valuation allowance                    1,700             1,500
         Valuation allowance                                                        (1,700)            (1500)
                                                                                   -------           -------

         Net deferred income tax asset                                             $    --           $    --
                                                                                   =======           =======

         Deferred income tax liabilities:
         Amortization of acquired technology (foreign)                             $   445           $   273
                                                                                   =======           =======
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. During 2000, the Company decreased its valuation allowance by
         approximately $ 200,000.

e.       Net operating losses carryforwards:

         The Company has accumulated losses for tax purposes as of December 31,
         2000, in the amount of approximately $ 6 million, which may be carried
         forward and offset against taxable income in the future for an
         indefinite period.

         Through December 31, 2000, the Company have accumulated losses for tax
         purposes in the amounts of approximately $ 2 million in the U.K.
         subsidiary, $ 1 million in the Australian subsidiary, and $ 0.3 million
         in other subsidiaries. These losses can be carried forward
         indefinitely.

                                      F-25
107
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

f.       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 (in thousands):
YEAR ENDED DECEMBER 31,
                                                                      -----------------------
                                                             1998              1999             2000
                                                             ----              ----             ----
Theoretical tax (benefit) computed
         at the statutory rate of 36%                      $ 1,767           $(1,360)          $ 986

         Increase (decrease) in income
         taxes resulting from:

         Tax adjustment in respect of
         inflation in Israel                                  (309)             (710)            (55)

         Non-deductible expenses                                61               211              72

         Carryforward losses for which a
         valuation allowance was provided                       --                --            (500)

         Losses for which benefits
         are not recognized                                    189             2,878              --

         Prior year income tax (benefit)                        --              (258)             --
         Temporary differences                                  --                --             (32)

         Accrued restructuring from 1997                      (623)             (180)             --

         Amortization of prior year's write-off
         of in-process research and development
         relating to CogniSeis acquisition                    (474)             (474)            (91)

         Amortization of deferred tax liabilities
         recorded upon acquisition of CogniSeis               (255)             (107)             --
                                                           -------           -------           -----
         Taxes on income expense                           $   356           $    --           $ 380
                                                           =======           =======           =====
g.       Income taxes consist of the following:
YEAR ENDED DECEMBER 31,
                                 -----------------------
                            1998          1999          2000
                            ----          ----          ----
                               U.S. DOLLARS IN THOUSANDS
                               -------------------------
Current           $ 558         $ 725         $ 552
         Deferred           (202)         (467)         (172)
         Prior year           --          (258)           --
                           -----         -----         -----
                           $ 356         $  --         $ 380
                           =====         =====         =====
         Domestic          $ 137         $  --         $ 123
         Foreign             219            --           257
                           -----         -----         -----
                           $ 356         $  --         $ 380
                           =====         =====         =====
F-26
108
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

h.       Income (loss) before income taxes from continued operation consists of
         the following:
YEAR ENDED DECEMBER 31,
                                  -----------------------
                           1998            1999             2000
                           ----            ----             ----
                                 U.S. DOLLARS IN THOUSANDS
                                 -------------------------
Domestic        $ 2,412         $(3,255)        $(13,948)
         Foreign           2,496            (523)          16,687
                         -------         -------         --------
                         $ 4,908         $(3,778)        $  2,739
                         =======         =======         ========
NOTE 10:- 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 has paid or accrued royalties in the amounts of $ 400,000,
         $ 100,000 and $ 100,000 for the years ended December 31, 1998, 1999 and
         2000, respectively, relating to the repayment of such grants.

         As of December 31, 2000, the Company had a contingent obligation to pay
         royalties in the amount of approximately $ 603,000.

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, 1998, 1999 and 2000.

         The Company has paid or accrued royalties in the amounts of $ 49,000,
         $0 and $0 for the years ended December 31, 1998, 1999 and 2000,
         respectively, relating to the repayment of such grants.

         As of December 31, 2000, the Company had a contingent obligation to pay
         royalties in the amount of approximately $ 418,000.

                                      F-27
109
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

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 "Accounting for Leases".

         Future minimum rental commitments under non-cancelable operating and
         capital leases as of December 31, 2000, are as follows (in thousands):
OPERATING         CAPITAL
                     YEAR ENDED DECEMBER 31,                      LEASES          LEASES
                                                                  ------          ------
2001                                                     $  2,821        $ 600
         2002                                                        2,899          267
         2003                                                        2,925           --
         2004                                                        2,603           --
         2005 and thereafter                                         6,032           --
                                                                  --------         ----

         Total minimum lease payments                             $ 17,281          867
                                                                  ========

         Less - amount representing interest                                       (115)
                                                                                   ----

         Present value of capital lease obligation                                  752
         Less - current portion                                                     546
                                                                                   ----
         Long-term portion                                                        $ 206
                                                                                   ====
Total rent expenses for the years ended December 31, 1998, 1999 and
         2000, amounted to $ 1,753,000, $ 2,020,000 and $ 2,930,000,
         respectively.

d.       Legal:

         Geophysical Micro Computer Application (international) Ltd. ("GMA") is
         appealing a final judgment entered by the trial court in the matter of
         Paradigm Geophysical Micro Computer Application (international) Ltd. On
         December 11, 1997, the Company filed a lawsuit for a declaratory
         judgment to determine whether it has any obligation to 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

                                      F-28
110
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         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
         above-referenced appeal, which has not yet been heard by the court,
         although briefing has been complete.

         The Company's management and the legal advisers of the Company believe
         that the outcome of the above claim will not have an adverse effect on
         the Company's consolidated financial statements. Accordingly, no
         provision has been recorded in the consolidated financial statements.

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
         loans, and credit lines in favor of two individual banks.

2.       All financed equipment is pledged in favor of the related financial
         institution.

                                      F-29
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PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 11:- 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.

         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 assets as presented is 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 are in accordance with the
         requirements of Statement of Financial Accounting Standards ("SFAS")
         131 "Disclosure about Segments of an Enterprise and Related
         Information".

         Segment revenues, cost of revenues, depreciation, assets and other
         data are as follows (in thousands):
YEAR ENDED DECEMBER 31, 2000
                                                                           ----------------------------
                                                         PRODUCTS        SERVICES       RECONCILIATION       CONSOLIDATED
                                                         --------        --------       --------------       ------------
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
                                                         =========       =========         =========          =========
F-30
112
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
                                                             ----------------------------------------------------------------
                                                              PRODUCTS        SERVICES       RECONCILIATION      CONSOLIDATED
                                                             ---------        ---------      --------------      ------------
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
                                                             =========        =========        =========           =========
YEAR ENDED DECEMBER 31, 1998
                                                                ----------------------------------------------------------------
                                                                PRODUCTS         SERVICES       RECONCILIATION      CONSOLIDATED
                                                                --------         --------       --------------      ------------
Revenues                                      $38,074          $ 7,288         $        -         $  45,362
                  Cost of revenues                                8,559            3,107                  -            11,666
                  Depreciation                                      385              972                941             2,298
                                                                -------          -------         ----------         ---------

                  Segment profit                                $29,130          $ 3,209         $     (941)        $  31,398
                                                                =======          =======         ==========         =========
F-31
113
PARADIGM GEOPHYSICAL LTD. AND ITS SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Segments assets are as follows (in thousands):
DECEMBER 31,
                                  -----------------------------
                                   1998       1999       2000
                                  -------    -------    -------
Products                          $ 1,584    $ 2,264    $ 2,622
Services                            4,284      6,692      8,520
   Other                            3,391      3,051      2,176
                                  -------    -------    -------
Total segment assets              $ 9,259    $12,007    $13,318
                                  =======    =======    =======
b.       Geographic operational information:

Net revenues attributed to countries based on the location of the end customers
are as follows (in thousands):
YEAR ENDED DECEMBER 31,
                                 -------------------------------------------
                                   1998             1999             2000
                                 --------         --------         ---------
North and South America          $21,721          $24,219          $32,104
EMEA                              12,962           14,604           19,240
Far East                          10,679           15,683           11,954
                                 -------          -------          -------

                                 $45,362          $54,506          $63,298
                                 =======          =======          =======
Long-lived assets are as follows (in thousands):
DECEMBER 31,
                              --------------------------------------
                                1998           1999           2000
                              --------       --------       --------
North and South America       $  7,858       $  7,932       $  7,232
EMEA                             1,709          1,704         17,270
Far East                         1,003          1,074          1,029
Israel                           8,794         16,016         13,392
                              --------       --------       --------
                              $ 19,364       $ 26,726       $ 38,923
                              ========       ========       ========
c.       Major customers:

The Company had one major customer, which accounted for approximately 0%, 12%
and 3% of the Company's revenues, for the years ended December 31, 1998, 1999
and 2000, respectively.

                                      F-32
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PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 12:- SELECTED STATEMENTS OF OPERATIONS DATA

a.   Non recurring expenses (in thousands):
YEAR ENDED DECEMBER 31,
                                                  -----------------------------
                                                   1998       1999        2000
                                                  ------    --------    -------
Lease termination costs                           $   --    $    763    $    --
Impairment of development technology                  --       1,595         --
Other                                                 --         347         --
                                                  ------    --------    -------
                                                  $   --    $  2,705    $    --
                                                  ======    ========    =======

b.   The following table sets forth the reconciliation of basic and diluted net
     earnings (loss) per share (in thousands except share and per share data):

Numerator:

Net earnings (loss) to shareholders of
  Ordinary shares                                 $4,552    $ (3,778)   $ 2,359
                                                  ======    ========    =======
Numerator for diluted net earnings (loss)
  per share -
Net earning (loss) available to
  shareholders of Ordinary shares                 $4,552    $ (3,778)   $ 2,359
                                                  ======    ========    =======

Denominator:

Weighted average number of Ordinary
  shares (denominator for basic net
  earnings(loss) per share)                        6,850      12,205     13,504
                                                  ------    --------    -------

Effect of securities:

Employee stock options                               145     *)   --        225
Warrants issued to third parties                     196     *)   --         60
Convertible Preferred shares for the
  period outstanding prior to conversion
  into Ordinary shares                             2,115     *)   --         --
                                                  ------    --------    -------
Dilutive potential of Ordinary shares              2,456     *)   --       285
                                                  ------    --------    -------
Denominator for diluted net earnings
  (loss) per share -                               9,306      12,205     13,789
                                                  ======    ========    =======
*)       Anti-dilutive.

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115
PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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NOTE 13:- SUBSEQUENT EVENTS (UNAUDITED)

a.       In April 2001, the Company acquired all the rights of a product line
         and related customer services from Oilfield Systems Limited.

b.       In May 2001, the Company acquired Sysdrill Limited, a Scottish company,
         for a cash consideration and issuance of the Company's Ordinary shares.
         The acquired company provides software and service of drilling
         engineering and well operations solutions.

c.       In May 2001, the Company entered into a capital expenditure commitment
         for computer hardware of $900,000.

                            - - - - - - - - - - - - -

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116

                                 EXHIBIT INDEX

    EXHIBIT  NO.                         EXHIBIT                            PAGE

         1.2        Amended and Restated Articles of Association.

         4.18       Securities Purchase Agreement, dated October 4, 2000, 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.

         8.1        Subsidiaries of Paradigm Geophysical Ltd.

        10.1        Consent of Kost Forer and Gabbay.