<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, 1999

                                       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)

                                     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.

                              TITLE OF EACH CLASS

                  ORDINARY SHARES, PAR VALUE NIS 0.5 PER SHARE

              SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION
                     PURSUANT TO SECTION 15(d) OF THE ACT.

                              TITLE OF EACH CLASS

                  ORDINARY SHARES, PAR VALUE NIS 0.5 PER SHARE

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

                           13,026,336 Ordinary Shares

Indicate by checkmark 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 proceeding 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 checkmark which financial statement item the registrant has elected
to follow:

                   [ ] Item 17                    [X] Item 18


<PAGE>   2


TABLE OF CONTENTS

<TABLE>
<CAPTION>
       ITEM                                                                                                      PAGE
       ----                                                                                                      ----
<S>                                                                                                              <C>
ITEM 1 - DESCRIPTION OF BUSINESS........................................................................................3

ITEM 2 - DESCRIPTION OF PROPERTY.......................................................................................15

ITEM 3 - LEGAL PROCEEDINGS.............................................................................................15

ITEM 4 - CONTROL OF REGISTRANT.........................................................................................17

ITEM 5 - NATURE OF TRADING MARKET......................................................................................19

ITEM 6 - EXCHANGE CONTROL REGULATIONS..................................................................................20

ITEM 7 - TAXATION......................................................................................................20

ITEM 8 - SELECTED FINANCIAL DATA.......................................................................................32

ITEM 9 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................36

ITEM 9A - Quantitative And Qualitative Disclosure About Market Risk....................................................51

ITEM 10 - DIRECTORS AND OFFICERS OF REGISTRANT.........................................................................52

ITEM 11 - COMPENSATION OF OFFICERS AND DIRECTORS.......................................................................62

ITEM 12 - OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES...............................................63

ITEM 13 - INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS...............................................................65

ITEM 14 - DESCRIPTION OF SECURITIES TO BE REGISTERED...................................................................66

ITEM 15 - DEFAULTS UPON SENIOR SECURITIES..............................................................................66

ITEM 16 - CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES AND USE OF PROCEEDS..................66

ITEM 17 - FINANCIAL STATEMENTS.........................................................................................66

ITEM 18 - FINANCIAL STATEMENTS.........................................................................................66

ITEM 19 - FINANCIAL STATEMENTS AND EXHIBITS...........................................................................F-1
</TABLE>




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<PAGE>   3



ITEM 1 - DESCRIPTION OF BUSINESS

GENERAL

Paradigm Geophysical Ltd. ( "Paradigm" , "the Company", "we", "our", "us") is
one of the world's leading providers of geoscience knowledge solutions for the
oil and gas industry. The Company provides integrated, scientifically advanced
productivity solutions for reservoir description with its leading edge products
and services which are based on innovative applications of science and
technology.

As of May 1, 2000, the Company has 15 offices in 13 countries employing 374
people and provides products and services to a broad range of customers
including the major and national oil companies and independent oil and gas
exploration and production companies and oilfield service companies.

In 1993, Paradigm introduced time to depth processing of seismic data. Today,
Paradigm provides a full set of geoscience tools, covering seismic data
processing and inversion, visualization and model building in both the time and
depth domains, mapping, geological analysis and reservoir characterization. In
1999, Paradigm introduced POROS(TM) its reservoir characterization product
suite, which bridges the gap between Geoscience and reservoir engineering. This
product helps professionals build geologic models from seismic data attributes,
well-log and geological data, using a shared earth model for reservoir property
description.

In March 1999, Paradigm acquired the net assets of the Petroleum Technology
Division of Mincom Limited ("PTM"), an Australian entity for $8.4 million.
PTM's flagship product Geolog(TM) is a complete set of well information
software tools for log analysis and petrophysics which is widely used in the
oil and gas exploration and production industry.

The Company's principal executive offices are located at Shenkar St. 9, Gav Yam
Center No.3, Herzlia 46120, Israel and its telephone number is + 972-9-9709300.
The Company has sales, customer support and service offices in Houston, London,
Aberdeen, Bahrain, Calgary, Moscow, Caracas, Buenos Aires, Rio de Janeiro,
Perth, Brisbane, Beijing, Jakarta and Singapore. The Company also has research
and development facilities in Herzlia, Houston, Calgary, Brisbane and Moscow.
Paradigm's web site address is www.paradigmgeo.com The Company's Ordinary Shares
are listed on the NASDAQ National Market under the symbol PGEO.


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<PAGE>   4

BUSINESS STRATEGY

In 1999, the Company made the strategic shift from concentrating on seismic
data analysis to positioning itself as the "The Geoscience Knowledge Company".
This shift expands the Company's offerings to include analysis and integration
of non-seismic data relevant to the characterization, management and simulation
of oil and gas reservoirs (hereinafter referred to as "reservoir management
solutions").
The Company's business strategy is to continue to provide scientifically
advanced productivity based solutions for reservoir management solutions by:
(i) focusing on research and development coupled with system integration and
workflows in response to customer's needs, evolving changes in the market and
new technologies;
(ii) expanding the products and services offered throughout our global network
of offices while providing responsive customer support;.
(iii) acquiring complementary businesses that add key technologies or market
presence and enhance existing products and services; and
(iv) maintaining a work environment that encourages new ideas and professional
achievement, that is driven by the integrity, creativity, expertise and
determination of our staff to work closely with one another and with our
customers.

OPERATIONS

The Company operates in a single industry, the oil and gas industry, as a
provider of software licenses and geoscience analysis services which facilitate
the exploration for, and development and production of, oil and gas resources.
In choosing to market both products and geoscience services, Paradigm's
management has chosen to diversify revenue sources to balance risks for
seasonal and regional variability. Maintenance and support revenues for the
installed software base also provide a predictable revenue stream.

PRODUCTS

The Company's revenues are derived mainly from licensing the rights to use its
software products and related maintenance and support contracts. In addition,
in 1999, the Company generated significant revenues from the sale of a turnkey
data processing center (hardware and software) for seismic data processing and
interpretation, including post-installation services, staff training, workflow
and technology transfer consulting and maintenance and support. Revenues from
this turnkey sale accounted for 12% of total revenues from products and
services for the year.

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The following table sets forth product sales in the major geographical regions
in which the Company operates for the fiscal years ended December 31, 1997,
1998 and 1999

* REVENUES-PRODUCTS

<TABLE>
<CAPTION>
                      1997           1998          1999
                            (DOLLARS IN THOUSANDS)
<S>               <C>             <C>           <C>
REGION
North and South
    America          13,018         18,893        16,582
Europe, Africa,
  Middle East         2,966          9,116        11,881
Far East and
     China            3,995         10,065        14,560
                 --------------------------------------------
     TOTAL           19,979         38,074        43,023
                 --------------------------------------------
</TABLE>

SERVICES

Paradigm operates ten service centers worldwide offering a range of seismic
data analysis, processing and consultancy services. Each center is equipped
with powerful hardware, functional software and skilled individuals with many
years of experience in processing, inversion, and interpretation of seismic
data and well data. The Company's philosophy in services is to cover the entire
scope of seismic data analysis from field tapes to a final earth model and an
earth image in depth.

The following table sets forth service revenues in the major geographical
regions in which the Company operates for the fiscal years ended December 31,
1997, 1998 and 1999.

* REVENUES-SERVICES

<TABLE>
<CAPTION>
                      1997           1998          1999
                           (DOLLARS IN THOUSANDS)
<S>               <C>             <C>           <C>
REGION
North and South
    America           1,694             2,828      7,637
Europe, Africa,
  Middle East         2,549             3,846      2,723
Far East and
     China             643                614      1,123
                 --------------------------------------------
     TOTAL            4,886             7,288     11,483
                 --------------------------------------------
</TABLE>

--------------------------------------------------------------------------------
* The CogniSeis acquisition occurred in October 1997 and the PTM acquisition in
March 1999. Revenues of CogniSeis and of PTM have been included in the results
of Paradigm from their respective acquisition dates. Therefore, historical
revenues do not provide the basis to assess future revenues of the Company or
what the revenues of Paradigm, CogniSeis and PTM would have been had the
Combined Businesses been operated on an integrated basis during all of the
periods presented.


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PRODUCTS

Geoscientists acquire a vast quantity of seismic signals, well-logs, geological
and other forms of data from an oil and gas prospect  to secure  information
about the earth's subsurface and its oil and gas content. Paradigm systems
process these data and provide innovative and dynamic ways to visualize and
model the resultant images. These systems

1.)   provide insight into the geologic formations that trap oil and gas.

2.)   reduce the risk in locating and drilling for economical hydrocarbon
      reservoirs.

3.)   enable optimization of the life cycle product of oil and gas assets.

Paradigm currently offers three major software suites, ECHOS(TM) (for data
analysis and inversion), ERGOS(TM) (for data interpretation and 3D Earth
modeling), and POROS(TM) (for reservoir characterization and shortly
reservoir simulation). Scalable across the full range of computers and computer
operating systems in use in the oil and gas industry, these open design suites
include software products dedicated to performing all of the tasks in seismic
data analysis and interpretation, and increasingly to incorporate and integrate
non-seismic reservoir related data. Through interactive information sharing
between the various geoscientists working on the oil and gas asset, the use of
Paradigm's product suites enables the development of more and better
geoscience-based analysis and knowledge from the available data in
significantly less time.

ECHOS  - THE SEISMIC DATA PROCESSING AND INVERSION SUITE

ECHOS is a fully integrated suite for seismic processing for time to depth and
seismic reflection signal strength inversion, applicable to every geological
environment worldwide. It enables the asset team to move projects from field
tapes to an earth model and seismic image in depth and the identification of
oil and gas bodies, all in a unified computing and analysis environment. By
sharing common data structures, file systems, applications and standard
interfaces, geoscientists generate more meaningful, reliable and direct
reservoir knowledge. Streamlined workflow, rather than serial manipulations of
data, reduce setup and idle time and eliminate redundancies in the process. The
suite comprises three powerful tools which provide: (i) seismic data processing
(FOCUS(R));(ii) velocity model building and depth imaging (GEODEPTH(R)
POWER(TM)); and (iii) seismic reflection signal strength inversion (PROBE(TM)).

FOCUS - SEISMIC DATA PROCESSING

Generating high-resolution seismic data sections and volumes is a prerequisite
for most exploration projects. FOCUS is a 2D and 3D


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seismic processing system for exploration geophysicists in the traditional time
domain. As seismic exploration objectives become more demanding, FOCUS readily
adapts to meet these demands. It accommodates new processing techniques and
integrates advanced geophysical applications for field, desktop, or production
processing. The popularity of the system is largely due to its broad scope of
geophysical applications, system maturity, stability, openness, and versatility
of its programming environment.

GEODEPTH POWER - VELOCITY MODEL BUILDING AND DEPTH IMAGING

GEODEPTH POWER is used by many of the world's leading oil and gas exploration
firms for obtaining accurate depth imaging results. This cost-effective system
integrates velocity analysis, time-to-depth conversion, model building, model
verification, and depth migration to resolve the challenging seismic data
imaging and positioning problems. Solutions in 3D tomography and 3D prestack
depth migration are complemented with productivity solutions in Solid Model
Building and horizon-based velocity analysis. The system provides a full range
of accurate 2D and 3D depth inversion and imaging tools for any size project of
any geological complexity.

PROBE - SEISMIC REFLECTION SIGNAL STRENGTH INVERSION AND ANALYSIS

Oil and gas field exploration and development requires the accurate prediction
of rock composition and rock properties including their capacity to hold
hydrocarbon fluids and the identification of hydrocarbon fluid bodies. The
PROBE system provides the geoscientist with a set of powerful tools and fully
interactive workflow for detecting the presence of hydrocarbon fluids using
seismic reflection signal strength inversion technology. By incorporating
information from velocity models, PROBE results (obtained from the inversion of
seismic amplitude data) have been demonstrated to be more reliable than
conventional methods in detecting the presence of hydrocarbons. PROBE
effectively integrates all of the tasks (inversion, analysis, and modeling)
involved in seismic reflection signal strength inversion studies into one
unified environment to greatly enhance the productivity of geoscientists.

ERGOS - THE INTERPRETATION SUITE

ERGOS is a comprehensive and integrated software suite dedicated to geoscience
data interpretation, model building, and mapping. The suite incorporates both
voxel-based and solid-based modeling technologies in order to better understand
and model the structural and stratigraphic properties of the subsurface. A
shared earth model assures data integrity and accuracy, allowing concurrent
application of solutions for maximum productivity and detailed insights. The
suite consists of five products which provide for: (i) seismic data
interpretation (SEISX(TM)); (ii) depth conversion and map-based geostatistics
(EARTHMODEL / EXPLORER(TM)); (iii) mapping


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and solid model building (SOLIDGEO(TM)); (iv) volume-based visualization and
interpretation (VOXELGEO*); and (v) structural modeling, restoration and
balancing (GEOSEC(TM));

SEISX - SEISMIC DATA INTERPRETATION

SEISX effectively integrates multiple 2D and 3D seismic data surveys with well
log data providing a high performance interpretation and mapping solution.
SEISX is an industry standard interpretation solution recognized for its
efficient data loading, interactive line tie analysis and grid balancing,
integration of supporting well log aplications, and its elegance in
accomodating multiple 2D and 3D surveys.

EARTHMODEL/EXPLORER -  TIME-TO DEPTH CONVERSION

EARTHMODEL/EXPLORER provides time-to-depth conversion and poststack imaging of
seismic data, guiding the user through the important tasks of data input, data
quality control, problem analysis, velocity mapping, depth conversion and
uncertainty assessment. EARTHMODEL/EXPLORER includes a variety of velocity
mapping approaches to accommodate the velocity dependency on depth, age
lithology, or combinations of these dependencies. EARTHMODEL/EXPLORER includes
geostatistical methods for generating velocity maps with sparse data as well as
simulation and stochastic modeling methods for assessing the uncertainty of
depth estimates.

SOLIDGEO - MAPPING AND  SOLID MODEL BUILDING

SOLIDGEO provides geoscientists with the latest and most advanced technologies
to accurately model and map the depositional and structural features of the
subsurface. SOLIDGEO produces geometrically-coherent models composed of closed
formation solids. It is engineered to handle multi-valued surfaces, closed-body
definitions, volumetric calculations, and property assignments while
maintaining surface connectivity during the model process. Field-tested on the
most complex models, SOLIDGEO integrates model data and accelerates the process
of building and refining models of the earth's subsurface.

VOXELGEO  - VOLUME-BASED  VISUALIZATION AND INTERPRETATION

VOXELGEO is the industry leading volume-based visualization and interpretation
solution engineered to reveal both structural complexity and stratigraphic
detail in a true three-dimensional setting. By combining Voxel-based technology
with unique rendering capabilities, VOXELGEO gives the seismic interpreter and
reservoir engineer with a direct pathway to the interior of the

--------------------------------------------------------------------------------
* VoxelGeo(R) is the registered trademark of Vital Images, Inc., and is licensed
exclusively to Paradigm for use in sub-surface visualization products.


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<PAGE>   9

seismic volume. VOXELGEO's opacity and subvolume detection functions allow the
geoscientist to detect, isolate, and extract 3D reservoir subvolumes. This
early analysis of large amounts of seismic data provides insights into
potential drilling locations within a time frame that is unachievable by
conventional interpretation methods.

GEOSEC - STRUCTURAL MODELING, RESTORATION, AND BALANCING

GEOSEC provides interpreters and structural geologists with the interactive
capabilities to construct, restore, and validate geologic cross sections and 3D
structural models. GEOSEC generates a range of permissible interpretation
solutions that can be used to refine velocity models leading to improved
seismic images of the subsurface. Geologic restoration and balancing quantifies
structural and basin evolution, hydrocarbon maturation, migration pathways, and
trap volumes, thereby quantifying and reducing risk. 3D GEOSEC functionalities
operate directly on the Solid Model Builder, negating the need for model export
or rebuilding.

POROS - RESERVOIR CHARACTERIZATION AND MANAGEMENT

POROS is a software suite dedicated to Rock and Fluid Characterization and
Production Management for oil and gas reservoirs under production. The suite
currently consists of two products which provide for: (i) well data management
(GEOLOG); and (ii) full workflow reservoir characterization (VANGUARD(TM)); In
the future, the POROS suite will include a Reservoir Simulation module
currently under production.

GEOLOG - WELL DATA MANAGEMENT

GEOLOG is one of the world's leading well data management, analysis, modeling
and petrophysical packages. It incorporates this full suite of log capabilities
in an open environment, providing the infrastructure to service other Paradigm
and client applications.

VANGUARD - WORKFLOW RESERVOIR CHARACTERIZATION

VANGUARD is a full workflow reservoir characterization package using seismic
data and well log data to derive reservoir parameters. It provides full 3D
interactive functionality for building background models; inverting seismic
reflectivities; and editing, analyzing, and calibrating well log data. These
micro-models can be converted to rock properties and used for geological
interpretation and reservoir characterization.

WEB-BASED-SOLUTIONS

In May 2000, the Company announced the launch of web-based delivery of its
geoscience solutions - ITS E-GEOSCIENCE(TM) SOLUTIONS. e-Geoscience applications
are planned to provide considerably easier remote access to applications and
data, and expand remote

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collaborative work between disbursed members of expert analysis teams.

Paradigm plans a series of releases of its web-enabled versions most of which
are expected to be delivered by the middle of 2001 which will include the
modules in the ECHOS, ERGOS and POROS product suites.

CUSTOMER SUPPORT

The Company employs geoscientists and computer scientists to provide
installation and training, online product 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. The Company has initiated on-line discussion
forums.

The Company provides its 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 the Company's customers have
entered into post-contract maintenance and support agreements, which entitle
them to receive all product updates as well as professional and technical
support.

GEOSCIENCE SERVICES

Paradigm's philosophy in services is to embrace the entire scope of seismic
data analysis from field tapes to a final earth model and an earth image in
depth.

Paradigm offers its own specialist geoscientists and computing resources in
partnership with customer's expert teams.

Paradigm service centers offer a full range of geophysical processing services
for seismic data including data processing, structural inversion and attribute
analysis.

Selected service center's offer interpretation, mapping and modeling services
and a complete formation evaluation service - from the analysis and
interpretation of a single pay-zone in an individual well to field-wide,
multi-well projects.

Through skilled data processing, velocity model buildings, depth imaging,
seismic inversion, and interpretation of seismic data and well data, the
geoscience services group aims to help clients get more out of their data.

The Company's planned e-Geoscience applications will provide considerably
easier remote access to applications and data, and expand remote collaborative
work between disbursed members of analysis teams. Paradigm has already
delivered remote-access


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model building for depth-inversion which is in use in the geoscience services
group. This enables collaborative work between the clients and the geoscience
services group, with data and applications located at the Paradigm service
centers. Paradigm operates ten service centers worldwide.

MARKETING AND SALES

The Company markets and sells its products and services to the international
oil and gas industry through its local sales offices and uses sales agents and
representatives in a small number of markets where Paradigm regional and local
sales offices do not operate. The Company's local offices are staffed with a
sales force, technical experts and operating managers. Customers include the
major international oil and gas companies, state-owned oil and gas companies,
independent oil and gas producers and oilfield service companies.

In implementing its sales and marketing strategy, the Company seeks to maintain
and enhance its local presence in its markets by acquiring significant in-house
knowledge of local geology and markets.

As part of its sales and marketing strategy, Paradigm conducts educational
workshops and seminars in several locations worldwide, aimed at geoscientists,
in order to both demonstrate the application of its products and to upgrade the
end users skills and efficiency in the use of Paradigm products.

The Company participates in regional trade shows showcasing its technology at
customized demonstration booths. Company staff present technical papers to
attendees at the technical conferences that sponsor these trade shows. Paradigm
participates in all major industry events worldwide.

Print advertising is placed on a regular basis in trade and technical magazines
that target the Company's customers.

RESEARCH AND DEVELOPMENT

The market for Paradigm's products and services is characterized by changing
technology. As a result, Paradigm's success is dependent upon its ability to
develop or acquire new products and services on a cost-effective basis and to
introduce them into the marketplace in a timely manner. The Company intends to
continue committing substantial financial resources and effort to the
development of new products and services. Research and development expenditure
in 1999 totaled $9,306,000 or 17.1% of revenues, compared with $7,660,000 in
1998 at 16.9% of revenues and $4,728,000 in 1997 at 19% of revenues.

In 1999, the Company expanded its research and development activities in
Moscow. Following the acquisition of PTM in March 1999, the PTM
Australian-based research and development team was integrated into the
worldwide research and development team.

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The Company also made the decision to develop new reservoir simulation products
based on next generation technology.

The Company expects to continue this global approach to product development,
utilizing specialized expertise available in each location. Paradigm views this
"global" nature of its research and development efforts as an intrinsic
strength and is expending management efforts to integrate and manage this
global product development system. Additional research and development centers
may be established in the future, continuing, where feasible, the policy of
"expertise-specific" rather than "product-specific" centers.

Over the years, the Company has made a number of technological advances,
including the development of key technologies:

  (a)       The inversion to depth of traditional time-based seismic data;

  (b)       Volume based interpretation;

  (c)       3D Commercial Pre-stack Depth Migration;

  (d)       Solid Model Building and Mapping; and

  (e)       The integrated common earth model for all geoscience applications
            for oil and gas prospect exploration and evaluation.

These technologies have been utilized in the Company's operations as a provider
of software licenses and geophysical services.

Part of the Company's research and development activities have been funded by
grants from the Office of the Chief Scientist of the Government of Israel
("OCS"). Elements of the Company's products developed by Paradigm (i.e. those
products not acquired) are covered to some extent under the royalty agreements
with the OCS. The Company has not applied for research grants from the OCS
since July 1996. The decision to apply for research grants from the OCS is
reviewed annually in light of the Company's research and development program
and the terms and conditions of such grants. There are continuing royalty
obligations to the OCS. (See note 10(a) of the Financial Statements). The
Company has expensed royalties in the amounts of $402,000, $400,000 and
$100,000 for the years ended December 31, 1997, 1998 and 1999, respectively. At
December 31, 1999, the Company had a contingent liability to pay royalties
totaling $818,000.

INTELLECTUAL PROPERTY

The Company believes its patents, trademarks and other intellectual property
rights are an important factor in maintaining its technological advantage,
although no one patent is considered essential to its success. Typically, the
Company will seek to protect its intellectual technology in all jurisdictions
where the Company believes the cost of such protection is warranted. While
certain key technologies have been patented by the Company, it has not


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patented all of its proprietary technology even where regarded as patentable.
In addition to patents, in many instances the Company protects its trade
secrets through confidentiality agreements with its employees and its
customers. The Company also relies, in part, on certain technology, which it
licenses from third parties, including software which is integrated with
Company-developed software and used in its products and geophysical services.

COMPETITION

 The businesses in which the Company engages are competitive. Some of the
Company's competitors are divisions or subsidiaries of companies that are
larger and have greater financial and other resources and more extensive and
diversified operations than the Company. The Company believes that its major
competitors, worldwide, for software products are: GeoQuest, a division of
Schlumberger Ltd. and Landmark Graphics Corporation, a subsidiary of Haliburton
Company. Its principal competitors in the geophysical services business
include, among others, Geco-Prakla, a division of Schlumberger Ltd., Western
Geophysical, a division of Western Atlas Inc. a subsidiary of Baker Hughes
Inc., Compagnie Generale de Geophysique and Veritas DGC. The Company competes
in different product and services to various degrees on the basis of price,
technical performance, availability, quality and technical support. The
Company's ability to compete successfully depends on elements both within and
outside of its control, including successful and timely development of new
products and services, performance and quality, customer service, pricing,
industry trends and general economic trends. The Company also faces competition
from a large number of much smaller competitors that provide products that
serve niche portions of the Company's markets and from small service bureaus
providing geophysical services. In addition, several of the major oil companies
develop software internally and operate geophysical data processing centers.

RELIANCE ON THE OIL AND GAS INDUSTRY

The Company's business and operations are substantially dependent upon the
condition of the global oil and gas industry. Future downturns in the oil and
gas industry, or in the oilfield services business, may have a material adverse
effect on the financial position or results of operations of the Company.
The oil and gas industry is highly cyclical and has been subject to significant
economic downturns 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;


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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.

INTERNATIONAL OPERATIONS

The Company operates 15 offices in 13 countries. The Company's business is
subject to various risks beyond its control, such as instability of foreign
economies and governments, currency fluctuations, overlap of different tax
structures and changes in laws and policies affecting trade and investment
transactions.

OPERATIONS IN ISRAEL

The Company is incorporated under the laws of, and its principal offices are
located in, the State of Israel. The Company is directly influenced by the
political, economic and military conditions affecting Israel such as
hostilities with neighboring countries and risks of cessation of trade and
disruption of operations.

The Company has and will benefit from certain Israeli government programs and
tax benefits, particularly as a result of the "Approved Enterprise" status of
the Company's Israeli operations and receipt of research and development grants
from the OCS. To be eligible for these programs and tax benefits, the Company
must continue to meet certain conditions. If the Company fails to meet such
conditions in the future, it could be required to refund all tax benefits
previously received. There can be no assurance that such programs and tax
benefits will be continued at their current levels, or otherwise. The
termination or reduction of such programs and tax benefits could have a
material adverse effect on the Company's business, operating results and
financial condition.

EMPLOYEES

As of May 1, 2000, Paradigm employed a total of 374 persons, an increase of 20
persons over a one-year period. As of May 1, 2000, Paradigm employees included
108 in research and development, 85 in marketing and sales, 70 in maintenance
and support, 43 in geophysical services, and 68 in executive management and
administration. The Company employed 104 persons in the US, with the remaining
270 located in its other offices worldwide.

With respect to the Company's operations, competition for appropriately
qualified and experienced Geoscience and software personnel is intense and
there are a limited number of professionals with the level of knowledge and
experience required by the Company.

The Company's future success substantially depends upon its continuing ability
to attract and retain highly qualified managerial, technical, sales and
marketing personnel.


                                       14
<PAGE>   15

The Company has to comply with various labor and immigration laws throughout
the world, including laws and regulations in the United States, Canada, Latin
America, Europe, Russia, Israel, China, the Far East and Australia. To date,
compliance with such laws has not been a material burden for the Company. As
the number of employees increases over time, compliance with such regulations
could become more burdensome.

The Company generally provides its employees with benefits and working
conditions above the required minimums. None of the Company's employees is
currently represented by a labor union. The Company has not, to date,
experienced any work stoppages.

ITEM 2 - DESCRIPTION OF PROPERTY

The Company does not own any real property.

Paradigm's corporate headquarters, main research and development facility and
support center is in Herzlia, Israel, and consists of premises occupying 30,600
square feet at an annual rent of $ 16 per square foot subject to adjustment.
The lease expires in June 2009.

The Company currently has eleven sales and service centers leased worldwide.
These are situated in Houston, Slough, Aberdeen, Bahrain, Calgary, Moscow,
Beijing, Perth, Jakarta, Caracas and Buenos Aries. The Company has research and
development facilities in three of these centers - Houston, Moscow and Calgary
- and a fourth research and development facility in Brisbane.

The leased premises in use by the Company aggregate approximately 111,000
square feet and are generally suitable and adequate for the requirements of the
Company. The Company is currently negotiating a new lease in the UK to replace
the premises it currently occupies in Slough.

ITEM 3 - LEGAL PROCEEDINGS

The Company is the plaintiff/appellee in the matter of Geophysical Micro
Computer Applications (International) Ltd. v. Paradigm Geophysical Ltd., Cause
No. 05-98-02016-CV in the Fifth Circuit Court of Appeals, Dallas, Texas.
Geophysical Micro Computer Applications (Int'l) Ltd. ("GMA") is appealing a
final judgment entered by the trial court in the matter of Paradigm Geophysical
Ltd. v. Geophysical Micro Computer Applications (International) Ltd., Cause No.
97-11010, in the 134th Judicial District Court of Dallas County, Texas. On
December 11, 1997, the Company filed suit for a declaratory judgment to
determine whether it has any


                                       15
<PAGE>   16

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, 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 takes nothing on its
counterclaim. On December 7, 1998, GMA filed the above-referenced appeal which
has not yet been considered by the court although briefing is complete.

On December 10, 1999, the Company's Canadian subsidiary (the "plaintiffs")
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, the plaintiffs applied for and obtained an Anton Pillar Order on
December 10, 1999, seizing certain property from the defendants and preserving
it pending a trial of the action. The defendants, Van Wieren and Stogrin were
former employees of the Company's Canadian subsidiary . The plaintiffs maintain
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 at of the Company's Canadian
subsidiary and is their property.

The plaintiffs are seeking unspecified damages and loss of profits as well as
injunctive relief and declaratory relief with respect to the rights of the
plaintiffs to the information and software in question. Based on the
information available at this early stage and having regard to some of the
materials seized pursuant to the Anton Pillar Order, there appears to be merit
to the claim advanced by the plaintiffs.

On May 21, 2000 the district court of Tel-Aviv dismissed the claim filed by
Eitan Zucker against the Company and Eldad Weiss, the Chairman and CEO of the
Company, and awarded the Company certain legal costs. The judgement is still
subject to appeal.

On April 14, 2000, the Company reached a settlement with Michael Burstein, the
former Chief Financial Officer of the Company, in which Mr. Burstein waived all
claims against the Company. The Company paid Mr. Burstein $26,000, which
represented amounts previously owing to him with respect to his employment by
the Company, and allowed Mr. Burstein to exercise 28,312 options granted to him
during his employment with the Company.


                                       16
<PAGE>   17

The Company is not a party to any other material legal proceedings.

ITEM 4 - CONTROL OF REGISTRANT

As of May 31, 2000, 13,191,902 Ordinary Shares of the Company were issued and
outstanding.

The following table sets forth, as of May 31, 2000, certain information with
respect to the beneficial owners of the Company's Ordinary Shares, as well as
options and warrants exercisable within 60 days of May 31, 2000, by:

            a)    Each person known by the Company to beneficially own more
                  than 10% of the outstanding Ordinary Shares; and

            b)    All officers and directors of the Company as a group:

<TABLE>
<CAPTION>
                                                      Ordinary Shares, Options And
Name And Address of                                   Warrants Beneficially owned
Beneficial Owners                                        Number         Percent
------------------------------------------------------------------------------------
<S>                                               <C>                   <C>
Shamrock Holdings Inc.                                 1,649,943          12.5%
4444 Lakeside Drive
Burbank, California 91510-7774
U.S.A

Mashov Gruss Investments Ltd.                          1,497,766          11.4%
5 Haplada St., Or Yehuda 60219
Israel

Bachow Investment Partners III L.P.                    1,399,000          10.6%
3 Bala Plaza East, 5th floor
Bla Cynwyd, PA 19004 U.S.A.

All officers and directors as a group(1)                 692,653           5.3%
(11 persons)
</TABLE>

To the Company's knowledge, there is no arrangement, the operation of which may
at a subsequent date, result in a change in control of the Company.

-------------------------------------------------------------------------------
(1) Comprised of 239,810 Ordinary Shares and options to purchase 452,843
Ordinary Shares of the Company which were exercisable within 60 days of May 31,
2000.

                                       17
<PAGE>   18

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 define 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

            (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.


                                       18
<PAGE>   19

SPECIAL PREFERRED SHARES

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.

ITEM 5 - NATURE OF TRADING MARKET

The Company's Ordinary Shares are quoted on the NASDAQ National Market under
the symbol "PGEO."

The following table shows the high and low sale prices of the Ordinary Shares
of the Company in the indicated quarters. Trading in the Company's Ordinary
Shares commenced on June 15, 1998.

<TABLE>
<CAPTION>
1998                                                    HIGH                           LOW
--------------------------------------------------------------------------------------------
<S>                                                   <C>                           <C>
6/15/98-6/30/98                                         $7.375                        $7.00
Third Quarter                                           $7.125                        $4.50
Fourth Quarter                                          $5.875                        $4.19

<CAPTION>

1999                                                    HIGH                           LOW
--------------------------------------------------------------------------------------------
<S>                                                   <C>                           <C>
First Quarter                                           $5.125                        $4.25
Second quarter                                          $7.25                         $5.00
Third Quarter                                           $6.75                         $5.625
Fourth Quarter                                          $5.875                        $4.50
</TABLE>


                                       19
<PAGE>   20

<TABLE>
<CAPTION>
2000                                                    HIGH                           LOW
--------------------------------------------------------------------------------------------
<S>                                                   <C>                           <C>
First Quarter                                           $10.063                       $4.50
Second Quarter(through June 14, 2000)                   $7.813                        $5.20
</TABLE>

As of May 31, 2000 there were 25 shareholders of record, of whom 11 have
addresses registered in the United States, holding 73% of the outstanding
Ordinary Shares of the Company.

ITEM 6 - EXCHANGE CONTROL REGULATIONS

The Israeli Currency Control Law, 1978 imposes certain limitations concerning
foreign currency transactions and transactions between Israeli and non-Israeli
residents, which limitations may be regulated or waived by the Controller of
Foreign Exchange at the Bank of Israel, through ""general" and ""special"
permits. In May 1998, a new ""general permit" was issued pursuant to which
substantially all transactions in foreign currency are permitted. Any dividends
or other distributions paid in respect of ordinary shares and any amounts
payable upon the dissolution, liquidation or winding up of the affairs of a
company, as well as the proceeds of any sale in Israel of the company's
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 any Israeli income tax owing has been paid on (or withheld from)
such payments. Because exchange rates between the NIS and the U.S. dollar
fluctuate continuously, U.S. shareholders will be subject to any such currency
fluctuation during the period from when such dividend is declared through the
date payment is made in U.S. dollars.

ITEM 7 - TAXATION

U.S. 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 discussion does not consider all aspects of U.S. federal income taxation
that may be relevant to particular U.S. Holders by reason of their particular
circumstances, including potential application of the alternative minimum tax,
or any aspect of state, local or non-


                                       20
<PAGE>   21

U.S. tax laws. In addition, this summary is directed only to U.S. Holders that
hold Ordinary Shares as capital assets and does not address the considerations
that may be applicable to particular classes of U.S. Holders who may be subject
to special rules, including, without limitation, financial institutions,
broker-dealers, tax-exempt organizations, U.S. Holders who own (directly,
indirectly or through attribution) 10% or more of the Company's outstanding
Ordinary Shares, U.S. Holders who acquired their Ordinary Shares pursuant to
the exercise of options or similar derivative securities or otherwise as
compensation, U.S. Holders who hold their Ordinary Shares as part of a
"straddle," "hedge" or "conversion transaction," or persons who own Ordinary
Shares through a partnership or other pass-through entity.

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 included 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

Sale or Exchange of Ordinary Shares

A U.S. Holder's sale or exchange of Ordinary Shares generally will result in
the recognition of capital gain or loss by such U.S. Holder in an amount equal
to the difference between the amount realized and the U.S. Holder's tax basis
in the Ordinary Shares sold. Such capital gain or loss will be long-term
capital gain or loss if the Ordinary Shares sold have been held for more than
one year at the time of the sale or exchange. If the U.S. Holder's holding
period on the date of the sale or exchange was one year or less, such gain or
loss will be short-term capital gain (generally subject to the same effective
federal income tax rates as ordinary income) or loss. See "Item 7:
Taxation-Israel -- Capital Gains Tax" for a discussion of taxation by Israel of
capital gains realized on the sale or exchange of Ordinary Shares. In general,
any capital gain or loss recognized by a U.S. Holder upon the sale or exchange
of Ordinary Shares will


                                       21
<PAGE>   22

be treated as U.S. source income for U.S. foreign tax credit purposes. Any
capital loss realized upon the sale, exchange or other disposition of Ordinary
Shares generally is deductible only against capital gains and not against
ordinary income, except that in the case of non-corporate taxpayers, a capital
loss is deductible only to the extent of capital gains plus ordinary income of
up to $3,000.

A U.S. Holder's tax basis in his, her or its Ordinary Shares generally will be
the purchase price paid therefor by such U.S. Holder. The holding period of
each Ordinary Share owned by a U.S. Holder will commence on the day following
the date of the U.S. Holder's purchase of such Ordinary Share and will include
the day on which the Ordinary Share is sold by such U.S. Holder.

Treatment of Dividend Distributions

For U.S. federal income tax purposes, the gross amount of any distribution made
with respect to, or in some cases a partial purchase or redemption of, Ordinary
Shares (including the amount of any U.S. taxes withheld therefrom) will be
included in a U.S. Holder's income as ordinary dividend income to the extent
that the dividends are paid out of current or accumulated earnings and profits
of the Company, as determined based on U.S. tax principles. Such dividends will
not be eligible for the dividends received deduction allowed to U.S.
corporations under Section 243 of the Code. Dividend distributions in excess of
the Company's current and accumulated earnings and profits will be treated
first as a non-taxable return of the U.S. Holder's tax basis in his, her or its
Ordinary Shares to the extent thereof and then as a gain from the sale of
Ordinary Shares. Dividends paid in NIS will be included in income in a U.S.
dollar amount based on the exchange rate at the time of their receipt. Any gain
or loss resulting from currency fluctuations during the period from the date a
dividend is paid to the date such payment is converted into U.S. dollars
generally will be treated as ordinary income or loss.

Dividends paid to a U.S. Holder with respect to Ordinary Shares will be treated
as foreign source dividend income for U.S. foreign tax credit limitation
purposes. Subject to certain conditions and limitations, any U.S. withholding
tax imposed on such dividends generally will be eligible for credit against
such U.S. Holder's U.S. federal income tax liability or, at the U.S. Holder's
election, may be claimed as a deduction against income in determining such tax
liability. However, a U.S. Holder will be denied a foreign tax credit with
respect to U.S. withholding tax deducted from dividends if such holder has not
held Ordinary Shares for a specified minimum period during which it is not
protected from risk of loss or to the extent such U.S. Holder is under an
obligation to make certain related payments with respect to positions in
substantially similar or related property. The limitations on claiming a
foreign tax credit include computation rules under which foreign tax credits
allowable with respect to specific classes of income cannot exceed


                                       22
<PAGE>   23

the U.S. federal income taxes otherwise payable with respect to each such class
of income. Dividends with respect to the Ordinary Shares generally will be
classified as "passive income," or, in the case of certain holders, "financial
services income" for purposes of computing the foreign tax credit limitation.
Foreign income taxes exceeding the credit limitation for the year of payment or
accrual generally 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%. The calculation of allowable foreign tax credits and, in the
case of a U.S. Holder that elects to deduct foreign taxes, the availability of
deductions for foreign taxes paid involve the application of rules that depend
on a U.S. Holder's particular circumstances. Accordingly, U.S. Holders should
consult their own tax advisors regarding their eligibility for foreign tax
credits or deductions.

Passive Foreign Investment Company Status

Generally, the Company will treated as a passive foreign investment company
("PFIC") for U.S. federal income tax purposes for any tax year if, in such tax
year, either (i) 75% or more of its gross income is passive in nature, or (ii)
on average for the taxable year, 50% or more of its assets (by value) produce
or are held for the production of passive income. The Company does not believe
that it will satisfy either of the foregoing tests for PFIC status for 2000
because the nature of its income and its assets are not expected to be
sufficiently passive within the meaning of the PFIC rules. However, since the
determination whether the Company is a PFIC will be made annually based on
facts and circumstances that, to some extent, may be beyond the Company's
control, there can be no assurance that the Company will not become a PFIC for
2000 or at some time in the future.

If the Company were treated as a PFIC for U.S. federal income tax purposes for
any year during a U.S. Holder's holding period and such U.S. Holder does not
make either a QEF Election or a "mark to market" election (each as described
below), any gain recognized by such U.S. Holder upon the sale of Ordinary
Shares (or the receipt of certain distributions) would be treated as ordinary
income, such income would be allocated over such U.S. Holder's holding period
with respect to such Ordinary Shares and an interest charge would be imposed on
the amount of deferred tax on such income allocated to prior taxable years.
Although the Company generally will be treated as a PFIC as to any U.S. Holder
if it is a PFIC for any year during such U.S. Holder's holding period, if the
Company ceases to satisfy the requirements for PFIC classification, such U.S.
Holder may avoid such classification for years after such cessation if he, she
or it elects to recognize gain based on the unrealized appreciation in the
Ordinary Shares through the close of


                                       23
<PAGE>   24

the tax year in which the Company ceased to be a PFIC. Additionally, if the
Company were to become a PFIC, U.S. Holders who acquire Ordinary Shares from
decedents would be denied the normally available step-up in income tax basis
for such Ordinary Shares to fair market value at the date of death and instead
would have a tax basis equal to the decedent's.

For any tax year in which the Company is determined to be a PFIC, a U.S. Holder
could elect to treat his, her or its Ordinary Shares as an interest in a
qualified electing fund (a "QEF Election"), in which case, the U.S. Holder
would be required to include in income currently his, her or its proportionate
share of the Company's earnings and profits in years in which the Company is a
PFIC regardless of whether distributions of such earnings and profits are
actually distributed to such U.S. Holder, but any gain subsequently recognized
upon the sale by such U.S. Holder of his, her or its Ordinary Shares generally
would be taxed as capital gain and the denial of the basis step-up at death
described above would not apply. As an alternative to a QEF Election, a U.S.
Holder generally could elect to mark the Ordinary Shares to market annually,
recognizing ordinary income or loss (subject to certain limitations) equal to
the difference between the fair market value of its Ordinary Shares and the
adjusted basis of such stock. Losses would be allowed only to the extent of net
mark to market gain accrued under the election. If a mark to market election
with respect to Ordinary Shares is in effect on the date of a holder's death,
the normally available step-up basis to fair market value will not be
available. Rather, the tax basis of such shares in the hands of a U.S. Holder
who acquired them from the decedent will be the lesser of the decedent's basis
or the fair market value of the shares. U.S. Holders should consult their own
tax advisors regarding the eligibility, manner and advisability of making a QEF
Election or a mark to market election if the Company is treated as a PFIC.

Information Reporting and Backup Withholding

Any dividends paid on the Ordinary Shares to U.S. Holders may be subject to
U.S. information reporting requirements and the 31% U.S. backup withholding
tax. In addition, the proceeds of a U.S. Holder's sale of Ordinary Shares may
be subject to information reporting and the 31% U.S. backup withholding tax.
Backup withholding will not apply if the holder (i) is a corporation or other
exempt recipient or (ii) the holder provides a U.S. taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with any applicable backup withholding requirements. Any
amounts withheld under the U.S. backup withholding tax rules will be allowed as
a refund or a credit against the U.S. Holder's U.S. federal income tax,
provided the required information is furnished to the U.S. Internal Revenue
Service.


                                       24
<PAGE>   25

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 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 ("The Tax Reform Committee") 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 has approved the recommendation in principle, but implementation of the
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


                                       25
<PAGE>   26

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

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

In addition, subject to certain limitations, depreciation on fixed assets and
loss carry forwards are adjusted for inflation based on changes in the Israeli
CPI. The net effect of the Adjustment for Inflation Law on 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.


                                       26
<PAGE>   27

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 taxes 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 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


                                       27
<PAGE>   28

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


                                       28
<PAGE>   29

which production commenced or fourteen years from the year of receipt of
Approved Enterprise status.

A company that has an Approved Enterprise status which was approved after April
1, 1986 may elect to forego any entitlement to the grants otherwise available
under the Investment Law and, in lieu of the foregoing, participate in an
alternative benefits program (the "Alternative Benefits Program"), under which
the undistributed income from the Approved Enterprise is fully tax exempt for a
defined period of time. The period of tax exemption ranges between 2 and 10
years, depending upon the location within Israel of the Approved Enterprise and
the type of Approved Enterprise. 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.


                                       29
<PAGE>   30

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

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

TAX BENEFITS FOR RESEARCH AND DEVELOPMENT

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


                                       30
<PAGE>   31

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.

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).


                                       31
<PAGE>   32

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 face royalty obligations 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, 1999, the Company had
received grants from the Marketing Fund in the amount of approximately $430,000.
At March 31, 2000, the aggregate contingent liability was approximately
$418,000.

ITEM 8

SELECTED  FINANCIAL  DATA

The following table summarizes certain selected consolidated financial data and
should be read in conjunction with the Company's Consolidated financial
statements and accompanying notes for the years ended December 31, 1999,
1998,1997, 1996 and 1995. and with Management's Discussion and Analysis of
Financial Condition and Results of Operations included as part of this
document.

The Selected financial data is derived from the Consolidated financial
statements of the Company for the years stated . These Consolidated financial
statements have been prepared in accordance with United States generally
accepted accounting principles (US GAAP) and have been audited by Kost, Forer
and Gabbay, a member of Ernst & Young International.

The CogniSeis acquisition occurred in October 1997 and the PTM acquisition in
March 1999; the businesses of CogniSeis and


                                       32
<PAGE>   33

of PTM have been included in the results of Paradigm from their respective
acquisition dates. Prior to the respective dates of acquisition, Paradigm's and
CogniSeis' businesses operated separately and PTM's business was a division of
Mincom Limited, an Australian entity. The selected financial data does not
include information for CogniSeis or PTM prior to their respective dates of
acquisition. Therefore, the historical financial data does not provide the
basis to assess the future financial position and results of operations of the
Company or what the financial position and results of operations of Paradigm,
CogniSeis and PTM would have been had the Combined Businesses been operated on
an integrated basis during all of the periods presented. Note 1 of the audited
Financial Statements includes pro-forma unaudited combined results of
operations of Paradigm and CogniSeis for the year ended December 31, 1997 as if
the CogniSeis acquisition had been completed on January 1, 1997 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.


                                       33
<PAGE>   34

<TABLE>
<CAPTION>
CONSOLIDATED INCOME STATEMENT DATA
 (IN THOUSANDS EXCEPT PER SHARE DATA)

                                                  1995           1996          1997          1998          1999
                                                  ----           ----          ----          ----          ----
<S>                                              <C>            <C>           <C>           <C>           <C>
REVENUES:

   Products                                          $7,336         $7,718       $19,979       $38,074       $43,023
   Services                                           2,056          3,884         4,886         7,288        11,483
                                              -----------------------------------------------------------------------
                 TOTAL REVENUES                       9,392         11,602        24,865        45,362        54,506
                                              -----------------------------------------------------------------------
                      YEAR -TO- YEAR % CHANGE                        23.5%         114.3%         82.4%         20.2%

OPERATING EXPENSES:

   Cost of products                                   1,561          2,450         5,070         8,559        12,418
   Cost of services                                   1,492          1,539         1,849         3,107         5,804
   Research and development                             340          1,466         4,728         7,660         9,306
   Selling, general and administrative                6,070          9,536         9,744        15,822        20,638
   Depreciation                                         306            997         2,012         2,298         3,865
   Amortization                                         955          1,040         1,185         2,347         3,064
   Non recurring expenses                                 -              -        10,676             -         2,705
                                              -----------------------------------------------------------------------
      TOTAL OPERATING EXPENSES                       10,724         17,028        35,264        39,793        57,800
                                              -----------------------------------------------------------------------

  OPERATING INCOME (LOSS)                           (1,332)        (5,426)      (10,399)         5,569       (3,294)
   Financial income (expenses), net                   (213)             57         (446)         (661)         (484)
                                              -----------------------------------------------------------------------
  INCOME (LOSS) BEFORE INCOME TAXES                 (1,545)        (5,369)      (10,845)         4,908       (3,778)
   Income tax                                             -              -             -           356             -
                                              -----------------------------------------------------------------------
  NET INCOME(LOSS)                                 $(1,545)       $(5,369)     $(10,845)        $4,552      $(3,778)
                                              -----------------------------------------------------------------------

    BASIC EARNINGS PER SHARE                        $(0.68)        $(2.33)       $(4.66)         $0.66       $(0.31)
    NUMBER OF SHARES USED IN COMPUTING BASIC
    EARNINGS(LOSS) PER SHARE                          2,270          2,300         2,328         6,850        12,205
    DILUTED EARNINGS PER SHARE                      $(0.68)        $(2.33)       $(4.66)         $0.49       $(0.31)
    NUMBER OF SHARES USED IN COMPUTING
    DILUTED EARNINGS(LOSS) PER SHARE                  2,270          2,300         2,328         9,306        12,205

SELECTED CONSOLIDATED  BALANCE SHEET DATA
(AT YEAR END - IN THOUSANDS EXCEPT PER SHARE DATA)

<CAPTION>

                                                  1995           1996          1997          1998          1999
                                                  ----           ----          ----          ----          ----
  CASH AND CASH  EQUIVALENTS                           $592         $7,113        $8,229        $3,463        $5,457
  WORKING CAPITAL(DEFICIENCY)                           963          7,958         (692)         9,154        15,346
  TOTAL ASSETS                                       12,964         19,383        47,883        46,135        66,165
  CURRENT DEBT                                        2,372          1,193         1,288         2,228         5,073
  NOTE PAYABLE                                            0              0         9,500             0             0
  BRIDGE LOAN  PAYABLE                                    0              0        12,000             0             0
  LONG TERM DEBTS(EXCLUDING CURRENT MATURITIES)         399            367           483            39         4,665
  SHAREHOLDERS'  EQUITY                               6,592         12,885         2,640        26,697        35,468
</TABLE>


                                       34
<PAGE>   35

<TABLE>
<CAPTION>
CASH FLOW  DATA
<S>                                                <C>          <C>           <C>           <C>           <C>
  CASH  PROVIDED BY (USED IN) OPERATING ACTIVITIES  (1,782)        (1,658)         1,633       (1,773)       (1,089)
  CASH  PROVIDED BY (USED IN) INVESTING ACTIVITIES  (3,320)        (2,436)      (11,594)       (4,516)      (15,401)
  CASH  PROVIDED BY (USED IN) FINANCING ACTIVITIES    4,952         10,734        11,077         1,674        19,068
</TABLE>


                                       35
<PAGE>   36

ITEM 9 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This section contains a discussion of the operating results and general
financial condition of Paradigm Geophysical Ltd., including:

  -   factors impacting Paradigm's  business;

  -   why Paradigm's  earnings and expenses  for the year  1999 differ from the
      years 1998 and 1997;

  -   Paradigm's capital expenditures ;

  -   factors impacting Paradigm's cash flows; and

  -   other items  that materially affect the  financial condition or earnings

FORWARD-LOOKING INFORMATION

The Private Securities Litigation Reform Act of 1995 provides safe harbor
provisions for forward-looking statements. Forward-looking statements involve
risks and uncertainties that may impact Paradigm's actual results of
operations. Statements in this Form 20-F annual report , which are
forward-looking and which provide other than historical information, involve
risks and uncertainties. The Company's forward-looking information reflects its
best judgement based on current information. From time to time the Company may
also provide oral or written forward-looking statements in other materials
released to the public. Your attention is drawn to the fact that any or all of
the forward-looking statements in this Form 20-F annual report and in any other
materials released to the public may not transpire at all or transpire
differently. In addition, forward-looking statements can be affected by
inaccurate assumptions the Company may make or by known or unknown risks and
uncertainties. There can be no assurance that other factors, other than those
listed below, will not affect the accuracy of forward-looking information. As a
result, no forward-looking statement can be guaranteed. While it is not
possible to identify all factors, the Company continues to face many risks and
uncertainties that could cause actual results to differ from those
forward-looking statements including:

GEOPOLITICAL AND LEGAL.

  -   trade  restrictions  and  economic  embargoes;

  -   unsettled political conditions, war, civil unrest, currency controls and
      governmental actions in the countries in which the Company operates;

  -   operations in countries with significant  amounts of political risk;

  -   changes in foreign exchange rates;

  -   changes in governmental regulations in the countries in which the Company
      operates; and

  -   litigation against the Company


                                       36
<PAGE>   37

WEATHER RELATED.

  -   the impact of prolonged mild weather conditions on the demand for and
      price of oil and natural gas.

COMPETITION AND PRODUCTS.

  -   impact of competitive products and services and their pricing;

  -   increased investments by Paradigm and its competitors to support new
      product and service introductions;

  -   market acceptance of  Paradigm's, and its competitors' products and
      services; and

  -   product and services transitions and changes in product and services
      sales mix.

CUSTOMERS AND VENDORS.

  -   changes in capital and operational expenditures by customers in the oil
      and gas industry for exploration, development and production;

  -   timing of capital expenditures by customers in the oil and gas industry
      for exploration, development and production; and

  -   consolidation of customers in the oil and gas industry following mergers
      and acquisitions, tempering capital expenditures.

INDUSTRY.

  -   technological and structural changes in the oil and gas production
      companies and in the oil field services industry; and

  -   changes in the price of oil and natural gas, including:

            -     OPEC's ability to set and maintain production levels and
                  prices for oil; and

            -     the level of oil production by non-OPEC countries.

  -   the policies of governments regarding exploration for and production and
      development of their oil and natural gas reserves; and

  -   the level of demand for oil and natural gas.

PERSONNEL AND MERGERS.

            -     increased competition in the hiring and retention of
                  employees in specific areas which are critical to the
                  Company's operations; and

            -     integration of acquired  businesses into Paradigm operations.

In addition, future trends for pricing, margins, revenues and profitability
remain difficult to predict in the oil field services industry .

The Company does not assume any responsibility to publicly update any of its
forward-looking statements regardless of whether factors change as a result of
new information future events or for any other reason. You are advised to
review any additional disclosures the Company makes in it's 6-K reports to the
Securities and Exchange Commission. You are also advised to listen to
Paradigm's quarterly earnings release conference calls with financial analysts.
You may find information on how to access those calls at Paradigm's web site
www.paradigmgeo.com.

GENERAL


                                       37
<PAGE>   38

The following discussion is based on the Consolidated Financial Statements
included in this report and should be read in conjunction with those Statements
and other financial information contained herein, primarily in Item 8 -
Selected Financial Data. The Company's accounting policies are discussed in
detail in the Consolidated Financial Statements contained in this report.

OVERVIEW

Paradigm Geophysical Ltd. is a geoscience knowledge solutions company, which
provides computer-aided exploration and production software products and
services to the oil and gas industry. Paradigm's enabling technologies through
its products and services facilitate the field asset teams of oil and gas
companies to explore, model, simulate and manage oil and gas reservoirs with
precision and accuracy, so as to reduce exploration and production costs,
minimize risk in drilling and resource exploitation and increase the
productivity of proven reserves. Paradigm achieves this objective by focusing
on two major categories of business activity in the oil and gas industry by
providing: (i) comprehensive software solution suites for the processing and
interpretation of prospect data for sub-surface modeling, prospect evaluation,
mapping, reservoir characterization and management; and (ii) geoscience
services, which includes geophysical, geological and petrophysical processing
and consultancy services. These activities contribute to extracting the most
geoscience knowledge from the seismic and geological, and well and reservoir
production data. Paradigm software solutions and services are in use in major
oil companies throughout the world and leading state owned oil and gas
companies, as well as independent producers and oilfield service providers.

1999 MARKET CONDITIONS

The Company's results in 1999 should be viewed within the context of the
developments and trends in the market in which it operates - the Oil Field
Services market. This, in turn, is 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.

INTERNATIONAL OIL PRICES were low and declined throughout much of 1998 with the
consequent mid-1998 cuts in some of the major oil producers' capital budgets.
1999 opened with low oil prices and continued uncertainty despite the oil price
rise that began in the second half of 1999.

Industry analysts assessed a 30% cut in capital budgets by the oil companies
over 1998 levels, i.e. to about $68 billion in 1999 vs. $93 billion in oil
field services capital spending in 1998. Despite the recovery of oil prices
after mid 1999, the capital budget levels remained essentially unchanged for
the full year.


                                       38
<PAGE>   39

The market results demonstrate an industry-wide decline in expenditures, with a
consequent sector-wide decline in oil field service companies' turnover and
profitability.

The Company assesses that the declines in oil and gas companies' capital
spending were not evenly distributed over all the various oil field services.
Various indicators show that oil field capital expenditures significantly
declined in 1999 and 1998, and were preferentially allocated to maintaining
production levels and improving productivity. Expenditures on exploration
activities, including exploration software and services, declined more than the
overall average capital expenditure decline. The extent of this differential
capital expenditure in favor of production over exploration is difficult to
quantify, but can be illustrated by comparing worldwide seismic activity and
worldwide rig counts. Analyst reports assess the Exploration and Production
software and data management market for 1998 at $1.2 billion, and the seismic
data processing market at about $1 billion. The Company's investigations suggest
that in 1999 the actual amounts of expenditures were in the range of $650
million and $600 million, declines of 45% and 40% respectively.

Even within the industry software expenditures were preferentially allocated to
reservoir management and production-related software, again reflecting the
industry's priorities on production over exploration. Where investment was made
in exploration software, this was for high-end data analysis solutions, such as
depth inversion and seismic reflection signal strength inversion analysis, and
advanced subsurface structure visualization and model building tools.

INDUSTRY TRENDS AND THEIR SIGNIFICANCE FOR FUTURE MARKET DEVELOPMENT

The downward trend in the software market was fueled by a number of factors in
addition to the overall lower capital budgets:

            The creation of the new "super-majors" alongside Shell (BPAmoco,
            ExxonMobil, TotalFina) resulted in suspension of investment
            expenditures until the results of the consequent reorganizations
            and the assignment of management and profit responsibilities became
            clear.

            The low oil prices in 1998 and the first half of 1999, and thus the
            declines in cash flows and profits, caused significant downsizing
            of geosciences and other staffs, with a consequent lowering in the
            overall number of software licenses needed by the major industry
            players. The decline in staff resulted, in the latter half of 1999
            in increasing demand for out-sourcing of complex seismic data
            analysis projects.


                                       39
<PAGE>   40

            Looking forward, the decline in the software market due, in part,
            to the severe lack of oil professionals coupled with an increasing
            demand for geophysical services appears to be indicative of the
            future trend in the oil and gas services industry, to which the
            Company is responding.

By the end of 1999, the disruptions from the industry consolidations appeared,
effectively, to be over. However the impact of staff downsizing remains
evident, and expert opinion is that this will have a long-term impact on the
way the major companies will be organizing their remaining staff. This, in
turn, will have consequences on the need to increase and widen the tasks
assigned to outsourcing contractors, and should lead to demands for wider and
deeper functionality and "expert systems" built into software used by the
industry.

Within the seismic data processing market, the trend that emerged was to
re-analyze archive and library data, not with traditional time-based methods,
but with the intent to extract more information and knowledge from the archive
using the high-end seismic data analysis, i.e. depth inversion and seismic
reflection signal strength inversion analysis methods. The concomitant trend
was the increase in outsourcing of this high-end data analysis, and, therefore,
the overall growth in market demand for depth and seismic reflection signal
strength inversion analysis services.

While these general trends have been observed, it should be noted that they are
evident to differing extents within the major sub-sectors of the Company's
markets, i.e., the super-majors, the majors, the independent oil producers, the
national oil companies, and the oil field services sector active in seismic
data processing and reservoir management services. For example, trends to
outsourcing are currently stronger within the independents, and less evident
among the super-majors and majors. The downsizing of staff and the consequent
changes in workflows and the manner in which software will be used is most
evident among the super-majors, majors and the large independents.

While the results of operations in 1999 have been negatively impacted by the
lower activity levels in the oil and gas industry, we believe the long-term
fundamentals of the oil and gas industry remain sound. Steadily rising
population and greater industrialization efforts should continue to propel
worldwide economic expansion, especially in developing nations. These factors
should cause increasing demand for oil and gas to produce refined products,
petrochemicals, fertilizers and power.

During the first half of 2000 there has been a continuing rise in international
oil prices, well above the "consensus level" of sustainable price level. There
is also a parallel expectation of significant increases in natural gas prices.


                                       40
<PAGE>   41

These trends in commodity prices have also raised expectations of increases in
capital expenditures by the production companies. However these expectations
may well not be fully applicable to the purchase of software because of the
decrease in the number of geoscience personnel using advanced software, and the
levels of investment made in past years for basic software platforms for
seismic data processing and interpretation.

Therefore, looking forward, industry spending on exploration and production
related software could well focus on special applications, add-ons, and
software for areas of the workflow not previously well served, rather than
significant levels of additional sales of basic-suite licenses. The levels of
professional staff available for such analysis could further impact on the
demand, translating into outsourcing for services based on the new software,
rather than significant purchases of software licenses, with the majority of
the use of software within the production companies focusing on quality
assurance and the end-decision rather than the analysis work-flow.

RESULTS OF OPERATIONS - 1999 COMPARED TO 1998 AND 1997

CHANGE IN FORMAT OF FINANCIAL STATEMENTS

The Company reviewed its accounts reporting format and best practices of
comparable companies with the objective of finding a format that would provide
more transparency and better reflect our actual business and earnings drivers,
and take into account the expected trends in our industry and market. The survey
of comparable companies showed that best practices, adopted by the Company for
1999 reporting, and going forward, had the following common characteristics:

      1.    Operating Income, rather than Gross Margin, as the primary
            indicator of a company's financial health. This is especially
            relevant for companies such as Paradigm with high fixed and low
            variable costs, and where the fixed costs are mostly for Research
            and Development and the Marketing infrastructure.

      2.    Clear separation of Depreciation and Amortization from the
            Operating Expenses line items.

      3.    Treatment of Goodwill charges as being outside of Operating
            Expenses (and the need to take into account that in some
            jurisdictions Goodwill charges are not a taxable expense).

      4.    Disclosure of Earnings per share measures with and without Goodwill
            charges. Paradigm will adopt this accounting disclosure principle
            following its approval by one of the


                                       41
<PAGE>   42

            authoritative bodies designated to establish accounting principles.

ACQUISITIONS
PTM - MARCH 1999

On March 31, 1999 the Company acquired the assets of the Petroleum Technologies
Division of Mincom, or PTM, a privately held Australian company. The primary
product asset is GeoLog(TM), a well-log and petrophysics analysis program.

The Company took over a staff of over 40 located in Brisbane, Houston, London,
Aberdeen and Calgary, which included management, research and development,
sales, customer support and administrative personnel. The PTM staff in Houston,
London and Calgary were integrated into the Company's offices in those
locations. The Company expanded its operations in Aberdeen through the PTM
office, and maintained the Brisbane operation as a research and development
center, transferring sales and support operations to the Company's offices in
Perth. Integration of the staff and sales and support operations and research
and development was completed by year-end.

While the GeoLog sells as a stand-alone product for well logging, the Company
is also integrating it into the ERGOS product suite, to provide integration of
geological data with seismic data for prospect interpretation. GeoLog will also
be integrated into the Company's new reservoir management product suite -
POROS.

COGNISEIS - OCTOBER 1997

The Company's acquisition of all of the outstanding stock of CogniSeis
Development Inc. in October 1997 permitted the Company to move from a supplier
of specialized depth-imaging products to integrated product suites that provide
a complete range of solutions in the time and depth domains for processing,
inversion and interpretation of seismic and non-seismic data. The integration
of CogniSeis and Paradigm products into coherent product suites was introduced
to the market in September 1998, transforming Paradigm into a total solution
provider of seismic and related data for oil and natural gas exploration.

The Company's acquisition of PTM in March 1999 and CogniSeis in October 1997
had a positive impact on year end 1999 and 1998 results. The 1999 results of
operations described in the Management's Discussion and Analysis of Financial
Condition and Results of Operations include the twelve months of operations of
Paradigm consolidated with nine months of post-acquisition operations (April
through December) of PTM.

The 1997 results of operations described in the Management's Discussion and
Analysis of Financial Condition and Results of Operations include the twelve
months of operations of Paradigm consolidated with only three months of
post-acquisition operations (October through December) of CogniSeis. The
contribution of


                                       42
<PAGE>   43

PTM and CogniSeis products and operations, as well as successful integration of
the Company's activities, cannot be adequately portrayed in a typical
year-by-year discussion. As a consequence, the financial results described in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations for these periods are not directly comparable. Note 1 of the audited
Financial Statements includes pro-forma unaudited combined results of
operations of Paradigm and CogniSeis for the year ended December 31, 1997 as if
the CogniSeis acquisition had been completed on January 1, 1997 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. Where it is considered relevant to understanding the
results of operations reference has been made to the consolidated pro forma
results.

REVENUES

The Company's revenues are derived mainly from the sale of software licenses
and related maintenance and support contracts (product sales) and from
providing geoscience processing and consultancy services. In choosing to market
both products and geoscience services, Paradigm's management has chosen to
diversify revenue sources to try to minimize risk in seasonal and regional
downturns. Maintenance and support revenues also provide a predictable revenue
stream.

The increase in total revenues by 20% over 1998, despite the overall weakness
of the market during 1999, can be accounted for by a number of factors.

Product revenues increased by 13% over 1998, and services revenues increased by
58%. There was a material change in 1999 over 1998 in the relative proportion
of revenue derived from services (at 21% of total revenue in 1999 vs. 16% in
1998). This increase was due both to the absolute growth in service revenues,
and the relatively slower growth in product revenues in 1999. By comparison,
total revenues in 1998 were 82% higher than in 1997 (21% higher on a pro-forma
comparison) with product revenues representing 80% of total revenues.

Looking forward to 2000, the Company expects the pace of growth for products to
improve, while the growth in services will also continue but not at the same
high pace of 1999. The Company therefore expects that for 2000 the relative
contribution of product revenues to total revenues will return back to a level
between the 1999 and 1998 levels of 79% and 84%, respectively.

For the longer term, the Company expects services and related revenues to form
a higher proportion of total revenues in line with the trend in the industry.


                                       43
<PAGE>   44

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. In 1999, this category included a major contract
for a turnkey data processing project including the delivery and integration of
Paradigm's and third party software and training services for the operating
staff. See note 2j(1) of the Consolidated Financial Statements for details of
the Company's accounting policy on revenue recognition of products.

The major difference between the composition of 1999 versus 1998 revenues was
the turnkey project. This contract is valued at over $10 million, of which about
$6 million was recognized as product revenue, in 1999.

As noted previously, in March 1999, the Company acquired PTM. PTM's primary
product GeoLog, provided a significant addition to the Company's product
offerings and contributed about $5 million of the product revenue during the
latter three quarters of the fiscal year.

The positive impact of these two new revenues sources, materially different
from 1998, offset a decline in revenues for the Company's other products, for a
net increase in total product sales of 13% over 1998. On a pro-forma basis
product revenue growth was 2% over pro-forma 1998.

By comparison, product sales in 1998 were 90% higher than in 1997 (16% higher
on a pro-forma comparison).
The sales proportion of the three product suites
was Echos and Ergos 40% each and Poros 20%. In 1998 Echos and Ergos sales were
equal as Poros had not yet been introduced. This is a further reflection of
management's decision to emphasize the expansion of our installed base for
interpretation products and to include analysis and integration of non-seismic
data relevant to the characterization, management and simulation of oil and gas
reservoirs.

SERVICES

The services revenue category includes seismic data analysis, processing and
consultancy services. The Company operates ten service centers worldwide. See
note 2j(2) of the Consolidated Financial Statements for details of the
Company's accounting policy on revenue recognition of products.

Revenues from services increased by 58% over 1998, which was 49% higher than
1997. In 1999 there was a significant increase in outsourcing demand for
high-end seismic data processing services, primarily in the US and Russian
markets. However, this increase was offset by weakness throughout the year in
the North Sea and Far East markets. The high-end services market is also now


                                       44
<PAGE>   45


becoming characterized by price pressures, a trend that the Company expects
will continue as high-end processing becomes more widely demanded by the
industry and the number of suppliers increases. On a pro-forma basis, service
revenue growth was 48% higher than pro-forma 1998.

To meet the increase in demand for high-end seismic data processing services
and to provide for faster turn-around time for large surveys, particularly in
the Gulf of Mexico, the Company continued its investment in computer hardware,
increasing computer capacity and expanding the Company's geoscience services
business worldwide.

OPERATING COSTS

COST OF  PRODUCTS

Cost of products 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.

The material change in the components of cost of revenue for products in 1999
over 1998 was the hardware component in the turnkey project. Of the $6 million
recognized in revenues for this project, $3.6 million was cost of hardware
provided. Hardware costs accounts for the decline in product gross margins in
1999 when compared to 1998. Gross margin on product sales in 1999 was 71%,
compared to 78% in 1998 and 75% in 1997.
The Company expects that cost of products and gross margins for product sales
will return to 1998 levels, in the absence of any additional turnkey projects.

COST OF  SERVICES

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

With the downturn in the service markets in the North Sea and the Far East,
Company computer capacity was under utilized during 1999, unfavorably impacting
on gross margins for services. This was offset by the full capacity utilization
of the US and Russian service centers and the cost-efficiencies realized with
the installation of the "super-computer" in Houston. Gross margin on services
in 1999 was 50%, compared to 57% in 1998 and 62% in 1997.

As high-end services become more widely available, the Company expects that
there will be price competition for services. We therefore do not expect that
the historic high gross margins, in excess of 50%, which were characteristic of
the 1997 and 1998 market, will be sustainable at these levels into the future.
In addition new services products, such as seismic reflection signal strength
inversion and interpretation, will have a higher proportion


                                       45
<PAGE>   46

of staff-cost in relation to computer CPU time, also contributing to possible
future lower margins in services.

RESEARCH AND DEVELOPMENT, NET.

Research and development expenses consist primarily of salaries and other
related expenses and the cost of facilities. See note 2h of the Consolidated
Financial Statements for details of the Company's accounting policy on software
development costs.

The Company invested in research and development at the rate of 17% of annual
revenues in both 1999 and 1998, and 19% in 1997. Research and development
expenses in 1999 were 21% higher than 1998, in absolute dollar terms.

Research and development is managed out of the Tel-Aviv office, and carried out
at four centers, Tel Aviv, Houston, Moscow and Brisbane. These centers are
expertise-specialized rather than product-specialized. The Tel Aviv office
performs the integration and commercialization function for each product
release.

The material changes in research and development in 1999 over 1998, were the
establishment and expansion of the research and development group in Moscow
and, following the acquisition of PTM, the integration of the Australian-based
PTM research and development group into the worldwide research and development
group. The Company also made the decision to develop new reservoir simulation
products based on next generation technology. Looking to the future the Company
expects to continue this global approach to new product development,
capitalizing on the specialized expertise characteristic of each location. The
Company sees this global optimization of its research and development efforts
as an intrinsic strength and is expending management efforts to further
integrate and manage this global product development system. In the future
additional research and development centers may be established continuing the
policy of expertise-specific, rather that product-specific, centers.

The Company expects to maintain its current level of research and development
expenditure in 2000.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, 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.

Selling, general and administrative expenses in 1999 were 38% of annual
revenues, compared to 35% in 1998 and 39% in 1997. In


                                       46
<PAGE>   47

absolute dollar terms selling general and administrative expenses were 30%
higher in 1999 than in 1998, 17% on a pro-forma basis. In 1999, the Company
continued strengthening its sales and marketing efforts worldwide, in
particular the addition of senior staff in all our major offices and the more
general expansion in Russia and Latin America, and the integration of the sales
infrastructure as a result of the PTM acquisition. This expansion was
undertaken in anticipation of the expected turn-around of the market in 2000
and beyond, and reflected management's view of the lead-time needed to
establish the sales and support infrastructure.

DEPRECIATION

The depreciation expense consists of the depreciation of capital equipment. See
note 2f of the Consolidated Financial Statements for details of the Company's
accounting policy on depreciation.

The depreciation expense in 1999 was $3,865,000 which was 68% higher than in
1998 at $ 2,298,000. Depreciation expense in 1998, was 14% higher than in 1997.
The main reason for the increase in 1999 was depreciation on the Company's
investment in computing capacity and equipment for the services department
which totaled $3.44 million in 1999.

AMORTIZATION

The amortization expense consists of amortization of acquired developed
technology and capitalized research and development costs, and amortization of
goodwill. See note 2g of the Consolidated Financial Statements for details of
the Company's accounting policy on amortization of acquired developed
technology and goodwill, and note 2h for details of the Company's accounting
policy on amortization of capitalized research and development costs.

The amortization expense in 1999 was $3,064,000. This was 31% higher than in
1998 at $ 2,347,000. The amortization expense in 1998, was 98% higher than in
1997. The increase in amortization in 1998 when compared to 1997 was primarily
due to the addition of acquired developed technology attributable to the
CogniSeis acquisition. 1998 was the first full year of amortization of this
acquired developed technology.

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 (see note 2g of the Consolidated Financial
Statements).


                                       47
<PAGE>   48

In the future, if the Company is successful in acquiring complementary
businesses, accounted for as purchases, 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, the Company recorded non recurring expenses totaling $2,705,000. This
amount included $763,000 related to lease termination costs from the elimination
of duplicate facilities, $1,595,000 related to impairment costs of developed
technology, developed or acquired prior to the PTM acquisition, and $347,000
associated with personnel reductions.

In 1997, the Company recorded non recurring expenses totaling $10,676,000
resulting from or associated with the CogniSeis acquisition.

FINANCIAL EXPENSES, NET

Financial expenses for 1999 was $484,000, a decrease of $177,000 as compared to
1998. The decrease in 1999 was primarily attributable to a reduced overall level
of borrowings in 1999, as explained in the following paragraph, together with
lower interest rates and reduced commissions.

In the first half of 1998, the Company incurred substantial finance expenses in
connection with the bridge financing facility, totaling $12 million, for the
acquisition of CogniSeis. The bridge loan was repaid from the proceeds of the
Company's initial public offering early in the third quarter of 1998. Commencing
in the fourth quarter of 1998 and continuing in 1999, the Company drew down on
its bank financing facilities.

LIQUIDITY, CAPITAL RESOURCES AND FINANCING

The Company has historically financed its operations and capital requirements
through equity funding, bridge funding and bank credit facilities.

At the end of 1999, cash and cash equivalents were $5,457,000 compared to
$3,463,000 at the end of 1998. At the end of 1999 short term bank debt,
including current maturities of long term loans stood at $4,639,000 and long
term bank loans at $3,923,000 compared to $2,228,000 and $39,000 respectively,
at the end of 1998. Total lease obligations at the end of 1999 were $1,935,000
compared to $959,000 at the end of 1998.

At the end of March 2000, cash and cash equivalents were $5,239,000, short term
bank debt, including current maturities of


                                       48
<PAGE>   49

long term loans, stood at $ 5,111,000, long term bank loans at $3,114,000 and
total lease obligations at $1,742,000.

In 1999, the Company increased its bank credit facilities for short-term and
long-term borrowings to a total of $18 million, of which $ 8.6 million had been
utilized at the end of 1999 and $8.2 million at the end of March 2000. The
interest rate on these borrowings is the London Inter Bank Offer Rate ("LIBOR")
plus 1.0%. As security for the credit facilities the Company has registered a
floating charge on all its assets in favor of the banks.

CASH FROM OR USED IN OPERATING ACTIVITIES

Cash used in operating activities totaled $1,089,000 in 1999 compared with
$1,773,000 in 1998 and cash from operating activities of $1,633,000 in 1997.

At December 31, 1999, the Company had working capital of $15,346,000 (of which
$5,457,000 was in cash and cash equivalents) compared to working capital of
$9,154,000 (of which $3,463,000 was in cash and cash equivalents) at December
31, 1998, an increase of $6,192,000 or 68%. Current assets increased by 49% in
1999 whilst current liabilities increased by only 38%. This is reflected by a
53% increase in trade receivables and accrued income and a 25% increase in trade
and other payables and deferred revenues.

In the first quarter of 2000, cash from operations totaled $2.6 million,
primarily resulting from a significant improvement in receivables collections.

CASH USED IN INVESTING ACTIVITIES

Cash used in investing activities in 1999 totaled $15,401,000 compared to
$4,516,000 in 1998 and $11,594,000 in 1997. In 1999, the Company continued its
investment in computer hardware, to expand the Company's geoscience services
business, and in office facility improvements.

In March 1999, Paradigm acquired PTM for a total investment of $ 8.4 million and
in June 1999, Paradigm acquired PlaNET, an integrated suite of software for
reservoir modeling and oil and gas field network planning for approximately $1.2
million.

The Company intends to continue to seek opportunities to expand its product line
and geoscience services business. Accordingly, future investing activities may
include acquiring complementary businesses that add key technologies or market
presence and enhance existing products and services.


                                       49








<PAGE>   50

CASH FROM FINANCING ACTIVITIES

Cash from financing activities totaled $19,068,000 in 1999, compared with
$1,674,000 in 1998 and $11,077,000 in 1997. In April and May 1999, the Company
raised $12,973,000, net, from the sale and issuance of Ordinary Shares in three
private placements and from the exercise of warrants.

During 1999, the Company increased its long term and short term bank debt by
$6.3 million.

The Company's initial public offering in June 1998 raised $21,160,000. Of this
amount, $12,000,000 was used to repay the bridge loans incurred in connection
with the CogniSeis acquisition and $8,457,000 was used to complete the payment
for the acquisition of CogniSeis.

Surplus funds are deposited in short term interest bearing bank deposits.

CAPITAL COMMITMENTS

As of May 31, 2000, the Company had no material capital expenditure commitments.
However, the planned capital expenditure budget for 2000, for ongoing equipment
replacement and intrinsic growth needs, is estimated at about $7 million, of
which $2.5 million has been expended to date. Where appropriate, the Company has
availed, and will in the future consider availing itself of equipment leasing
facilities for the acquisition of fixed assets.

FUTURE FINANCING REQUIREMENTS

The Company's ability to maintain and grow its operating income and cash flow is
dependent upon continued capital spending.

Looking forward, the Company considers that its cash flow from operations and
its 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 sources external to the Company, either as additional
leverage on the balance sheet or through the issue of equity.

IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS

The inflation rate in Israel in 1999 was 1.3%, compared to 8.6% in 1998 and 7%
in 1997. The inflation rate between January and April 2000 is negative at -1%.
The impact of inflation on the Company's results of operations is insignificant.

Most of the Company's sales and a substantial portion of its costs (65%) are
denominated in United States dollars. Since the US


                                       50
<PAGE>   51

dollar is the primary currency in the economic environment in which the Company
operates the dollar is its functional currency. Since the beginning of 1999, the
Company has entered into short-term hedging where foreign currency exposure was
anticipated (See Item 9A- Quantitative and Qualitative Disclosure about Market
Risk). In the future, the Company may enter into currency hedging transactions
to decrease the risk of financial exposure from fluctuations in exchange rates;
however, no assurance can be given that such measures will adequately protect
the Company from material adverse effects arising from exchange rate
fluctuation.

YEAR 2000

The Company did not experience any significant disruptions in its
operations during the transition into the Year 2000. The Company completed
necessary assessments, modifications or replacement and testing of systems
critical for the delivery of products and services and believes that it met its
Year 2000 readiness objectives. The company also prepared a contingency plan to
mitigate potential adverse effects which might have arisen from non-compliant
systems or third parties who had not adequately addressed the Year 2000 issue.
Because of these preparations, there were no significant disruptions in
operations. While the Company did not experience any significant Year 2000
disruptions during the transition into the Year 2000, it will continue to
monitor operations and systems and address any date-related problems that may
arise as the year progresses.

ITEM 9A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risks relating to the Company's operations may result from changes in
interest rates, foreign currency exchange rates and weak economic conditions in
foreign markets. In general, the Company does not invest in foreign currency or
engage in foreign currency hedging, interest-risk hedging or other risk-related
tradable financial instruments, and the Company has not held derivative
financial instruments. Since the beginning of 1999, the Company has entered into
short-term hedging where foreign currency exposure was anticipated.

FOREIGN CURRENCY EXPOSURE AND RISK:

Most of the Company's sales and expenses are in US dollars. A strengthening of
the US dollar could make the Company's products less competitive in foreign
markets. A minority of the sales are denominated in Canadian dollars, U.K
sterling, Australian dollars and Russian rubles. To-date, these foreign currency
exposures have been fully offset by expenses incurred in local currencies.

The Company does have foreign currency exposure with respect to the local
currencies in each of its office locations as local expenses are incurred in
local


                                       51
<PAGE>   52

currency. The Company has judged this exposure not to be material because most
of the Company's revenues are in US dollars. Only a future weakening of the US
dollar against UK sterling, the Canadian or the Australian dollars would change
this risk profile. The Company, because 15% of its expenses are in New Israeli
Shekels, does have an ongoing exposure to the risk of exchange rate changes
between the shekel and the US dollar, and therefore the company covers it's
exposure by forward Shekel/US Dollar transactions. See Management's Discussion
and Analysis of Financial Condition and Results of Operations-Impact of
Inflation and Currency Fluctuations.

Under these circumstances, there has been no material foreign currency exposure
and the over-all effect of foreign currency exchange rate fluctuations on the
Company in 1999 was not material.

INTEREST RATE RISK:

The Company's interest expenses are sensitive to changes in the London InterBank
offered rate (LIBOR), since all of its short and medium term borrowings bear a
LIBOR-based interest rate. Excess liquidity is invested in short term
investments which bear minimal interest rate risk.

As of December 31,1999, short term bank debt, including current maturities of
long term loans was $ 4.6 million and medium term bank loans were $3.9 million.
At the end of March 2000, short term bank debt, including current maturities of
long term loans was $5.1 million and medium term bank loans were $3.1 million
The Company has concluded that this risk is not material and has not availed
itself of financial instruments to hedge this risk. Under these circumstances no
quantitative tabular disclosures are required.

ITEM 10 - DIRECTORS AND OFFICERS OF REGISTRANT

Pursuant to the Articles of Association of the Company, Directors are elected at
each annual general meeting of shareholders of the Company (an "Annual
Meeting"), by a vote of the holders of a majority of the voting power
represented at such Annual Meeting. The Articles of Association provide that the
Chief Executive Officer of the Company must be a Director. Each Director holds
office until the first Annual Meeting following the Annual Meeting at which such
Director was elected. The number of Directors may not exceed eight. Currently
there are eight directors. Executive Officers are appointed by and serve at the
discretion of the Board of Directors.

As at May 31, 2000, the Company's executive officers and directors were as
follows:



                                       52
<PAGE>   53


<TABLE>
<CAPTION>
NAME:                      AGE:      POSITION:
----                       ---       --------
<S>                        <C>       <C>
Eldad Weiss(2)             44        Chairman, Chief Executive Officer, Director
Yehezkel Marueli           46          President, Chief Operating Officer
Brian W. Berman            54        Chief Financial Officer
Mordechai Abir             70        Director
Elie Barr (1)              53        Director
Jacob Dunietz (2)          44        Director
Michael Geiger (2)         62        Director
Erel Margalit (1)          37        Director
Amos Nur                   62        Director
Jay Seid (1)               39        Director
Jonathan Keller            48        Corporate Secretary
</TABLE>

(1)    Member of the Audit Committee
(2)    Member of the Compensation Committee


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.

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 Bachelor of Arts 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 B.Sc. in Chemistry and Physics, a B.Sc. (Honors)
in Chemistry and a M.Sc. 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.

MORDECHAI ABIR has served as a Director since August 1999 Since May 2000, Dr.
Abir is Director of Research, Energy and International Politics at Hoenig & Co.
International. From September 1995 until April 2000, Dr. Abir was Senior
Strategist in the field of energy and international relations at Schroder & Co.
Inc., having been a consultant to Schroder & Co. Inc. since 1991. From October
1988 until September 1995 Dr. Abir was a Professor of MidEastern & African
Studies at the Hebrew University in Jerusalem and has been a Professor Emeritus
since 1995. Dr. Abir is a


                                       53
<PAGE>   54

consultant and guest lecturer in the fields of International and Middle East
affairs, the oil economy and oil politics at academic institutions and
government and non-government organizations in the United States, Europe, Israel
and Japan, including, the Woodrow Wilson and Brookings Institution in Washington
D.C., the U.S. Congress, the NATO Defense College in Rome and several East
European Institutions of Political Science. Professor Dr. Abir holds a Bachelor
of Arts Degree (with Honors) in MidEastern Islamic Studies and International
relations and a M.A (with Honors) in MidEastern Islamic Studies and Middle East
Economics, from the Hebrew University, Jerusalem and a Ph.D. from the University
of London School of Oriental and African Studies.

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 1995, Mr. Barr was an Executive Vice President of Teledata Communications
Ltd., a telecommunications Company. Mr. Barr has a B.A. in Economics and
Political Sciences from Tel Aviv University and a B.A. 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 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. Mr. Dunietz is a member of the Board of Directors of BVR
Technologies Ltd., a holding company, whose securities are publicly traded on
the Nasdaq National Market, and 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 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 B.S. (with Honors) 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 serves on the supervisory board of Netia Holdings and is a director
of Tel Ad Jerusalem studios and Formula Ventures Ltd. Mr. Geiger served as a
consultant to Occidental Petroleum Corporation for their energy and chemical
industry activities in Israel. Mr. Geiger holds a Bachelor of Science Degree in
Economics from Tel-Aviv University, of which he is a Governor, and a M.A. in
Economics from the University of California in Los Angeles.

EREL MARGALIT has served as a Director since May 1995. Mr. Margalit is the
General Partner of each of two venture capital funds, Jerusalem Pacific Ventures
(1994) L.P. and Jerusalem Venture Partners (1997) L.P., which he founded,
targeted at early stage communications and software and e-commerce companies in
Israel. Mr. Margalit also serves on the Boards of Directors of several
privately-held companies. From 1990 to 1993, Mr. Margalit was Director of
Business Development for the City of Jerusalem. Mr. Margalit has a B.A. in
Philosophy and an M.B.A. from the Hebrew University of Jerusalem, and a M.Phil.
from Columbia University in New York.


                                       54
<PAGE>   55

AMOS NUR has served as a Director since October 1998. Professor Nur is Professor
of Earth Sciences at Stanford University. Professor Nur joined the faculty of
Stanford University in 1970, and has served as a Professor of Geophysics at
Stanford since 1979, and Chairman of the University's Department of Geophysics
between 1985 and 1991, and again since 1997. He was appointed to the Wayne Loel
chair of Earth Sciences in 1988. He is a director of the Stanford Rock Physics
project which he founded in 1977. In 1997 he was a distinguished lecturer of the
Society of Exploration Geophysicists and in 1988 he was a distinguished lecturer
for the American Association of Petroleum Geologists. Professor Nur holds a
Bachelor of Science Degree in geology from the Hebrew University, Jerusalem and
a Ph.D. in geophysics from M.I.T.

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
B.A., Summa Cum Laude, from Rutgers University and a J.D., with honors, from New
York University School of Law.

JONATHAN KELLER has served as 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.

Pursuant to the agreement between the Company and Shamrock Holdings Inc., 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
("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 annual general meeting
of shareholders of the Company to elect Mr. Erel Margalit to the Board of
Directors of the Company.


                                       55
<PAGE>   56

EXTERNAL AND INDEPENDENT DIRECTORS

Under the new Israeli Companies Law which came into effect on February 1, 2000,
Israeli companies whose shares have been offered to the public in or outside of
Israel are required to appoint two people to serve as external directors on the
board of directors of a company. The Companies Law provides that a person may
not be appointed as an external director if the person or the person's relative,
partner, employer or any entity controlled by that person has at the date of
appointment, or has had at any time during the two years preceding that date,
any affiliation with the company, any entity controlling the company or any
entity controlled by the company or by this controlling entity. The term
"affiliation" includes:


       -      an employment relationship;

       -      business or professional relationship maintained on a regular
              basis;

       -      control; or

       -      service as an officer.

No person can serve as an external director if the person's position or other
business creates, or may create, conflict of interests with the person's
responsibilities as an external director or if such position or other business
may impair such director's ability to serve as an external director. No person
who is a director in one company can serve as an external director in another
company, if at that time a director of the other company serves as an external
director in the first company. The Companies Law further provides that when, at
the time of appointment of an external director, all members of the board of
directors of the company are of one gender, then the external director appointed
shall be of the other gender.

External directors are appointed by a majority vote at a shareholders' meeting,
provided that either: (1) the majority of shares voted at the meeting, including
at least one third of the shares of non-controlling shareholders voted at the
meeting, vote in favor of appointment of the director or (2) the total number of
shares of non-controlling shareholders voted against the election of the
director does not exceed one percent of the aggregate voting rights in the
company. The initial term of an external director will be three years and may be
extended for an additional three-year period. Each committee of a company's
board of directors will be required to include at least one external director
and all external directors must be members of the company's audit committee.
Regulations promulgated under the Companies Law provide that the applicability
of the Companies Law with respect to the nomination by an Israeli company whose
shares are publicly traded outside Israel only shall commence on August 1, 2000.
At such time, the Company shall be required to appoint two external directors.
These regulations also provide that, with respect to a company whose shares are
publicly traded outside Israel only, the external directors do not have to be
residents of Israel. None of the existing directors will qualify as external
directors under the Companies Law and the Company is currently engaged in
selecting suitable candidates for the position of external directors.


                                       56
<PAGE>   57

In addition, we are obligated under the requirements for quotation on the Nasdaq
National Market to have at least two independent directors on our board of
directors, who also may serve as external directors under the Companies Law, and
to establish an audit committee, at least a majority of whose members are
independent of management. The audit committee should adopt a formal written
audit committee charter to be reviewed annually.

An external director is entitled to consideration and to the refund of expenses,
only as provided in regulations adopted under the Companies Law and is otherwise
prohibited from receiving any other consideration, directly or indirectly, in
connection with service provided as an external director. Nevertheless, the
grant of an exemption from liability for breach of fiduciary duty or duty of
care, an undertaking to indemnify, indemnification or insurance under the
provisions of the Companies Law shall not be deemed as consideration. Under the
Companies Law, an external director cannot be dismissed from the office unless:

       -      the board of directors determines that the external director no
              longer meets the requirements for holding such office, as set
              forth in the Companies Law or that the director is in breach of
              his or her fiduciary duties to the company and the shareholders of
              the company vote (by the same majority required for the
              appointment) to remove the external director after the external
              director has been given the opportunity to present his or her
              position;

       -      an Israeli court determines, upon a request of a director or a
              shareholder, that the director no longer meets the requirements
              for holding such office as set forth in the Companies Law or that
              the director is in breach of his or her fiduciary duties to the
              company; or

       -      the court determines, upon a request of the company or a director,
              shareholder or creditor of the company, that the external director
              is unable to fulfill his or her duty or has been convicted of
              certain crimes as specified in the Companies Law.

DUTY OF CARE AND FIDUCIARY AND LOYALTY DUTIES

The Companies Law codifies the duty of care and fiduciary and duties of loyalty
that an officer owes to a company. The term officer includes any director,
managing director, general manager, chief executive officer, executive vice
president, vice president, other managers who are directly subject to the
general manager and any other person fulfilling or assuming any of these
positions or responsibilities without regard to such person's title. The
fiduciary and loyalty duties of an officer include:

       -      avoiding any conflict of interest between the officer's position
              with the company and his personal affairs;

       -      avoiding any competition with the company;

       -      avoiding exploiting any of the company's business opportunities in
              order to receive personal advantage for himself or others; and


                                       57
<PAGE>   58

       -      revealing to the company any information or documents relating to
              the company's affairs which the officer has received due to his
              position as an officer of the company.

In addition, the Companies Law requires disclosure by an officer to the company
in the event that an office holder is aware of a ""personal interest" in any
transaction or proposed transaction of the company (including, generally, a
personal interest of certain relatives in an extraordinary transaction of the
company).

AUDIT COMMITTEE, INTERNAL AUDITOR AND CERTIFIED PUBLIC ACCOUNTANT

The Companies Law provides that public companies must appoint an Audit Committee
of the Board of Directors. The number of members of the Audit Committee shall
not be fewer than three and it shall include all of the external directors. The
chairman of the Board of Directors, any director who is employed by the company
or gives services to the company, on a regular basis, a controlling shareholder
or his relative cannot be a member of the Audit Committee. These directors are
not external directors under the Companies Law. The Board of Directors must also
appoint an internal auditor in accordance with the recommendations of the Audit
Committee. The role of the internal auditor is to examine, among other matters,
whether the company's actions comply with the law, integrity and orderly
business procedure. The internal auditor may be an employee of the company but
not a person holding 5% or more of a company's capital, a person who has the
power to appoint one or more directors or the general manager, an officer, or a
relative of the foregoing or the company's certified public accountant or its
representative. The Company has appointed an internal auditor. In addition,
under the Companies Law, all companies must appoint a certified public
accountant to audit the company's financial statements and report any material
improprieties that he may discover to the chairman of the Board of Directors.

APPROVAL OF SPECIAL TRANSACTIONS UNDER ISRAELI LAW

Under the 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 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 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


                                       58

<PAGE>   59

director or the general manager. The disclosure must be made without delay and
not later than the board of directors meeting as which the transaction is first
discussed. For these purposes, the definition of a controlling shareholder under
the Companies Law includes a shareholder that holds 25% or more of the voting
rights in a company, unless another shareholder holds more than 50% of the
voting rights (if two or more shareholders are interested parties in the same
transaction their shareholdings shall be deemed cumulative).

Once the officer or controlling shareholder complies with these disclosure
requirements, the company may approve the transaction in accordance with the
provisions of the 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, 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.

DUTY OF SHAREHOLDERS

Under the Companies Law, in exercising their rights and in fulfilling their
obligations to the company and the other shareholders, shareholders must act in
good faith and in a customary manner and refrain from abusing their power when,
among other things, voting at general or class meetings on any amendment of the
articles of association, an increase of the company's registered (authorized)
share capital, a merger or approval of certain acts and transactions which
require shareholder approval. The laws governing breach of contract apply, with
the necessary modifications, to breach of the above obligations. Furthermore, a
shareholder who may control the company, a


                                       59
<PAGE>   60

shareholder who knows that his vote will be decisive at a general or class
meeting and a shareholder who has the power to appoint or prevent the
appointment of an office holder or who has any other power with respect to the
company, must act fairly towards the company. Any breach by any such shareholder
of these obligations is treated in the same way as a breach by an office holder
of his fiduciary duty, with the necessary modifications.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Companies Law permits a company to insure an officer in respect of
liabilities incurred by him by reason of acts or omissions committed in his
capacity as an officer with respect to: a breach of the officer's duty of care
to the company or to another person, or a breach of the officer's fiduciary duty
to the company, to the extent that he acted in good faith and had reasonable
cause to believe that the act would not prejudice the company. Furthermore, the
Companies Law provides that a company can indemnify an officer for monetary
liabilities or obligations imposed upon him in favor of other persons pursuant
to a court judgement, including a compromise judgement or an arbitrator's
decision approved by a court, and reasonable litigation expenses, including
attorney's fees, actually incurred by the officer or imposed upon him by a
court, in an action, suit or proceedings brought against him by or on behalf of
the company or by other persons, in connection with a criminal action from which
he was acquitted or in connection with a criminal action which does not require
proof of criminal intent in which he was convicted, in each case by reasons of
acts or omissions of such person in his capacity as officer.

Furthermore, the Companies Law provides that the company's articles of
association may provide for indemnification of an officer post-factum and may
also provide that a company may undertake to indemnify an officer in advance,
provided such undertaking is limited to types of occurrences which, in the
opinion of the company's board of directors, are, at the time of the
undertaking, foreseeable and, to an amount the board of directors has determined
is reasonable in the circumstances.

The Company's articles of association allows it to insure and indemnify officers
to the fullest extent permitted by law except that shareholders have not yet
approved the indemnification of officers in advance and the required amendments
to the articles of association. The Company carries Directors and Officers
Insurance up to a limit of $10 million in aggregate. The Company intends to
enter into indemnification agreements with each of it's officers and directors.

ANTI-TAKEOVER PROVISIONS; MERGERS AND ACQUISITIONS UNDER ISRAELI LAW

Pursuant to the 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 Companies Law provides


                                       60
<PAGE>   61

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 Companies Law further provides that if following the tender offer such
acquiring shareholder holds more than 95% of the outstanding shares of any
class, the holders of all the remaining shares will be obligated to transfer
such shares to the acquiror at the tender offer price. This entails the
possibility of additional delay and the imposition of further approval
requirements at the court's discretion. The 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 Companies Law does not generally
require court approval of a merger. Pursuant to the Companies Law the articles
of association of companies such as Paradigm, 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 Companies Law,
companies, such as Paradigm, which have been incorporated prior to the
Companies Law coming into effect, must specifically amend their articles of
association to provide for the shareholder voting requirements contained in the
Companies Law.

The 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 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 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.

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<PAGE>   62

ITEM 11 - COMPENSATION OF OFFICERS AND DIRECTORS

The aggregate remuneration paid by the Company to all persons as a group (11
persons) who served in the capacity of director or officer in the year ended
December 31, 1999, was approximately $ 662,000, which includes amounts paid to
provide pension, retirement or similar benefits, but does not include expenses
for automobiles made available to all of its officers, expenses reimbursed to
officers and other fringe benefits commonly reimbursed or paid by companies in
Israel. In 1999, the Company set aside approximately $ 83,000, for the pension
and severance fund benefits of its executive officers and directors.

The Company 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 Ordinary Shares of the Company. Mr. Weiss's employment
agreement also contains confidentiality and non-competition provisions.

The Company entered into an employment agreement with Mr. Brian Berman which is
terminable 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
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 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
Ordinary Shares of the Company. Mr. Marueli's employment agreement requires
compliance with confidentiality and non-competition provisions.

                                       62




<PAGE>   63



ITEM 12 - OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES


STOCK OPTION PLANS

THE 1994 STOCK OPTION PLANS

In 1994, the Company 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, the Company granted options to six key employees of
the Company 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, the Company has 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 the 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 the 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, 226,184 options are vested and are exercisable immediately. Options
granted under the 1994 General Plan are vested, two thirds are exercisable
immediately and one-third on July 15, 2000. 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 the 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 the Board of
Directors or the 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.

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<PAGE>   64

As of May 31, 2000, 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 60,176 Ordinary
Shares, respectively, were outstanding

As of May 31, 2000, the Company had granted options 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; 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 Company's 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"), the Company has reserved for issuance an
aggregate of 1,950,000 Ordinary Shares. The 1997 Plans are administered by the
Board of Directors or the Compensation Committee and will terminate on January
4, 2005. 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 the Company 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 the Company's
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 the Board of Directors or the Compensation
Committee. In addition, the Company may provide loans to employees to assist
them in purchasing shares upon exercise of the options. The 1997 Plans vest as
to 25% of the options granted after a period of employment with the Company or
its 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 the Board of Directors or the 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 s termination. In the event of the option
holder's retirement, any outstanding options shall, at the discretion of the
Board of Directors or the Compensation Committee, accelerate and become
immediately exercisable as of the later of the date of retirement or one year
following the date of the grant. The shares underlying any options which expire
or are cancelled prior to exercise are subject to future options grants under
the 1997 Plans.

                                       64
<PAGE>   65

As of May 31, 2000 options to purchase a total of 1,737,322 Ordinary Shares
under the 1997 Plans were outstanding.

As of May 31, 2000, the Company had granted options under the 1997 Plans to
certain officers of the Company 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 the Company's Board of Directors.

1994 WARRANTS

In July 1994, the Company issued to certain investors and their affiliates
warrants (the "1994 Warrants") to purchase an aggregate of 539,244 Ordinary
Shares of the Company at an aggregate exercise price equal to the lesser of (i)
80% of the share price of the Company's most recent private placement or (ii)
80% of the initial public offering price of the Company's Ordinary Shares.

In 1999, the 1994 Warrants were fully exercised by the warrant holders,
including warrants held by Eldad Weiss, the Company's Chairman and Chief
Executive Officer.

1997  WARRANTS

In September 1997, the Company issued warrants to purchase an aggregate of
720,000 Ordinary Shares at an exercise price of $6.00 per Ordinary share (the
"1997 Warrants"). The 1997 Warrants contain anti-dilution protections and expire
on September 30, 2004.

Resulting from the completion of a share issuance in April and May 1999 of
2,017,544 Ordinary Shares at $5.70 per share to new and existing investors,
under the terms of the 1997 warrant agreements, the holders of the 1997 Warrants
will be entitled to a further 5,723 warrants. The exercise price on all of the
warrants will be $5.95 per Ordinary Share.

In April 2000, 119,782 Ordinary shares were issued following a "net cashless
exercise" of 362,861 1997 Warrants.

1999 WARRANTS

As compensation for services provided to the Company in connection with the
Company's private placement of Ordinary Shares in May 1999, Schroder & Co., Inc.
was issued warrants to purchase 250,000 Ordinary Shares exercisable during a
three year period at an exercise price of $5.70 per Ordinary Share. These
warrants have incidental registration rights with respect to the underlying
shares.

ITEM 13 - INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS

Certain principals of Mashov Gruss Investments Ltd. and Bachow & Associates Inc.
(including Jay Seid, a director of the Company and a Managing Director of Bachow
& Associates Inc.), principal shareholders of the Company, as part of the group
of

                                       65
<PAGE>   66

lenders with whom the Company entered into bridge loans in connection with the
acquisition of CogniSeis at an interest rate of 10% per annum, were repaid
$1,180,000 and $87,000, respectively, of such bridge loans plus accrued interest
thereon.

The Company 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, the Company 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. Both loans are repayable on December 31,
2000.

ITEM 14 - DESCRIPTION OF SECURITIES TO BE REGISTERED

NONE

ITEM 15 - DEFAULTS UPON SENIOR SECURITIES

NONE

ITEM 16 - CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES AND USE OF PROCEEDS

None

ITEM 17 - FINANCIAL STATEMENTS

NOT APPLICABLE

ITEM 18 - FINANCIAL STATEMENTS

See - Item 19.

ITEM 19 - FINANCIAL STATEMENTS AND EXHIBITS

(a)    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


                                       66
<PAGE>   67

       All schedules for which provision is made in the applicable accounting
       regulations of the Securities and Exchange Commission are not required
       under the related instructions or are inapplicable and therefore have
       been omitted.



(b)    Exhibits:
                  EXHIBIT NO.                EXHIBIT
                  3.1      Memorandum of Association of Registrant.++**
                  3.2      Amended and Restated Articles of Association of
                           Registrant.**
                  3.3      Proposed Amendment to the Amended and Restated
                           Articles of Association of the Registrant*******
                  10.      Form of Warrant Agreement dated as of October 10,
                           1997 between the Company and the Bridge Loan
                           lenders.**
                  10.2     Form of Warrant Certificate by the Company in favor
                           of the Bridge Loan lenders.**
                  10.3     Stock Purchase Agreement, dated as of September 5,
                           1997,** as amended September 24, 1997 among Paradigm
                           Geophysical Ltd., Paradigm Geophysical Corp. and
                           GeoScience Corporation.***
                  10.4     Key Employee Plan.**
                  10.5     May 1994 Stock Option Plan.**
                  10.6     1994 General Stock Option Plan.**
                  10.7     1997 Executive Stock Option Plan.**
                  10.8     1997 Stock Option Plan for Qualifying Israel
                           Employees.**
                  10.9     1997 Stock Option Plan for U.S. Employees.**
                  10.10    Form of 1994 Warrant issued in connection with a
                           private placement of the Company's securities.**
                  10.11    Amended and Restated Asset Purchase Agreement by and
                           among Geotech Joint Stock Company and Dr. Nikolai L.
                           Baransky, Dr. Evgenii A. Kozlov, Mr. Dimitry V.
                           Sulitsky, Mr. Christopher D. Kim, Paradigm
                           Geophysical (U.K.) Ltd., Paradigm Geophysical Europe
                           Ltd., Paradigm Geophysical Services Ltd. and Paradigm
                           Geophysical Ltd.********
                  10.12    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.********
                  10.13    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.********
                  10.14    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. ********
                  10.16    Share Purchase Agreement, dated April 14, 1999, by
                           and between Paradigm Geophysical Ltd. and Shamrock
                           Holdings, Inc.********
                  10.15    Registration Rights Agreement by and among Paradigm
                           Geophysical Ltd., Shamrock Holdings, Inc., Eastgate
                           Fund L.P., Eastgate International Limited, Mr. Harris
                           Kaplan and Berman Eastgate Growth Fund. ********


                                       67
<PAGE>   68

                  10.17    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. ********
                  11.1     Statement regarding computation of per share earnings
                           (loss).***
                  21.1     Subsidiaries of the Registrant.
                  23.2     Consent of Kost Forer and Gabbay.
                  **       Incorporated herein by reference to the Company'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 the Company's Registration Statement on Form F-1
                           (File No. 333-7926), filed with the Commission on
                           November 21, 1997.
                  ****     Incorporated herein by reference to Amendment No. 2
                           to the Company's Registration Statement on Form F-1
                           (File No. 333-7926), filed with the Commission on
                           April 7, 1998.
                  *****    Incorporated herein by reference to Amendment No. 3
                           to the Company's Registration Statement on Form F-1
                           (File No. 333-7926), filed with the Commission on May
                           13, 1998.
                  ******   Incorporated herein by reference to Amendment No. 4
                           to the Company's Registration Statement on Form F-1
                           (File No. 333-7926), filed with the Commission on
                           June 2, 1998.
                  *******  Incorporated herein by reference to Amendment No. 6
                           to the Company's Registration Statement on Form F-1
                           (File No. 333-7926), filed with the Commission on
                           June 5, 1998.
                  ******** Incorporated herein by reference to Form 20-F Annual
                           Report pursuant to Section 13 or 15(d) of the
                           Securities Exchange Act of 1934 filed with the
                           Commission on June 30, 1999
                  ++       English translations from Hebrew original.
(c)               Financial Statement Schedule.
                  Not Applicable.


                                       68
<PAGE>   69





                   PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES


                        CONSOLIDATED FINANCIAL STATEMENTS


                             AS OF DECEMBER 31, 1999


                                 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 FINANCIAL STATEMENTS                         F-9 - F-29
</TABLE>




                                 - - - - - - - -



                                      F-1
<PAGE>   70




[ERNST & YOUNG LOGO]







                         REPORT OF INDEPENDENT AUDITORS

                             TO THE SHAREHOLDERS OF

                            PARADIGM GEOPHYSICAL LTD.


        We have audited the accompanying consolidated balance sheets of Paradigm
Geophysical Ltd. ("the Company") and subsidiaries as of December 31, 1998 and
1999 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, 1999. 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.) Ltd. and Paradigm Geophysical
(Singapore) Pte (Ltd.), wholly-owned subsidiaries, whose statements reflect
total assets of $ 7,443 thousand as of December 31, 1998, and total revenues of
$ 3,642 thousand and $ 17,746 thousand for the years ended December 31, 1997 and
1998, respectively. We did not audit the financial statements of Paradigm
Geophysical (U.K.) Ltd., a wholly-owned subsidiary whose statements reflect
total assets of $ 8,892 thousand as of December 31, 1999, and total revenues of
$ 11,851 thousand, for the year ended December 31, 1999. Those statements were
audited by other auditors whose reports have been furnished to us and our
opinion, insofar as it relates to the amounts included for those other
subsidiaries is based solely on the reports of the other auditors.

        We conducted our audits in accordance with generally accepted auditing
standards 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 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 on the reports of other
auditors, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and
subsidiaries as of December 31, 1998 and 1999, and the related consolidated
results of operations and cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles in the United States.




Tel-Aviv, Israel                                          KOST FORER & GABBAY
January 25, 2000                                       A Member of Ernst & Young
                                                             International



                                      F-2
<PAGE>   71


                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,
                                                                   ----------------------------------------------------
                                                                            1998                         1999
                                                                   ------------------------     -----------------------
<S>                                                                <C>                          <C>
        ASSETS

CURRENT ASSETS:
Cash and cash equivalents                                                  $   3,463                     $  5,457
Trade receivables (net of allowance for doubtful accounts -
     $ 1,222 in 1998 and $ 1,666 in 1999)                                     14,281                       21,612
Accrued income                                                                 5,677                        9,012
Other receivables and prepaid expenses (Note 3)                                2,470                        2,443
                                                                   ------------------------     -----------------------

Total current assets                                                          25,891                       38,524
                                                                   ------------------------     -----------------------

LONG-TERM TRADE RECEIVABLES                                                      275                           54
                                                                   ------------------------     -----------------------

SEVERANCE PAY FUNDS                                                              605                          861
                                                                   ------------------------     -----------------------

FIXED ASSETS (Note 4)                                                          9,259                       12,007
                                                                   ------------------------     -----------------------

OTHER ASSETS:
Acquired developed technology (net of accumulated
     amortization of $ 1,878 in 1998 and $ 1,490 in 1999)
     (Note 1b and 1c)                                                           7,322                       9,805
Other assets, net (Note 5)                                                      2,783                       4,914
                                                                    -----------------------     -----------------------

                                                                               10,105                      14,719
                                                                    -----------------------     -----------------------

                                                                           $   46,135                    $ 66,165
                                                                    =======================     =======================
</TABLE>




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




                                      F-3
<PAGE>   72
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                     ------------------------------------------------------------
                                                                             1998                                  1999
                                                                     ----------------------               -----------------------

<S>                                                                  <C>                                  <C>
        LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term bank debt (Note 7)                                                $   1,778                            $   2,000
Current maturities of long-term bank loans (Note 7)                                450                                2,639
Current maturities of capital lease obligations                                      -                                  434
Trade payables                                                                   3,024                                2,774
Other payables and accrued expenses (Note 6)                                     7,811                                8,792
Deferred revenues                                                                3,674                                6,539
                                                                     ----------------------               -----------------------

Total current liabilities                                                       16,737                               23,178
                                                                     ----------------------               -----------------------

LONG TERM LIABILITIES:
Long-term bank loans (Note 7)                                                       39                                3,923
Capital lease obligations (Note 7)                                                   -                                  742
Other lease obligations                                                            959                                  759
Accrued severance pay                                                            1,151                                1,650
Deferred tax liability (Note 1c)                                                   552                                  445
                                                                     ----------------------               -----------------------

Total long-term liabilities                                                      2,701                                7,519
                                                                     ----------------------               -----------------------

SHAREHOLDERS' EQUITY (Note 8):
Ordinary shares:
     Authorized - 20,000,000 shares of NIS 0.5 par value at
     December 31, 1998 and at
     December 31, 1999
     Issued and outstanding - 10,514,484 shares at
        December 31, 1998 and 13,026,336 shares at
        December 31, 1999                                                        1,758                                2,064
Additional paid-in capital                                                      39,236                               51,903
Accumulated other comprehensive loss                                              (742)                              (1,166)
Accumulated deficit                                                            (13,555)                             (17,333)
                                                                     ----------------------               -----------------------

Total shareholders' equity                                                      26,697                               35,468
                                                                     ----------------------               -----------------------

                                                                             $  46,135                            $  66,165
                                                                     ======================               =======================
</TABLE>




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



                                      F-4
<PAGE>   73

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                             --------------------------------------------------------------------------------
                                                      1997                        1998                         1999
                                             -----------------------      ----------------------      -----------------------
<S>                                          <C>                          <C>                         <C>
Revenues: (Note 12)
  Products                                          $   19,979                  $    38,074                    $ 43,023
  Services                                               4,886                        7,288                      11,483
                                             -----------------------      ----------------------      -----------------------

                                                        24,865                       45,362                      54,506
                                             -----------------------      ----------------------      -----------------------

Operating expenses:
  Cost of products                                       5,070                        8,559                      12,418
  Cost of services                                       1,849                        3,107                       5,804
  Research and development                               4,728                        7,660                       9,306
  Selling, general and administrative                    9,744                       15,822                      20,638
  Depreciation                                           2,012                        2,298                       3,865
  Amortization                                           1,185                        2,347                       3,064
  Non recurring expenses (Note 13)                      10,676                            -                       2,705
                                             -----------------------      ----------------------      -----------------------

Total operating expenses                                35,264                       39,793                      57,800
                                             -----------------------      ----------------------      -----------------------

Operating income (loss)                                (10,399)                       5,569                      (3,294)
Financial expenses, net                                   (446)                        (661)                       (484)
                                             -----------------------      ----------------------      -----------------------

Income (loss) before income taxes                      (10,845)                       4,908                      (3,778)
Income taxes                                                 -                          356                           -
                                             -----------------------      ----------------------      -----------------------

Net income (loss)                                   $  (10,845)                 $     4,552                $     (3,778)
                                             =======================      ======================      =======================

Basic income (loss) per share (Note 14)             $    (4.66)                 $      0.66                $      (0.31)
                                             =======================      ======================      =======================

Number of shares used in computing
  basic income (loss) per share                          2,328                        6,850                      12,205
                                             =======================      ======================      =======================

Diluted income (loss) per share (Note 14)           $    (4.66)                 $      0.49                $      (0.31)
                                             =======================      ======================      =======================

Number of shares used in computing
  diluted income (loss) per share                        2,328                        9,306                      12,205
                                             =======================      ======================      =======================
</TABLE>





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



                                      F-5
<PAGE>   74

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES


STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>

                                                  PREFERRED SHARES                             ORDINARY SHARES
                                       ----------------------------------------    -----------------------------------------
                                            SHARES                AMOUNT                SHARES                 AMOUNT
                                       ------------------    ------------------    ------------------     ------------------

<S>                                    <C>                   <C>                   <C>                     <C>
Balance as of January 1, 1997                4,735,802         $       765                2,328,682         $       521
-----------------------------
Comprehensive income (loss):
  Net loss                                           -                   -                        -                   -
  --------
Comprehensive income (loss)

Debt issuance costs from
  warrants issued                                    -                   -                        -                   -
                                       ------------------    ------------------    ------------------     ------------------

Balance as of December 31, 1997              4,735,802                 765                2,328,682                 521
-------------------------------
Comprehensive income (loss):
  Net loss                                           -                   -                        -                   -
  --------
Other comprehensive income (loss),
  Foreign currency translation
    adjustment                                       -                   -                        -                   -

Other comprehensive income (loss)

Comprehensive income (loss)

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 income (loss):
  Net loss                                           -                   -                        -                   -
  --------

  Foreign currency translation
------------------------------
    adjustment                                       -                   -                        -                   -
--------------

Comprehensive income (loss)
---------------------------
Issuance of ordinary shares, net                     -                   -                2,017,544                 246
Exercise of warrants                                 -                   -                  479,908                  58
Exercise of options                                  -                   -                   14,400                   2
                                       ------------------    ------------------    ------------------     ------------------

Balance as of December 31, 1999                      -         $         -               13,026,336         $     2,064
-------------------------------        ==================    ==================    ==================     ==================
</TABLE>

<TABLE>
<CAPTION>
                                                               ACCUMULATED
                                        ADDITIONAL                OTHER                                              TOTAL
                                          PAID-IN             COMPREHENSIVE             ACCUMULATED              SHAREHOLDERS'
                                          CAPITAL             INCOME (LOSS)               DEFICIT                   EQUITY
                                     ------------------   -----------------------  ----------------------    ----------------------

<S>                                  <C>                       <C>                 <C>                        <C>
Balance as of January 1, 1997           $    19,107             $      (246)            $   (7,262)              $       12,885
-----------------------------
Comprehensive income (loss):
  Net loss                                        -                       -                (10,845)                     (10,845)
  --------                                                                                                   ----------------------
Comprehensive income (loss)                                                                                             (10,845)
                                                                                                             ----------------------
Debt issuance costs from
  warrants issued                               600                       -                      -                          600
                                     ------------------   -----------------------  ----------------------    ----------------------

Balance as of December 31, 1997              19,707                    (246)               (18,107)                       2,640
-------------------------------
Comprehensive income (loss):
  Net loss                                        -                       -                  4,552                        4,552
  --------
Other comprehensive income (loss),
  Foreign currency translation
    adjustment                                    -                    (496)                    -                         (496)
                                                                                                             ----------------------
Other comprehensive income (loss)                                                                                         (496)
                                                                                                             ----------------------
Comprehensive income (loss)                                                                                               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 income (loss):
  Net loss                                        -                       -                 (3,778)                      (3,778)
  --------
                                                                                                             ----------------------
  Foreign currency translation
------------------------------
    adjustment                                    -                    (424)                     -                         (424)
--------------
                                                                                                             ----------------------
Comprehensive income (loss)                                                                                              (4,202)
---------------------------                                                                                  ----------------------
Issuance of ordinary shares, net             10,736                       -                      -                       10,982
Exercise of warrants                          1,861                       -                      -                        1,919
Exercise of options                              70                       -                      -                           72
                                     ------------------   -----------------------  ----------------------    ----------------------

Balance as of December 31, 1999         $    51,903             $    (1,166)            $  (17,333)              $       35,468
-------------------------------      ==================   =======================  ======================    ======================
</TABLE>

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



                                      F-6
<PAGE>   75

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31,
                                                                      ---------------------------------------------
                                                                           1997            1998            1999
                                                                      -------------   -------------   -------------
<S>                                                                   <C>             <C>             <C>
Cash flows from operating activities:
-------------------------------------
Net income (loss)                                                     $     (10,845)  $       4,552   $      (3,778)
-----------------
Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
    Depreciation and amortization                                             3,197           4,778           6,929
    Loss on disposal of property                                                139               -               -
    Write-off of intangible assets                                              207               -           1,595
    In process research and development write-off upon
        acquisition of CogniSeis                                              6,577               -               -
    Decrease (increase) in other assets                                        (183)              -              84
    Increase in trade receivables, and accrued income                        (5,486)         (5,035)         (8,866)
    Decrease (increase) in other receivables and
        prepaid expenses                                                     (2,742)          1,432             (98)
    Decrease (increase) in deferred tax assets and
        liabilities, net                                                       (363)           (202)            203
    Increase (decrease) in deferred revenues                                  1,612          (1,929)          1,004
    Increase (decrease) in trade and other payables
        and accrued expenses                                                  9,374          (5,384)          1,795
    Increase in accrued severance pay, net                                      146              15             243
    Payment of other lease obligations                                            -               -            (200)
                                                                      -------------   -------------   -------------

Net cash provided by (used in) operating activities                           1,633          (1,773)         (1,089)
                                                                      -------------   -------------   -------------
Cash flows from investing activities:
-------------------------------------
Purchase of fixed assets                                                     (2,575)         (4,516)         (5,847)
------------------------
Purchase of developed technology                                                  -               -          (1,175)
--------------------------------                                                                      -------------
Investment in CogniSeis, net of cash acquired (1)                            (8,541)              -
Investment in PTM, net of cash acquired (2)                                       -               -          (8,379)
Capitalization of computer software costs                                      (649)              -               -
Cash received on disposal of fixed assets                                       171               -               -
                                                                      -------------   -------------   -------------

Net cash used in investing activities                                       (11,594)         (4,516)        (15,401)
                                                                      -------------   -------------   -------------
Cash flows from financing activities:
-------------------------------------
Amortization of debt issuance costs from warrants issued                        125             475               -

Issuance of share capital, exercise of warrants and exercise of                   -          21,160          12,973
Deferred offering expenses                                                     (759)              -               -
Proceeds from long-term loans                                                 1,089               -           6,500
Proceeds from bridge loans                                                   12,000               -               -
Repayment of bridge loan                                                          -         (12,000)              -
Repayment of note payable                                                         -          (8,457)              -
Repayment of long-term loans                                                   (883)           (571)           (427)
Short-term bank debt, net                                                      (495)          1,067             222
Payments on capital lease obligations                                             -               -            (200)
                                                                      -------------   -------------   -------------
Net cash provided by financing activities                                    11,077           1,674          19,068
                                                                      -------------   -------------   -------------

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

Increase (decrease) in cash and cash equivalents                              1,116          (4,766)          1,994
Cash and cash equivalents at the beginning of the year                        7,113           8,229           3,463
                                                                      -------------   -------------   -------------
Cash and cash equivalents at the end of the year                      $       8,229   $       3,463   $       5,457
                                                                      =============   =============   =============
</TABLE>

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



                                      F-7
<PAGE>   76

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


<TABLE>
<CAPTION>
                                                                                        YEAR ENDED DECEMBER 31,
                                                                       -----------------------------------------------------------
                                                                             1997                1998                 1999
                                                                       ------------------  ------------------   ------------------
<S>                                                                    <C>                 <C>                  <C>
(1)       On October 14 1997, the Company acquired all of the
             outstanding shares of CogniSeis, Development Inc.
             The net fair value of assets acquired was as
               follows (see Note 1c):
               Working capital, excluding cash and cash equivalents        $    (455)
               Fixed assets                                                    1,943
               Excess of cost over net fair value upon acquisition            16,553
                                                                       ------------------

                                                                              18,041
               Less - amounts financed by a note payable                      (9,500)
                                                                       ------------------

                                                                           $   8,541
                                                                       ==================

(2)       On March 31, 1999, the Company acquired the net assets of
            the Petroleum Technology Division of Mincom Limited
            ("PTM")
             The net fair value of liabilities acquired was as
               follows (see Note 1b):
               Working capital, excluding cash and cash equivalents                                                $     (672)
               Fixed assets, net                                                                                          318
               Excess of cost over net fair value upon acquisition                                                      8,733
                                                                                                                ------------------

                                                                                                                   $    8,379
                                                                                                                ==================
Supplemental disclosure of cash flow information:
   Cash paid during the period for:
     Interest                                                              $     491           $     721           $       42
                                                                       ==================  ==================   ==================

     Income taxes                                                                  -                   -                  379
                                                                       ==================  ==================   ==================

Non-cash transactions:
   Purchase of fixed assets                                                $   1,007           $     863           $    1,376
                                                                       ==================  ==================   ==================

   Note payable in the acquisition of CogniSeis(see Note 1b)               $   9,500           $       -           $        -
                                                                       ==================  ==================   ==================

   Offering expenses                                                       $     400           $   1,159           $        -
                                                                       ==================  ==================   ==================

Reduction of note payable to CogniSeis as a result of
   reevaluation of certain assets purchased                                $       -           $   1,043           $        -
                                                                       ==================  ==================   ==================


Additional acquired technology associated with the CogniSeis
   acquisition                                                             $       -           $   2,343           $        -
                                                                       ==================  ==================   ==================
</TABLE>


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



                                      F-8
<PAGE>   77


                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS



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 software and service solutions to the oil and gas
                industry which facilitate the exploration and development of oil
                and gas reserves. The Company's customers include all of the
                major international oil and gas companies as well as leading
                state-owned oil companies, independent producers and oil field
                service providers.

                Paradigm operates worldwide through wholly-owned subsidiaries in
                the U.S.A., Canada, Venezuela, Argentina, U.K., Australia and in
                Singapore and through representative offices in Russia,
                Indonesia, Bahrain, Latin America and in 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
                and South America.

        b.      Acquisition of PTM:

                On March 31, 1999, Paradigm acquired (the "Acquisition") the net
                assets of the Petroleum Technology Division of Mincom Limited
                ("PTM"), an Australian entity for US$ 8.38 million in cash.

                PTM's flagship product, Geolog, is a complete suite of well
                information software tools for log analysis and petrophysics,
                widely used throughout the exploration and production industry,
                Gelolog has a long history of development and refinement through
                user cooperation and input.

                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 has been allocated to
                identifiable intangible assets and to goodwill, as follows:

<TABLE>
<S>                                                    <C>
                Net tangible liabilities of PTM             $     (353)
                Developed technology                             5,146
                Assembled work force                               851
                Goodwill                                         2,736
                                                       ----------------------

                                                            $    8,380
                                                       ======================
</TABLE>

                The results of operations of PTM were consolidated with the
                accounts of the Company commencing on March 31, 1999.



                                      F-9
<PAGE>   78
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS



                Pro-forma information:

                The following are pro-forma unaudited results of operations for
                the years ended December 31, 1998 and 1999 representing the
                combined results of operations as if the PTM acquisition had
                been completed on January 1, 1998, as follows:

<TABLE>
<CAPTION>
                                                                        1998                       1999
                                                                ---------------------      ---------------------

<S>                                                             <C>                        <C>
                Revenues                                               $    51,337                 $   56,105
                                                                =====================      =====================
                Income (loss) before income taxes                      $     4,833                 $   (3,795)
                                                                =====================      =====================
                Net income (loss)                                      $     4,190                 $   (3,867)
                                                                =====================      =====================
                Basic net income (loss) per share                      $      0.61                 $    (0.32)
                                                                =====================      =====================

                Number of shares used in computing basic net
                  income (loss) per share                                    6,850                     12,205
                                                                =====================      =====================

                Diluted net income (loss) per share                    $      0.45                  $   (0.32)
                                                                =====================      =====================
                Number of shares used in computing
                  diluted net income (loss) per share                        9,306                     12,205
                                                                =====================      =====================
</TABLE>

        c.      Acquisition of CogniSeis:

                On October 14, 1997 (the "Closing Date"), Paradigm acquired (the
                "Acquisition") all of the outstanding shares of CogniSeis
                Development, Inc. ("CogniSeis"), a multinational company whose
                product line complements products offered by Paradigm for total
                acquisition costs of $ 18,913.

                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. In 1998, the purchase price was
                retroactively reallocated and the development technology was
                increased by approximately $900 to correct an overstatement of
                certain accounts receivable balances included at the date of the
                acquisition. The excess of the purchase price over the fair
                value of the tangible assets has been allocated to identifiable
                intangible assets of acquired development software, in-process
                research and development and assembled work force, as follows:

<TABLE>
<S>                                                     <C>
                Net tangible assets of CogniSeis              $   2,360
                Developed technology                              9,355
                In-process research and development               6,577
                Assembled work force                              1,428
                Deferred tax liability                             (807)
                                                        ----------------------

                                                              $  18,913
                                                        ======================
</TABLE>

                The in-process research and development was charged to the
                statement of operations at the date of acquisition.



                                      F-10
<PAGE>   79

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


                The financial statements of CogniSeis were consolidated with the
                accounts of the Company, commencing on October 1, 1997.

                Pro forma information:

                The following are pro forma unaudited results of operations for
                the year ended December 31, 1997 representing the combined
                results of operations as if CogniSeis acquisition had been
                completed on January 1, 1997 as follows:

<TABLE>
<CAPTION>
                                                                            1997
                                                                    ---------------------

<S>                                                                 <C>
                Revenues                                                    $   42,440
                                                                    =====================

                Loss before income taxes (including goodwill
                  charges)                                                  $  (10,748)
                                                                    =====================
                Net loss                                                    $  (10,748)
                                                                    =====================
                Basic and diluted net loss per share                        $    (4.62)
                                                                    =====================

                Number of shares used in computing basic and
                  diluted net loss per share                                     2,328
                                                                    =====================
</TABLE>

                These pro-forma unaudited results of operations do not include a
                non-recurring charge of in-process research and development in
                the amount of $ 6,577, related to the CogniSeis acquisition.

        d.      Geotech acquisition:

                In June 1998, the Company entered into a contract, which was
                completed and signed in February 1999, with Geotech Joint Stock
                Company ("Geotech") and its shareholders to acquire certain
                assets and assume certain liabilities of Geotech for a minimum
                payment of $ 485. Geotech is a Russian-based seismic software
                development company which markets CAEX in the countries of the
                former Soviet Union. The Company recorded goodwill in the amount
                of $ 325 which is being amortized over a period of five years.

        e.      CogniSeis acquisition

                During the fourth quarter of 1997, following the acquisition of
                CogniSeis, the Company incurred costs of $ 4,099 through the
                implementation of its 1997 worldwide restructuring plan (see
                Note 13c).

                Those costs included substantial severance pay costs incurred in
                the process of reducing its combined workforce. In addition,
                while consolidating workforces, duplicate offices were vacated
                resulting in a substantial lease write-off, as well as the
                write-off of all obsolete fixed assets.



                                      F-11
<PAGE>   80

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


                The following is a breakdown of the restructuring costs
                incurred:

<TABLE>
<S>                                              <C>
                 Employee termination expense            $    1,394
                 Lease write-off                              1,765
                 Fixed asset write-off                          733
                 Other                                          207
                                                 ----------------------

                                                         $    4,099
                                                 ======================
</TABLE>

                As of December 31, 1999, the Company had paid all the
                termination costs, and the remaining liability of the leases
                will be paid over their respective periods.


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

        The consolidated financial statements have been prepared in accordance
        with generally accepted accounting principles in the United States.

        a.      Use of estimates:

                The preparation of financial statements in conformity with
                generally accepted accounting principles requires management to
                make estimates and assumptions that effect 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 parent Company's sales are made in United
                States dollars. In addition, a substantial portion of its costs
                are incurred in dollars. Since the dollar is the primary
                currency in the economic environment in which the parent Company
                operates, the dollar is its functional currency, and,
                accordingly, monetary accounts maintained in currencies other
                than the dollar are remeasured using the foreign exchange rate
                at the balance sheet date. Operational accounts and non-monetary
                balance sheet accounts are measured and recorded at the rate in
                effect at the date of the transaction. The effects of foreign
                currency remeasurement are reported in current operations.

                The functional currency of all subsidiaries has been determined
                to be the local currency. 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 a separate
                component of "Other comprehensive income".

        c.      Consolidation:

                The financial statements of the Company are consolidated with
                the accounts of its subsidiaries. Intercompany balances and
                transactions have been eliminated (see also Note 1b and 1c).



                                      F-12
<PAGE>   81

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


        d.      Cash and cash equivalents:

                The Company considers all highly liquid investments with a
                maturity of three months or less, when purchased, to be cash
                equivalents. The carrying amounts of cash and cash equivalents
                approximate their fair values.

        e.      Asset impairment:

                The Company accounts for asset impairment in accordance with the
                provisions of FASB Statement No. 121, "Accounting for the
                Impairment of Long-Lived Assets and for Long-Lived Assets to be
                Disposed Of", which requires impairment losses to be recorded on
                long-lived assets used in operations, certain identifiable
                intangibles, and the goodwill related to those assets, when
                indicators of impairment are present and the undiscounted cash
                flows estimated to be generated by those assets are less than
                the assets' carrying amount. In this case, an impairment loss is
                recognized to the extent that the carrying amount exceeds the
                fair value of the assets. Statement No. 121 also addresses the
                accounting for long-lived assets that are expected to be
                disposed of. Such assets are reported at the lower of their
                carrying amount or fair value, less costs to sell the assets.

        f.      Fixed assets:

                Fixed assets are stated at cost. Depreciation is computed using
                the straight-line method over the estimated useful lives of the
                assets at the following annual rates:

<TABLE>
<CAPTION>
                                                                     %
                                                     ---------------------------------

<S>                                                     <C>
                Computers and related equipment                   20 - 33
                Furniture and equipment                           6 - 15
                Motor vehicles                                      15
                Leasehold improvements                  over the term of the lease
</TABLE>

        g.      Other assets:

                Other assets include goodwill, developed technology and other
                identified intangibles and are amortized using the straight-line
                method over the estimated useful life, which ranges from five to
                ten years.

                The Company regularly performs reviews to determine whether the
                carrying value of the assets is impaired. The reviews take into
                consideration circumstances, which indicate that the carrying
                value of the asset cannot be recovered. In 1999 following the
                PTM acquisition such impairment was indicated, and the Company
                recognized an impairment loss in the amount of $ 1,595 related
                to developed technology.



                                      F-13
<PAGE>   82

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


        h.      Software development costs:

                Research and development costs incurred in the process of
                software development before the establishment of technological
                feasibility, are charged to the statement of operations as
                incurred. Based on the Company's product development process,
                technological feasibility is established upon the completion of
                a detailed program design. Costs of the development of a
                product's master incurred subsequent to the establishment of
                technological feasibility are capitalized.

                Amortization of capitalized costs is at the greater of the
                amount computed using the:

                1.      Ratio that current gross revenues from sales of the
                        software bear to the total of current and anticipated
                        future gross revenues from sales of that software.

                2.      Straight-line method over the remaining estimated useful
                        life of the product (not to exceed three years).

                Amortization expense for capitalized software development costs
                for 1997, 1998 and 1999 was $ 724, $ 503 and $ 504,
                respectively.

        i.      Accounting for stock-based compensation:

                The Company has chosen to continue accounting for stock-based
                compensation in accordance with the provisions of Accounting
                Principles Board Opinion No. 25 ("APB-25"), "Accounting for
                Stock Issued to Employees". Under APB-25, when the exercise
                price of the company's share options equals or is higher than
                the market price of the underlying shares on the date of grant,
                no compensation expense is recognized. The pro forma information
                with respect to the fair value of the options is provided in
                accordance with he provisions of Statement No. 123 (see Note
                8b). The Company has adopted the accounting treatment of FAS
                123, with respect to equity compensation to non-employees of the
                Company.

        j.      Revenue recognition:

                The Company generates revenues from licensing the rights to use
                its software products directly to end-users. In 1999 the Company
                generated substantial revenues from the sale of software
                licenses requiring significant customization, integration and
                installation. The Company also generates revenues from sales of
                professional services.

                1.      Products:

                        Revenues from software license agreements are
                        recognized, according to SOP 97-2, as amended, upon
                        delivery of the software, and (i) if collection is
                        probable, (ii) the license fee is fixed and
                        determinable, (iii) vendor-specific evidence exists to
                        allocate the total fee to the elements of the
                        arrangement, and (iv) there is a signed contract. If an
                        acceptance period is included in an arrangement,
                        revenues are recognized at the earlier of customer
                        acceptance or expiration of the acceptance period.



                                      F-14
<PAGE>   83
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


                        Revenues from software licenses that require significant
                        customization, integration and installation are
                        recognized using contract accounting on a percentage of
                        completion method, based on the relationship of actual
                        costs incurred to total estimated costs.

                        Provisions for estimated losses on uncompleted contracts
                        are made in the period in which such losses are first
                        determined, in the amount of the estimated loss on the
                        entire contract.

                        Maintenance and support revenue is recognized ratably
                        over the term of the maintenance period. If maintenance
                        is included in a software license arrangement, the
                        amounts related to maintenance are segregated from the
                        software license fees and recognized ratably over the
                        maintenance period, based on their fair value as
                        established by the independent sale of maintenance to
                        customers.

                2.      Services:

                        Revenues from Seismic data processing and interpretation
                        services are recognized as the services are performed.

        k.      Basic and diluted income (loss) per share:

                Basic income (loss) per share is computed based on the weighted
                average number of ordinary shares outstanding during each year.
                Diluted income (loss) 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 FASB Statement
                No. 128, "Earnings Per Share".

        l.      Income taxes:

                The Company accounts for income taxes in accordance with
                Statement of Financial Accounting Standards (SFAS) No. 109,
                "Accounting for Income Taxes". This statement prescribes the use
                of the liability method, whereby deferred tax asset 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 provides a valuation allowance, if
                necessary, to reduce deferred tax assets to their estimated
                realizable value.

        m.      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.



                                      F-15
<PAGE>   84

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


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

        n.      Concentrations of credit risk:

                Financial instruments that potentially subject the Company to
                concentrations of credit risk consist principally of trade
                receivables and cash and cash equivalents. The Company's cash
                and cash equivalents are invested in deposits with major Israeli
                and U.S. banks. 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 accounts receivable are derived from sales to
                customers located primarily in the United States, Europe and the
                Far East. The allowance for doubtful accounts is calculated on
                both specific customers and on an aging basis in respect of
                those debts where, in management's opinion, collection is
                doubtful.

        o.      Fair value of financial instruments:

                The fair market value of the Company's financial instruments
                approximate their carrying value as of December 31, 1999, due to
                the short-term maturities of such items.

        p.      Impact of recently issued accounting standards:

                In June 1998, the Financial Accounting Standards Board issued
                Statement of Financial Accounting Standards No. 133 ("SFAS
                133"), "Accounting for Derivative Instruments and Hedging
                Activities" ("SFAS No. 133"). This statement establishes
                accounting and reporting standards requiring that every
                derivative instrument (including certain derivative instruments
                embedded in other contracts) be recorded in the balance sheet as
                either an asset or liability measured at its fair value. The
                statement also requires 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.
                Statement 133 is effective for fiscal years beginning after June
                15, 2000 and can not be applied retroactively.



                                      F-16
<PAGE>   85

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


                In March 1998, the American Institute of Certified Public
                Accountants issued SOP98-1, "Accounting for the Costs of
                Computer Software Developed or Obtained for Internal Use" ("SOP
                98-1"), which provides guidance on accounting for the costs of
                computer software developed or obtained for internal use. The
                pronouncement identifies the characteristics of internal-use
                software and provides guidance on new cost recognition
                principles. SOP 98-1 is effective for financial statements for
                fiscal years beginning after December 15, 1998.

                The adoption of SOP 98-1 did not have any significant impact on
                the Company's consolidated financial position, results of
                operations or cash flows.

        q.      Reclassification:

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

NOTE 3:- OTHER RECEIVABLES AND PREPAID EXPENSES

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                             --------------------------------------------------------
                                                      1998                             1999
                                             -----------------------          -----------------------

<S>                                          <C>                              <C>
                Government authorities             $     264                        $     274
                Prepaid expenses                         714                              777
                Deposits                                 553                              262
                Other                                    939                            1,130
                                             -----------------------          -----------------------

                                                   $   2,470                        $   2,443
                                             =======================          =======================
</TABLE>

NOTE 4:- FIXED ASSETS

<TABLE>
<S>                                                     <C>                              <C>
                Cost:
                  Computers and related equipment              $ 12,265                        $  17,130
                  Furniture and equipment                         1,369                            1,925
                  Motor vehicles                                    194                              173
                  Leasehold improvements                          1,169                            2,383
                                                        -----------------------          -----------------------

                                                                 14,997                           21,610
                                                        -----------------------          -----------------------
                Accumulated depreciation:
                  Computers and related equipment                 4,910                            8,248
                  Furniture and equipment                           434                              762
                  Motor vehicles                                    112                              118
                  Leasehold improvements                            282                              475
                                                        -----------------------          -----------------------

                                                                  5,738                            9,603
                                                        -----------------------          -----------------------

                Depreciated cost                                $ 9,259                        $  12,007
                                                        =======================          =======================
</TABLE>


        Depreciation expense amounted to $ 2,012, $ 2,298 and $ 3,865 for the
        years ended December 31, 1997, 1998 and 1999, respectively. (See also
        Note 7c).


                                      F-17
<PAGE>   86
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS





NOTE 5: - OTHER ASSETS, NET

<TABLE>
<CAPTION>
                                                                                             DECEMBER 31,
                                                                        --------------------------------------------------------
                                                                                 1998                             1999
                                                                        -----------------------          -----------------------

<S>                                                                     <C>                               <C>
                Assembled work force (net of accumulated
                  amortization of $ 346 in 1998 and $ 644 in 1999)           $    1,042                        $   1,595
                Goodwill (net of accumulated amortization of
                  $ 218 in 1998 and $ 527 in 1999)                                  433                            2,909
                Computer software development costs (net of
                  accumulated amortization of $ 1,041 in 1998
                and $ 1,545 in 1999)                                                679                              175
                Deferred tax asset                                                  310                                -
                Other                                                               319                              235
                                                                        -----------------------          -----------------------

                                                                             $    2,783                        $   4,914
                                                                        =======================          =======================
</TABLE>

NOTE 6:- OTHER PAYABLES AND ACCRUED EXPENSES

<TABLE>
<S>                                                        <C>                              <C>
                Accrued expenses                                $      933                        $   2,195
                Employee and related payroll accruals                1,784                            2,583
                Royalties                                            2,519                            1,421
                Employee termination expense                             -                               54
                Lease termination costs                                335                              366
                Income and other taxes                               1,353                            1,632
                Other payables                                         887                              541
                                                           -----------------------          -----------------------

                                                                $    7,811                        $   8,792
                                                           =======================          =======================
</TABLE>

NOTE 7:- FINANCING ARRANGEMENTS

        a.      Short-term loans consist of bank loans, primarily revolving
                credit lines which bear interest rates of 6.5%.

                The weighted average interest rate on the short term debt for
                the two years ended December 31, 1998 and 1997, was
                approximately 9% and 6.5% for the year ended December 31, 1999.



                                      F-18
<PAGE>   87

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


        b.      Long-term loans represent other bank loans which are linked to
                the U.S. dollar and bear interest rates of 7%.

                Aggregate maturities of long-term loans:

<TABLE>
<S>                                                      <C>                          <C>
                First year (current maturities)                 $    450                     $  2,639
                                                         -----------------------      --------------------

                Second year                                           39                        3,145
                Third year                                             -                          778
                                                         -----------------------      --------------------

                                                                 $    39                     $  3,923
                                                         =======================      ====================
</TABLE>

                The fair market value of the Company's short-term loans and
                long-term loans approximated the carrying value as of December
                31, 1998 and 1999. Fair values were estimated using discounted
                cash flow analyses, based on the Company's incremental borrowing
                rates for similar types of borrowing arrangements.

        c.      In 1999, the Company increased its credit arrangements and now
                has available unused short- and long-term credit lines in the
                amount of approximately $ 18 million.

                This amount includes its bank debt as of December 31, 1999, of
                approximately $ 8M, and the additional $ 10M can be either
                short- or long-term.

        d.      In August 1999, the Company entered into a three years lease
                agreement to acquire computer equipment, which has appropriately
                been recorded as a capital lease in accordance with FASB 13.

                Future obligations under the arrangement are as follows:

<TABLE>
<CAPTION>
<S>                                             <C>
                Current                                  $     535
                Less - interest portion                       (101)
                                                -----------------------------

                                                               434
                                                -----------------------------

                Second year                                    535
                Third years                                    267
                                                -----------------------------

                                                               802
                Less interest portion                          (60)
                                                -----------------------------

                                                         $     742
                                                =============================
</TABLE>

                The equipment acquired in the amount of $ 1.3 million is
                included in fixed assets and depreciation expense relating to
                this equipment was approximately $ 115 for the year ended
                December 31, 1999.



                                      F-19
<PAGE>   88

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


NOTE 8:- SHARE CAPITAL

        a.      In April and May 1999, the Company completed a share issuance of
                2,017,544 Ordinary Shares to new and existing investors, and
                raised approximately $ 11m.

        b.      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 engage in the performance of
                services for the Company or any subsidiary.

                Pursuant to the Plans, a total of 2,300,000 ordinary shares of
                the Company are reserved for issuance.

                Each option granted under the Plans may expire no later than
                eight years from the date of the grant. Options granted under
                the Plans are generally exercisable in installments during the
                option term. Options which are canceled or not exercised before
                expiration become available for future grants.

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

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                      -------------------------------------------------------------------------------------------------------------
                                    1997                                 1998                                 1999
                      ----------------------------------- ------------------------------------ ------------------------------------
                                             WEIGHTED                             WEIGHTED                             WEIGHTED
                                              AVERAGE                              AVERAGE                              AVERAGE
                           NUMBER         EXERCISE PRICE         NUMBER        EXERCISE PRICE        NUMBER         EXERCISE PRICE
                      ------------------ ---------------- ------------------- ---------------- ------------------  ----------------
<S>                   <C>                <C>              <C>                 <C>              <C>                 <C>
Outstanding at the
  beginning of year           265,474         $  3.35             1,043,104       $  4.88              1,592,616       $  5.65
Granted                       785,426         $  5.55               629,000       $  7.00                121,500       $  7.00
Canceled                       (7,796)        $  2.50               (79,488)      $  6.31                (96,500)      $  7.00
Exercised                           -            -                        -          -                   (14,400)      $  5.00
                      ------------------ ---------------- ------------------- ---------------- ------------------  ----------------

Outstanding at the
  end of year               1,043,104         $  5.01             1,592,616       $  5.65              1,603,216       $  5.67
                      ================== ================ =================== ================ ==================  ================
</TABLE>

                The number of options exercisable as of December 31, 1997, 1998
                and 1999 was 371,781, 664,430 and 978,486, respectively.

                In June 1998, the Company re-priced certain options at an
                exercise price of $ 7, the fair market value at the date of the
                re-pricing, following of which the exercise price of the options
                outstanding as of December 31, 1999 was between $ 0.59 and $ 7.

                All options granted were at an exercise price, equal to or
                exceeding the fair market value of the Company's ordinary shares
                on the date of grant. The weighted expected life of the options
                as of December 31, 1999 was eight years.



                                      F-20
<PAGE>   89

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


                Under FASB Statement No. 123, "Accounting for Stock-Based
                Compensation" ("SFAS 123") pro-forma information regarding net
                income is required (for grants issued after December 1994) and
                has been determined as if the Company had accounted for its
                employee stock option under the fair value method of that
                Statement.

                The fair value for these options was estimated at the date of
                grant using a Black-Scholes option pricing model with the
                following weighted-average assumptions for 1997, 1998 and 1999:
                risk-free interest rates of 6%, dividend yields of 0%,
                volatility factors of the expected market price of the Company's
                ordinary shares of 0.5-0.567 and expected life of the options of
                eight years.

                The weighted average fair value of the options at their dates of
                grant in 1997, 1998 and 1999 was $ 3.48, $ 3.99 and $ 4.38,
                respectively.

                Because changes in the subjective input assumptions can
                materially effect the fair value estimate, it is management's
                opinion that the existing option pricing models do not
                necessarily provide a reliable single measure of the fair value
                of its employee stock options.

                Pro-forma information under FAS 123:

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                           ----------------------------------------------------------------------
                                                                 1997                     1998                      1999
                                                           ------------------      --------------------     ---------------------

<S>                                                            <C>                    <C>                          <C>
                Net income (loss) as reported                  $    (10,845)          $     4,552                  $    (3,778)
                Pro-forma net income (loss)                    $    (11,423)          $     3,488                  $    (5,035)
                Pro-forma basic income (loss) per share        $       (4.9)          $      0.51                  $     (0.41)
                Pro-forma diluted net income (loss)
                  per share for SFAS 123                       $       (4.9)          $      0.37                  $     (0.41)
</TABLE>

                Because SFAS 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.

        c.      Warrants:

                In 1994, the Company issued 539,244 warrants to purchase
                ordinary shares of the Company to various shareholders, in
                connection with their loan guarantees to the Company. These
                warrants are exercisable over five years, which terminated on
                July 21, 1999, at an exercise price of the lower of either: (i)
                80% of the price of the last private placement or (ii) 80% of
                the IPO price of the Company's shares. In the year ended
                December 31, 1999, 479,908 warrants were exercised, at an
                exercise price of $ 4.00 per share and, as of December 31, 1999,
                all of the warrants were exercised.



                                      F-21
<PAGE>   90

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


                In October 1997, the Company issued 720,000 warrants in
                connection with bridge loans received in relation to the
                acquisition of CogneSeis (see Note 7c), at an exercise price of
                $ 6.00 per ordinary share. These warrants are exercisable over
                seven years. The fair value of these warrants in the amount of $
                600 was amortized as additional interest expense in 1997 and
                1998, amounting to $ 125 and $ 475, respectively.

                As compensation for services provided to the Company in
                connection with the share issuance (see a), investment bankers
                received 250,000 warrants exercisable during a three year period
                at an exercise price of $ 5.70 per Ordinary Share.

NOTE 9:- INCOME TAXES

        a.      Domestic:

                1.      Tax benefits under the Law for the Encouragement of
                        Capital Investments, 1959 ("the law"):

                        The Company's production facilities and its two
                        expansion programs have been granted the status of
                        "Approved Enterprise", under the law. According to the
                        provisions of this law, the Company has chosen to enjoy
                        "alternative benefits" - waiver of grants in return for
                        tax exemption - and, accordingly, the Company's income
                        is tax-exempt for a period

                        of two to four years commencing with the year it first
                        earns taxable income. In the remaining six to eight
                        years of benefits, the Company will be liable to
                        corporate tax at the rate of 25%.

                        In the event of distribution of cash dividends from
                        income which is tax exempt due to the above, the Company
                        would have to pay tax at the rate of 25% on an amount
                        equal to the amount distributed. The Company currently
                        has no plans to distribute dividends and intends to
                        retain future earnings to finance the development of its
                        business. 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.

                        The period of tax benefits, detailed above, is subject
                        to limits of 12 years from the commencement of
                        production, or 14 years from the approval date,
                        whichever is earlier.

                        The law also grants entitlement to claim accelerated
                        depreciation on buildings, machinery and equipment used
                        by the "Approved Enterprise", during the first five tax
                        years.

                        Should the Company derive income from sources other than
                        the "Approved Enterprise" during the relevant period of
                        benefits, such income will be taxable at regular
                        corporate tax rates of 36%.



                                      F-22
<PAGE>   91

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


                2.      Tax benefits under the Law for the Encouragement of
                        Industry (Taxation), 1969:

                        The Company currently qualifies as an "industrial
                        company", under the above law and, as such, is entitled
                        to certain tax benefits.

                3.      Tax assessments:

                        The Company is currently being reviewed by the Israeli
                        income tax authorities, pertaining to tax assessments
                        for the years 1994-1997.

                        The Company has currently not yet received any final tax
                        assessments from the Israeli income tax authorities.

        b.      Foreign:

                Carryforward tax losses:

                The Company has an available tax loss carryforward in the amount
                of approximately $ 2 million in the UK subsidiary, $ 300 in the
                Singapore subsidiary and $ 1 million in the Australian
                subsidiary. These losses can be carried forward indefinitely.

        c.      Deferred tax assets:

                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.

<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                        --------------------------------------------
                                                               1998                     1999
                                                        --------------------      ------------------

<S>                                                     <C>                       <C>
                Various accrued liabilities
                  (including a provision for
                  restructuring charges in 1997)               $    466            $        -
                Net operating loss carryforward                   1,991                 4,511
                                                        --------------------      ------------------

                                                                  2,457                 4,511
                Valuation allowance                              (2,147)               (4,511)
                                                        --------------------      ------------------

                Net deferred tax asset                         $    310            $        -
                                                        ====================      ==================
</TABLE>

                The Company has provided valuation allowances against the
                deferred tax assets in respect of its tax loss carryforwards and
                other temporary differences, due to a history of losses and
                current uncertainty concerning its ability to realize these
                deferred tax assets in the future.



                                      F-23
<PAGE>   92

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


        d.      Income tax reconciliation:

                A reconciliation of the theoretical tax expense, assuming all
                income is taxed at the statutory rate applicable to income of
                the Company, and the actual tax expense are as follows:

<TABLE>
<CAPTION>
                                                                                    YEAR ENDED DECEMBER 31,
                                                                ---------------------------------------------------------------
                                                                       1997                  1998                 1999
                                                                --------------------  -------------------  --------------------

<S>                                                             <C>                   <C>                  <C>
                Theoretical tax (benefit) computed
                    at the statutory rate of 36%                       $ (3,904)              $ 1,767             $ (1,360)
                Increase (decrease) in income
                    taxes resulting from:
                    Tax adjustment in respect of
                      inflation in Israel                                    64                  (309)                (710)
                    Non-deductible expenses                                  87                    61                  211
                    Utilization of tax loss carryforwards
                      previously not recognized                            (438)                    -                    -
                    Write-off of in-process research
                      and development                                     2,368                     -                    -
                    Losses for which benefits
                      are not recognized                                  1,823                   189                2,520
                    Prior year's accrued restructuring
                                                                              -                  (623)                (180)

                    Amortization of prior year's

                                                                              -                  (474)                (474)
                    Amortization of deferred tax liabilities
                      recorded upon acquisition of CogniSeis                  -                  (255)                (107)
                                                                --------------------  -------------------  --------------------

                Income tax expense                                    $       -             $     356           $        -
                                                                ====================  ===================  ====================
</TABLE>

        e.      Income taxes consist of the following:

<TABLE>
<S>                                                             <C>                   <C>                  <C>
                Current                                                $    363              $    558             $   725
                Deferred                                                   (363)                 (202)               (467)
                Prior year                                                    -                     -                (258)
                                                                --------------------  -------------------  --------------------

                                                                       $      -              $    356           $       -
                                                                ====================  ===================  ====================
</TABLE>

        f.      Income (loss) before income taxes consists of the following:

<TABLE>
<S>                                                             <C>                   <C>                  <C>
                Domestic                                             $   (2,716)             $  2,452          $   (3,255)
                Foreign                                                  (8,089)                2,496                (523)
                                                                --------------------  -------------------  --------------------

                                                                      $ (10,805)             $  4,948          $   (3,778)
                                                                ====================  ===================  ====================
</TABLE>



                                      F-24
<PAGE>   93

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


NOTE 10:- CONTINGENT LIABILITIES AND COMMITMENTS

        a.      Under the Company's research and development agreements with the
                Office of the Chief Scientist of the Government of Israel 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 has expensed royalties in the amounts of $ 402, $
                400 and $ 100 for the years ended December 31, 1997, 1998 and
                1999, respectively, relating to the repayment of such grants.

                As of December 31, 1999, the Company had a contingent liability
                to pay royalties in the amount of approximately $ 818.

        b.      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, 1997, 1998
                and 1999.

                The Company has expensed royalties in the amounts of $ 181, $ 49
                and $ 0 for the years ended December 31, 1997, 1998 and 1999,
                respectively, relating to the repayment of such grants.

                As of December 31, 1999, the Company had a contingent liability
                to pay royalties in the amount of approximately $ 418.

        c.      The Company and its subsidiaries have entered into rental
                agreements in regard to space for their operations. The rental
                fees are linked in part to the dollar and in part to the Israeli
                Consumer Price Index.

                Future minimum commitments under non-cancelable rental
                agreements as of December 31, 1999 are as follows:

<TABLE>
<CAPTION>
                YEAR ENDING DECEMBER 31,
                ------------------------

<S>                                                                   <C>
                2000                                                        $      2,158
                2001                                                               1,967
                2002                                                               1,992
                2003                                                               1,091
                2004                                                               1,718
                2005 and thereafter                                                2,499
                                                                      ------------------------------

                                                                            $     12,425
                                                                      ==============================
</TABLE>

                Rent expense for the years ended December 31, 1997, 1998 and
                1999 amounted to $ 1,052, $ 1,753 and $ 2,020, respectively.



                                      F-25
<PAGE>   94

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


        d.      Legal:

                1.      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 suit for a
                        declamatory 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 and declamatory 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 takes nothing on
                        its counterclaim. On December 7, 1998, GMA filed the
                        above-referenced appeal, which has not yet been
                        considered by the court, although briefing is complete.

                        The Company believes that the outcome of the above claim
                        will not have an adverse effect on the company's
                        consolidated financial statements.


                2.      On December 10, 1999, the Company's 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. 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. Based on the information
                        available at this early stage and having regard to some
                        of the material seized pursuant to the Anton Pillar
                        order, there appears to be merit to the claim.

                        The Company believes that the outcome of the litigation
                        will not have an adverse effect on the company's
                        business, operating results and financial condition



                                      F-26
<PAGE>   95
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


NOTE 11:- CHARGES (ASSETS PLEDGED)

        a.      The Company has a floating charge on all of its assets and on
                its outstanding share capital, with respect to its short- and
                long-term loans and credit lines to two individual banks.

        b.      All financed equipment is pledged to the related financial
                institution.

NOTE 12:- SEGMENT REPORTING AND GEOGRAPHIC OPERATION INFORMATION

        a.      Segment reporting

                The Company operates in a single industry as a provider of
                software licenses, seismic data processing and interpretation
                services which facilitate the exploration of oil and gas
                resources.

        b.      Geographic operational information

                Summary information about geographic areas:

                The following presents total revenues for the year ended
                December 31, 1997, 1998 and 1999 and long-lived assets as of
                December 31, 1998 and 1999.

<TABLE>
<CAPTION>
                                        1997                         1998                       1999
                             --------------------------  --------------------------  --------------------------
                                              LONG-                       LONG-                       LONG-
                                TOTAL         LIVED         TOTAL         LIVED         TOTAL         LIVED
                              REVENUES*)      ASSETS      REVENUES*)      ASSETS      REVENUES*)      ASSETS
                             ------------  ------------  ------------  ------------  ------------  ------------

<S>                          <C>           <C>           <C>           <C>           <C>           <C>
North and South
  America                    $     17,627  $     12,337  $     21,721  $     13,896  $     24,219  $      7,986
Europe, Africa
  Middle East                       3,642         4,996        12,962         5,673        14,604        18,581
Far East                            3,596           320        10,679           675        15,683         1,074
                             ------------  ------------  ------------  ------------  ------------  ------------

                             $     24,865  $     17,653  $     45,362  $     20,244  $     54,506  $     27,641
                             ============  ============  ============  ============  ============  ============
</TABLE>

        *)      Net revenues are attributed to countries based on invoicing of
                customers.

        c.      Major customers:

                In 1999, the Company had one major customer, which accounted for
                approximately 12% of the Company's revenues.

NOTE 13:- NON RECURRING EXPENSES

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                         -----------------------------------------------------------------------
                                                                1997                      1998                     1999
                                                         --------------------      -------------------      --------------------
<S>                                                      <C>                       <C>                      <C>
                In-process research and development
                  write off (Note 1c)                          $   6,577                $        -                $       -
                Lease termination costs                                -                         -                      763
                Impairment of intangible assets
                  (Note 2g)                                            -                         -                    1,595
                Other                                                  -                         -                      347
                Restructuring costs (Note 1e)                      4,099                         -                        -
                                                         --------------------      -------------------      --------------------

                                                               $  10,676                $        -                $   2,705
                                                         ====================      ===================      ====================
</TABLE>



                                      F-27
<PAGE>   96

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


NOTE 14: - INCOME (LOSS) PER SHARE DATA

        The following table sets forth the reconciliation of basic and diluted
        income (loss) per share.

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED DECEMBER 31,
                                                              -------------------------------------------------------------------
                                                                     1997                    1998                    1999
                                                              -------------------     -------------------     -------------------
<S>                                                           <C>                     <C>                     <C>
        Numerator:
        ----------

        Net income (loss) to shareholders of
           ordinary shares                                           $ (10,845)            $     4,552              $   (3,778)
        Effect of conversion of preferred shares                             -                       -                       -
                                                              -------------------     -------------------     -------------------
        Numerator for diluted income (loss)
           per share - income (loss) available to
           shareholders of ordinary shares                           $ (10,845)             $    4,552              $   (3,778)
                                                              ===================     ===================     ===================

        Denominator:
        ------------

        Weighted average number of ordinary
           shares (denominator for basic income
           (loss) per share)                                             2,328                   6,850                  12,205
                                                              -------------------     -------------------     -------------------
        Effect of securities:
           Employee stock options                                            -                     145                       -
           Warrants issued to third parties                                  -                     196                       -
           Convertible preferred shares
              for the period outstanding prior to conversion
           into ordinary shares                                              -                   2,115                       -
                                                              -------------------     -------------------     -------------------

        Dilutive potential ordinary shares                                   -                   2,456                       -
                                                              -------------------     -------------------     -------------------
        Denominator for diluted income (loss)
           per share - adjusted weighted average number
           of shares, assumed conversions and
           exercise of options and/or warrants                           2,328                   9,306                  12,205
                                                              ===================     ===================     ===================
</TABLE>




                                 - - - - - - - -





                                      F-28
<PAGE>   97
                                  SIGNATURES




        Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this registration statement to be
signed on its behalf by the undersigned, thereto duly authorized.

                                        PARADIGM GEOPHYSICAL LTD.



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

Date: June 26, 2000
<PAGE>   98
                                 EXHIBIT INDEX

               EXHIBIT NO.                  DESCRIPTION

                  3.1      Memorandum of Association of Registrant.++**

                  3.2      Amended and Restated Articles of Association of
                           Registrant.**

                  3.3      Proposed Amendment to the Amended and Restated
                           Articles of Association of the Registrant*******

                  10.      Form of Warrant Agreement dated as of October 10,
                           1997 between the Company and the Bridge Loan
                           lenders.**

                  10.2     Form of Warrant Certificate by the Company in favor
                           of the Bridge Loan lenders.**

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

                  10.4     Key Employee Plan.**

                  10.5     May 1994 Stock Option Plan.**

                  10.6     1994 General Stock Option Plan.**

                  10.7     1997 Executive Stock Option Plan.**

                  10.8     1997 Stock Option Plan for Qualifying Israel
                           Employees.**
                  10.9     1997 Stock Option Plan for U.S. Employees.**

                  10.10    Form of 1994 Warrant issued in connection with a
                           private placement of the Company's securities.**

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

                  10.12    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.********

                  10.13    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.********

                  10.14    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. ********

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

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



<PAGE>   99

                  10.17    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. ********

                  11.1     Statement regarding computation of per share earnings
                           (loss).***

                  21.1     Subsidiaries of the Registrant.

                  23.2     Consent of Kost Forer and Gabbay.

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

                  ****     Incorporated herein by reference to Amendment No. 2
                           to the Company's Registration Statement on Form F-1
                           (File No. 333-7926), filed with the Commission on
                           April 7, 1998.

                  *****    Incorporated herein by reference to Amendment No. 3
                           to the Company's Registration Statement on Form F-1
                           (File No. 333-7926), filed with the Commission on May
                           13, 1998.

                  ******   Incorporated herein by reference to Amendment No. 4
                           to the Company's Registration Statement on Form F-1
                           (File No. 333-7926), filed with the Commission on
                           June 2, 1998.

                  *******  Incorporated herein by reference to Amendment No. 6
                           to the Company's Registration Statement on Form F-1
                           (File No. 333-7926), filed with the Commission on
                           June 5, 1998.

                  ******** Incorporated herein by reference to Form 20-F Annual
                           Report pursuant to Section 13 or 15(d) of the
                           Securities Exchange Act of 1934 filed with the
                           Commission on June 30, 1999

                  ++       English translations from Hebrew original.

(c)               Financial Statement Schedule.
                  Not Applicable.
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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, 1999

                                       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)

                                     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.

                              TITLE OF EACH CLASS

                  ORDINARY SHARES, PAR VALUE NIS 0.5 PER SHARE

              SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION
                     PURSUANT TO SECTION 15(d) OF THE ACT.

                              TITLE OF EACH CLASS

                  ORDINARY SHARES, PAR VALUE NIS 0.5 PER SHARE

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

                           13,026,336 Ordinary Shares

Indicate by checkmark 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 proceeding 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 checkmark which financial statement item the registrant has elected
to follow:

                   [ ] Item 17                    [X] Item 18
2

TABLE OF CONTENTS
ITEM                                                                                                      PAGE
       ----                                                                                                      ----
ITEM 1 - DESCRIPTION OF BUSINESS........................................................................................3

ITEM 2 - DESCRIPTION OF PROPERTY.......................................................................................15

ITEM 3 - LEGAL PROCEEDINGS.............................................................................................15

ITEM 4 - CONTROL OF REGISTRANT.........................................................................................17

ITEM 5 - NATURE OF TRADING MARKET......................................................................................19

ITEM 6 - EXCHANGE CONTROL REGULATIONS..................................................................................20

ITEM 7 - TAXATION......................................................................................................20

ITEM 8 - SELECTED FINANCIAL DATA.......................................................................................32

ITEM 9 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................36

ITEM 9A - Quantitative And Qualitative Disclosure About Market Risk....................................................51

ITEM 10 - DIRECTORS AND OFFICERS OF REGISTRANT.........................................................................52

ITEM 11 - COMPENSATION OF OFFICERS AND DIRECTORS.......................................................................62

ITEM 12 - OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES...............................................63

ITEM 13 - INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS...............................................................65

ITEM 14 - DESCRIPTION OF SECURITIES TO BE REGISTERED...................................................................66

ITEM 15 - DEFAULTS UPON SENIOR SECURITIES..............................................................................66

ITEM 16 - CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES AND USE OF PROCEEDS..................66

ITEM 17 - FINANCIAL STATEMENTS.........................................................................................66

ITEM 18 - FINANCIAL STATEMENTS.........................................................................................66

ITEM 19 - FINANCIAL STATEMENTS AND EXHIBITS...........................................................................F-1
2
3

ITEM 1 - DESCRIPTION OF BUSINESS

GENERAL

Paradigm Geophysical Ltd. ( "Paradigm" , "the Company", "we", "our", "us") is
one of the world's leading providers of geoscience knowledge solutions for the
oil and gas industry. The Company provides integrated, scientifically advanced
productivity solutions for reservoir description with its leading edge products
and services which are based on innovative applications of science and
technology.

As of May 1, 2000, the Company has 15 offices in 13 countries employing 374
people and provides products and services to a broad range of customers
including the major and national oil companies and independent oil and gas
exploration and production companies and oilfield service companies.

In 1993, Paradigm introduced time to depth processing of seismic data. Today,
Paradigm provides a full set of geoscience tools, covering seismic data
processing and inversion, visualization and model building in both the time and
depth domains, mapping, geological analysis and reservoir characterization. In
1999, Paradigm introduced POROS(TM) its reservoir characterization product
suite, which bridges the gap between Geoscience and reservoir engineering. This
product helps professionals build geologic models from seismic data attributes,
well-log and geological data, using a shared earth model for reservoir property
description.

In March 1999, Paradigm acquired the net assets of the Petroleum Technology
Division of Mincom Limited ("PTM"), an Australian entity for $8.4 million.
PTM's flagship product Geolog(TM) is a complete set of well information
software tools for log analysis and petrophysics which is widely used in the
oil and gas exploration and production industry.

The Company's principal executive offices are located at Shenkar St. 9, Gav Yam
Center No.3, Herzlia 46120, Israel and its telephone number is + 972-9-9709300.
The Company has sales, customer support and service offices in Houston, London,
Aberdeen, Bahrain, Calgary, Moscow, Caracas, Buenos Aires, Rio de Janeiro,
Perth, Brisbane, Beijing, Jakarta and Singapore. The Company also has research
and development facilities in Herzlia, Houston, Calgary, Brisbane and Moscow.
Paradigm's web site address is www.paradigmgeo.com The Company's Ordinary Shares
are listed on the NASDAQ National Market under the symbol PGEO.

                                       3
4

BUSINESS STRATEGY

In 1999, the Company made the strategic shift from concentrating on seismic
data analysis to positioning itself as the "The Geoscience Knowledge Company".
This shift expands the Company's offerings to include analysis and integration
of non-seismic data relevant to the characterization, management and simulation
of oil and gas reservoirs (hereinafter referred to as "reservoir management
solutions").
The Company's business strategy is to continue to provide scientifically
advanced productivity based solutions for reservoir management solutions by:
(i) focusing on research and development coupled with system integration and
workflows in response to customer's needs, evolving changes in the market and
new technologies;
(ii) expanding the products and services offered throughout our global network
of offices while providing responsive customer support;.
(iii) acquiring complementary businesses that add key technologies or market
presence and enhance existing products and services; and
(iv) maintaining a work environment that encourages new ideas and professional
achievement, that is driven by the integrity, creativity, expertise and
determination of our staff to work closely with one another and with our
customers.

OPERATIONS

The Company operates in a single industry, the oil and gas industry, as a
provider of software licenses and geoscience analysis services which facilitate
the exploration for, and development and production of, oil and gas resources.
In choosing to market both products and geoscience services, Paradigm's
management has chosen to diversify revenue sources to balance risks for
seasonal and regional variability. Maintenance and support revenues for the
installed software base also provide a predictable revenue stream.

PRODUCTS

The Company's revenues are derived mainly from licensing the rights to use its
software products and related maintenance and support contracts. In addition,
in 1999, the Company generated significant revenues from the sale of a turnkey
data processing center (hardware and software) for seismic data processing and
interpretation, including post-installation services, staff training, workflow
and technology transfer consulting and maintenance and support. Revenues from
this turnkey sale accounted for 12% of total revenues from products and
services for the year.

                                       4
5

The following table sets forth product sales in the major geographical regions
in which the Company operates for the fiscal years ended December 31, 1997,
1998 and 1999

* REVENUES-PRODUCTS
1997           1998          1999
                            (DOLLARS IN THOUSANDS)
REGION
North and South
    America          13,018         18,893        16,582
Europe, Africa,
  Middle East         2,966          9,116        11,881
Far East and
     China            3,995         10,065        14,560
                 --------------------------------------------
     TOTAL           19,979         38,074        43,023
                 --------------------------------------------
SERVICES

Paradigm operates ten service centers worldwide offering a range of seismic
data analysis, processing and consultancy services. Each center is equipped
with powerful hardware, functional software and skilled individuals with many
years of experience in processing, inversion, and interpretation of seismic
data and well data. The Company's philosophy in services is to cover the entire
scope of seismic data analysis from field tapes to a final earth model and an
earth image in depth.

The following table sets forth service revenues in the major geographical
regions in which the Company operates for the fiscal years ended December 31,
1997, 1998 and 1999.

* REVENUES-SERVICES
1997           1998          1999
                           (DOLLARS IN THOUSANDS)
REGION
North and South
    America           1,694             2,828      7,637
Europe, Africa,
  Middle East         2,549             3,846      2,723
Far East and
     China             643                614      1,123
                 --------------------------------------------
     TOTAL            4,886             7,288     11,483
                 --------------------------------------------
--------------------------------------------------------------------------------
* The CogniSeis acquisition occurred in October 1997 and the PTM acquisition in
March 1999. Revenues of CogniSeis and of PTM have been included in the results
of Paradigm from their respective acquisition dates. Therefore, historical
revenues do not provide the basis to assess future revenues of the Company or
what the revenues of Paradigm, CogniSeis and PTM would have been had the
Combined Businesses been operated on an integrated basis during all of the
periods presented.

                                       5
6

PRODUCTS

Geoscientists acquire a vast quantity of seismic signals, well-logs, geological
and other forms of data from an oil and gas prospect  to secure  information
about the earth's subsurface and its oil and gas content. Paradigm systems
process these data and provide innovative and dynamic ways to visualize and
model the resultant images. These systems

1.)   provide insight into the geologic formations that trap oil and gas.

2.)   reduce the risk in locating and drilling for economical hydrocarbon
      reservoirs.

3.)   enable optimization of the life cycle product of oil and gas assets.

Paradigm currently offers three major software suites, ECHOS(TM) (for data
analysis and inversion), ERGOS(TM) (for data interpretation and 3D Earth
modeling), and POROS(TM) (for reservoir characterization and shortly
reservoir simulation). Scalable across the full range of computers and computer
operating systems in use in the oil and gas industry, these open design suites
include software products dedicated to performing all of the tasks in seismic
data analysis and interpretation, and increasingly to incorporate and integrate
non-seismic reservoir related data. Through interactive information sharing
between the various geoscientists working on the oil and gas asset, the use of
Paradigm's product suites enables the development of more and better
geoscience-based analysis and knowledge from the available data in
significantly less time.

ECHOS  - THE SEISMIC DATA PROCESSING AND INVERSION SUITE

ECHOS is a fully integrated suite for seismic processing for time to depth and
seismic reflection signal strength inversion, applicable to every geological
environment worldwide. It enables the asset team to move projects from field
tapes to an earth model and seismic image in depth and the identification of
oil and gas bodies, all in a unified computing and analysis environment. By
sharing common data structures, file systems, applications and standard
interfaces, geoscientists generate more meaningful, reliable and direct
reservoir knowledge. Streamlined workflow, rather than serial manipulations of
data, reduce setup and idle time and eliminate redundancies in the process. The
suite comprises three powerful tools which provide: (i) seismic data processing
(FOCUS(R));(ii) velocity model building and depth imaging (GEODEPTH(R)
POWER(TM)); and (iii) seismic reflection signal strength inversion (PROBE(TM)).

FOCUS - SEISMIC DATA PROCESSING

Generating high-resolution seismic data sections and volumes is a prerequisite
for most exploration projects. FOCUS is a 2D and 3D

                                       6
7

seismic processing system for exploration geophysicists in the traditional time
domain. As seismic exploration objectives become more demanding, FOCUS readily
adapts to meet these demands. It accommodates new processing techniques and
integrates advanced geophysical applications for field, desktop, or production
processing. The popularity of the system is largely due to its broad scope of
geophysical applications, system maturity, stability, openness, and versatility
of its programming environment.

GEODEPTH POWER - VELOCITY MODEL BUILDING AND DEPTH IMAGING

GEODEPTH POWER is used by many of the world's leading oil and gas exploration
firms for obtaining accurate depth imaging results. This cost-effective system
integrates velocity analysis, time-to-depth conversion, model building, model
verification, and depth migration to resolve the challenging seismic data
imaging and positioning problems. Solutions in 3D tomography and 3D prestack
depth migration are complemented with productivity solutions in Solid Model
Building and horizon-based velocity analysis. The system provides a full range
of accurate 2D and 3D depth inversion and imaging tools for any size project of
any geological complexity.

PROBE - SEISMIC REFLECTION SIGNAL STRENGTH INVERSION AND ANALYSIS

Oil and gas field exploration and development requires the accurate prediction
of rock composition and rock properties including their capacity to hold
hydrocarbon fluids and the identification of hydrocarbon fluid bodies. The
PROBE system provides the geoscientist with a set of powerful tools and fully
interactive workflow for detecting the presence of hydrocarbon fluids using
seismic reflection signal strength inversion technology. By incorporating
information from velocity models, PROBE results (obtained from the inversion of
seismic amplitude data) have been demonstrated to be more reliable than
conventional methods in detecting the presence of hydrocarbons. PROBE
effectively integrates all of the tasks (inversion, analysis, and modeling)
involved in seismic reflection signal strength inversion studies into one
unified environment to greatly enhance the productivity of geoscientists.

ERGOS - THE INTERPRETATION SUITE

ERGOS is a comprehensive and integrated software suite dedicated to geoscience
data interpretation, model building, and mapping. The suite incorporates both
voxel-based and solid-based modeling technologies in order to better understand
and model the structural and stratigraphic properties of the subsurface. A
shared earth model assures data integrity and accuracy, allowing concurrent
application of solutions for maximum productivity and detailed insights. The
suite consists of five products which provide for: (i) seismic data
interpretation (SEISX(TM)); (ii) depth conversion and map-based geostatistics
(EARTHMODEL / EXPLORER(TM)); (iii) mapping

                                       7
8
and solid model building (SOLIDGEO(TM)); (iv) volume-based visualization and
interpretation (VOXELGEO*); and (v) structural modeling, restoration and
balancing (GEOSEC(TM));

SEISX - SEISMIC DATA INTERPRETATION

SEISX effectively integrates multiple 2D and 3D seismic data surveys with well
log data providing a high performance interpretation and mapping solution.
SEISX is an industry standard interpretation solution recognized for its
efficient data loading, interactive line tie analysis and grid balancing,
integration of supporting well log aplications, and its elegance in
accomodating multiple 2D and 3D surveys.

EARTHMODEL/EXPLORER -  TIME-TO DEPTH CONVERSION

EARTHMODEL/EXPLORER provides time-to-depth conversion and poststack imaging of
seismic data, guiding the user through the important tasks of data input, data
quality control, problem analysis, velocity mapping, depth conversion and
uncertainty assessment. EARTHMODEL/EXPLORER includes a variety of velocity
mapping approaches to accommodate the velocity dependency on depth, age
lithology, or combinations of these dependencies. EARTHMODEL/EXPLORER includes
geostatistical methods for generating velocity maps with sparse data as well as
simulation and stochastic modeling methods for assessing the uncertainty of
depth estimates.

SOLIDGEO - MAPPING AND  SOLID MODEL BUILDING

SOLIDGEO provides geoscientists with the latest and most advanced technologies
to accurately model and map the depositional and structural features of the
subsurface. SOLIDGEO produces geometrically-coherent models composed of closed
formation solids. It is engineered to handle multi-valued surfaces, closed-body
definitions, volumetric calculations, and property assignments while
maintaining surface connectivity during the model process. Field-tested on the
most complex models, SOLIDGEO integrates model data and accelerates the process
of building and refining models of the earth's subsurface.

VOXELGEO  - VOLUME-BASED  VISUALIZATION AND INTERPRETATION

VOXELGEO is the industry leading volume-based visualization and interpretation
solution engineered to reveal both structural complexity and stratigraphic
detail in a true three-dimensional setting. By combining Voxel-based technology
with unique rendering capabilities, VOXELGEO gives the seismic interpreter and
reservoir engineer with a direct pathway to the interior of the

--------------------------------------------------------------------------------
* VoxelGeo(R) is the registered trademark of Vital Images, Inc., and is licensed
exclusively to Paradigm for use in sub-surface visualization products.

                                       8
9

seismic volume. VOXELGEO's opacity and subvolume detection functions allow the
geoscientist to detect, isolate, and extract 3D reservoir subvolumes. This
early analysis of large amounts of seismic data provides insights into
potential drilling locations within a time frame that is unachievable by
conventional interpretation methods.

GEOSEC - STRUCTURAL MODELING, RESTORATION, AND BALANCING

GEOSEC provides interpreters and structural geologists with the interactive
capabilities to construct, restore, and validate geologic cross sections and 3D
structural models. GEOSEC generates a range of permissible interpretation
solutions that can be used to refine velocity models leading to improved
seismic images of the subsurface. Geologic restoration and balancing quantifies
structural and basin evolution, hydrocarbon maturation, migration pathways, and
trap volumes, thereby quantifying and reducing risk. 3D GEOSEC functionalities
operate directly on the Solid Model Builder, negating the need for model export
or rebuilding.

POROS - RESERVOIR CHARACTERIZATION AND MANAGEMENT

POROS is a software suite dedicated to Rock and Fluid Characterization and
Production Management for oil and gas reservoirs under production. The suite
currently consists of two products which provide for: (i) well data management
(GEOLOG); and (ii) full workflow reservoir characterization (VANGUARD(TM)); In
the future, the POROS suite will include a Reservoir Simulation module
currently under production.

GEOLOG - WELL DATA MANAGEMENT

GEOLOG is one of the world's leading well data management, analysis, modeling
and petrophysical packages. It incorporates this full suite of log capabilities
in an open environment, providing the infrastructure to service other Paradigm
and client applications.

VANGUARD - WORKFLOW RESERVOIR CHARACTERIZATION

VANGUARD is a full workflow reservoir characterization package using seismic
data and well log data to derive reservoir parameters. It provides full 3D
interactive functionality for building background models; inverting seismic
reflectivities; and editing, analyzing, and calibrating well log data. These
micro-models can be converted to rock properties and used for geological
interpretation and reservoir characterization.

WEB-BASED-SOLUTIONS

In May 2000, the Company announced the launch of web-based delivery of its
geoscience solutions - ITS E-GEOSCIENCE(TM) SOLUTIONS. e-Geoscience applications
are planned to provide considerably easier remote access to applications and
data, and expand remote

                                       9
10

collaborative work between disbursed members of expert analysis teams.

Paradigm plans a series of releases of its web-enabled versions most of which
are expected to be delivered by the middle of 2001 which will include the
modules in the ECHOS, ERGOS and POROS product suites.

CUSTOMER SUPPORT

The Company employs geoscientists and computer scientists to provide
installation and training, online product 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. The Company has initiated on-line discussion
forums.

The Company provides its 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 the Company's customers have
entered into post-contract maintenance and support agreements, which entitle
them to receive all product updates as well as professional and technical
support.

GEOSCIENCE SERVICES

Paradigm's philosophy in services is to embrace the entire scope of seismic
data analysis from field tapes to a final earth model and an earth image in
depth.

Paradigm offers its own specialist geoscientists and computing resources in
partnership with customer's expert teams.

Paradigm service centers offer a full range of geophysical processing services
for seismic data including data processing, structural inversion and attribute
analysis.

Selected service center's offer interpretation, mapping and modeling services
and a complete formation evaluation service - from the analysis and
interpretation of a single pay-zone in an individual well to field-wide,
multi-well projects.

Through skilled data processing, velocity model buildings, depth imaging,
seismic inversion, and interpretation of seismic data and well data, the
geoscience services group aims to help clients get more out of their data.

The Company's planned e-Geoscience applications will provide considerably
easier remote access to applications and data, and expand remote collaborative
work between disbursed members of analysis teams. Paradigm has already
delivered remote-access

                                       10
11

model building for depth-inversion which is in use in the geoscience services
group. This enables collaborative work between the clients and the geoscience
services group, with data and applications located at the Paradigm service
centers. Paradigm operates ten service centers worldwide.

MARKETING AND SALES

The Company markets and sells its products and services to the international
oil and gas industry through its local sales offices and uses sales agents and
representatives in a small number of markets where Paradigm regional and local
sales offices do not operate. The Company's local offices are staffed with a
sales force, technical experts and operating managers. Customers include the
major international oil and gas companies, state-owned oil and gas companies,
independent oil and gas producers and oilfield service companies.

In implementing its sales and marketing strategy, the Company seeks to maintain
and enhance its local presence in its markets by acquiring significant in-house
knowledge of local geology and markets.

As part of its sales and marketing strategy, Paradigm conducts educational
workshops and seminars in several locations worldwide, aimed at geoscientists,
in order to both demonstrate the application of its products and to upgrade the
end users skills and efficiency in the use of Paradigm products.

The Company participates in regional trade shows showcasing its technology at
customized demonstration booths. Company staff present technical papers to
attendees at the technical conferences that sponsor these trade shows. Paradigm
participates in all major industry events worldwide.

Print advertising is placed on a regular basis in trade and technical magazines
that target the Company's customers.

RESEARCH AND DEVELOPMENT

The market for Paradigm's products and services is characterized by changing
technology. As a result, Paradigm's success is dependent upon its ability to
develop or acquire new products and services on a cost-effective basis and to
introduce them into the marketplace in a timely manner. The Company intends to
continue committing substantial financial resources and effort to the
development of new products and services. Research and development expenditure
in 1999 totaled $9,306,000 or 17.1% of revenues, compared with $7,660,000 in
1998 at 16.9% of revenues and $4,728,000 in 1997 at 19% of revenues.

In 1999, the Company expanded its research and development activities in
Moscow. Following the acquisition of PTM in March 1999, the PTM
Australian-based research and development team was integrated into the
worldwide research and development team.

                                       11
12

The Company also made the decision to develop new reservoir simulation products
based on next generation technology.

The Company expects to continue this global approach to product development,
utilizing specialized expertise available in each location. Paradigm views this
"global" nature of its research and development efforts as an intrinsic
strength and is expending management efforts to integrate and manage this
global product development system. Additional research and development centers
may be established in the future, continuing, where feasible, the policy of
"expertise-specific" rather than "product-specific" centers.

Over the years, the Company has made a number of technological advances,
including the development of key technologies:

  (a)       The inversion to depth of traditional time-based seismic data;

  (b)       Volume based interpretation;

  (c)       3D Commercial Pre-stack Depth Migration;

  (d)       Solid Model Building and Mapping; and

  (e)       The integrated common earth model for all geoscience applications
            for oil and gas prospect exploration and evaluation.

These technologies have been utilized in the Company's operations as a provider
of software licenses and geophysical services.

Part of the Company's research and development activities have been funded by
grants from the Office of the Chief Scientist of the Government of Israel
("OCS"). Elements of the Company's products developed by Paradigm (i.e. those
products not acquired) are covered to some extent under the royalty agreements
with the OCS. The Company has not applied for research grants from the OCS
since July 1996. The decision to apply for research grants from the OCS is
reviewed annually in light of the Company's research and development program
and the terms and conditions of such grants. There are continuing royalty
obligations to the OCS. (See note 10(a) of the Financial Statements). The
Company has expensed royalties in the amounts of $402,000, $400,000 and
$100,000 for the years ended December 31, 1997, 1998 and 1999, respectively. At
December 31, 1999, the Company had a contingent liability to pay royalties
totaling $818,000.

INTELLECTUAL PROPERTY

The Company believes its patents, trademarks and other intellectual property
rights are an important factor in maintaining its technological advantage,
although no one patent is considered essential to its success. Typically, the
Company will seek to protect its intellectual technology in all jurisdictions
where the Company believes the cost of such protection is warranted. While
certain key technologies have been patented by the Company, it has not

                                       12
13

patented all of its proprietary technology even where regarded as patentable.
In addition to patents, in many instances the Company protects its trade
secrets through confidentiality agreements with its employees and its
customers. The Company also relies, in part, on certain technology, which it
licenses from third parties, including software which is integrated with
Company-developed software and used in its products and geophysical services.

COMPETITION

 The businesses in which the Company engages are competitive. Some of the
Company's competitors are divisions or subsidiaries of companies that are
larger and have greater financial and other resources and more extensive and
diversified operations than the Company. The Company believes that its major
competitors, worldwide, for software products are: GeoQuest, a division of
Schlumberger Ltd. and Landmark Graphics Corporation, a subsidiary of Haliburton
Company. Its principal competitors in the geophysical services business
include, among others, Geco-Prakla, a division of Schlumberger Ltd., Western
Geophysical, a division of Western Atlas Inc. a subsidiary of Baker Hughes
Inc., Compagnie Generale de Geophysique and Veritas DGC. The Company competes
in different product and services to various degrees on the basis of price,
technical performance, availability, quality and technical support. The
Company's ability to compete successfully depends on elements both within and
outside of its control, including successful and timely development of new
products and services, performance and quality, customer service, pricing,
industry trends and general economic trends. The Company also faces competition
from a large number of much smaller competitors that provide products that
serve niche portions of the Company's markets and from small service bureaus
providing geophysical services. In addition, several of the major oil companies
develop software internally and operate geophysical data processing centers.

RELIANCE ON THE OIL AND GAS INDUSTRY

The Company's business and operations are substantially dependent upon the
condition of the global oil and gas industry. Future downturns in the oil and
gas industry, or in the oilfield services business, may have a material adverse
effect on the financial position or results of operations of the Company.
The oil and gas industry is highly cyclical and has been subject to significant
economic downturns 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;

                                       13
14

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.

INTERNATIONAL OPERATIONS

The Company operates 15 offices in 13 countries. The Company's business is
subject to various risks beyond its control, such as instability of foreign
economies and governments, currency fluctuations, overlap of different tax
structures and changes in laws and policies affecting trade and investment
transactions.

OPERATIONS IN ISRAEL

The Company is incorporated under the laws of, and its principal offices are
located in, the State of Israel. The Company is directly influenced by the
political, economic and military conditions affecting Israel such as
hostilities with neighboring countries and risks of cessation of trade and
disruption of operations.

The Company has and will benefit from certain Israeli government programs and
tax benefits, particularly as a result of the "Approved Enterprise" status of
the Company's Israeli operations and receipt of research and development grants
from the OCS. To be eligible for these programs and tax benefits, the Company
must continue to meet certain conditions. If the Company fails to meet such
conditions in the future, it could be required to refund all tax benefits
previously received. There can be no assurance that such programs and tax
benefits will be continued at their current levels, or otherwise. The
termination or reduction of such programs and tax benefits could have a
material adverse effect on the Company's business, operating results and
financial condition.

EMPLOYEES

As of May 1, 2000, Paradigm employed a total of 374 persons, an increase of 20
persons over a one-year period. As of May 1, 2000, Paradigm employees included
108 in research and development, 85 in marketing and sales, 70 in maintenance
and support, 43 in geophysical services, and 68 in executive management and
administration. The Company employed 104 persons in the US, with the remaining
270 located in its other offices worldwide.

With respect to the Company's operations, competition for appropriately
qualified and experienced Geoscience and software personnel is intense and
there are a limited number of professionals with the level of knowledge and
experience required by the Company.

The Company's future success substantially depends upon its continuing ability
to attract and retain highly qualified managerial, technical, sales and
marketing personnel.

                                       14
15

The Company has to comply with various labor and immigration laws throughout
the world, including laws and regulations in the United States, Canada, Latin
America, Europe, Russia, Israel, China, the Far East and Australia. To date,
compliance with such laws has not been a material burden for the Company. As
the number of employees increases over time, compliance with such regulations
could become more burdensome.

The Company generally provides its employees with benefits and working
conditions above the required minimums. None of the Company's employees is
currently represented by a labor union. The Company has not, to date,
experienced any work stoppages.

ITEM 2 - DESCRIPTION OF PROPERTY

The Company does not own any real property.

Paradigm's corporate headquarters, main research and development facility and
support center is in Herzlia, Israel, and consists of premises occupying 30,600
square feet at an annual rent of $ 16 per square foot subject to adjustment.
The lease expires in June 2009.

The Company currently has eleven sales and service centers leased worldwide.
These are situated in Houston, Slough, Aberdeen, Bahrain, Calgary, Moscow,
Beijing, Perth, Jakarta, Caracas and Buenos Aries. The Company has research and
development facilities in three of these centers - Houston, Moscow and Calgary
- and a fourth research and development facility in Brisbane.

The leased premises in use by the Company aggregate approximately 111,000
square feet and are generally suitable and adequate for the requirements of the
Company. The Company is currently negotiating a new lease in the UK to replace
the premises it currently occupies in Slough.

ITEM 3 - LEGAL PROCEEDINGS

The Company is the plaintiff/appellee in the matter of Geophysical Micro
Computer Applications (International) Ltd. v. Paradigm Geophysical Ltd., Cause
No. 05-98-02016-CV in the Fifth Circuit Court of Appeals, Dallas, Texas.
Geophysical Micro Computer Applications (Int'l) Ltd. ("GMA") is appealing a
final judgment entered by the trial court in the matter of Paradigm Geophysical
Ltd. v. Geophysical Micro Computer Applications (International) Ltd., Cause No.
97-11010, in the 134th Judicial District Court of Dallas County, Texas. On
December 11, 1997, the Company filed suit for a declaratory judgment to
determine whether it has any

                                       15
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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, 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 takes nothing on its
counterclaim. On December 7, 1998, GMA filed the above-referenced appeal which
has not yet been considered by the court although briefing is complete.

On December 10, 1999, the Company's Canadian subsidiary (the "plaintiffs")
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, the plaintiffs applied for and obtained an Anton Pillar Order on
December 10, 1999, seizing certain property from the defendants and preserving
it pending a trial of the action. The defendants, Van Wieren and Stogrin were
former employees of the Company's Canadian subsidiary . The plaintiffs maintain
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 at of the Company's Canadian
subsidiary and is their property.

The plaintiffs are seeking unspecified damages and loss of profits as well as
injunctive relief and declaratory relief with respect to the rights of the
plaintiffs to the information and software in question. Based on the
information available at this early stage and having regard to some of the
materials seized pursuant to the Anton Pillar Order, there appears to be merit
to the claim advanced by the plaintiffs.

On May 21, 2000 the district court of Tel-Aviv dismissed the claim filed by
Eitan Zucker against the Company and Eldad Weiss, the Chairman and CEO of the
Company, and awarded the Company certain legal costs. The judgement is still
subject to appeal.

On April 14, 2000, the Company reached a settlement with Michael Burstein, the
former Chief Financial Officer of the Company, in which Mr. Burstein waived all
claims against the Company. The Company paid Mr. Burstein $26,000, which
represented amounts previously owing to him with respect to his employment by
the Company, and allowed Mr. Burstein to exercise 28,312 options granted to him
during his employment with the Company.

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The Company is not a party to any other material legal proceedings.

ITEM 4 - CONTROL OF REGISTRANT

As of May 31, 2000, 13,191,902 Ordinary Shares of the Company were issued and
outstanding.

The following table sets forth, as of May 31, 2000, certain information with
respect to the beneficial owners of the Company's Ordinary Shares, as well as
options and warrants exercisable within 60 days of May 31, 2000, by:

            a)    Each person known by the Company to beneficially own more
                  than 10% of the outstanding Ordinary Shares; and

            b)    All officers and directors of the Company as a group:
Ordinary Shares, Options And
Name And Address of                                   Warrants Beneficially owned
Beneficial Owners                                        Number         Percent
------------------------------------------------------------------------------------
Shamrock Holdings Inc.                                 1,649,943          12.5%
4444 Lakeside Drive
Burbank, California 91510-7774
U.S.A

Mashov Gruss Investments Ltd.                          1,497,766          11.4%
5 Haplada St., Or Yehuda 60219
Israel

Bachow Investment Partners III L.P.                    1,399,000          10.6%
3 Bala Plaza East, 5th floor
Bla Cynwyd, PA 19004 U.S.A.

All officers and directors as a group(1)                 692,653           5.3%
(11 persons)
To the Company's knowledge, there is no arrangement, the operation of which may
at a subsequent date, result in a change in control of the Company.

-------------------------------------------------------------------------------
(1) Comprised of 239,810 Ordinary Shares and options to purchase 452,843
Ordinary Shares of the Company which were exercisable within 60 days of May 31,
2000.

                                       17
18

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 define 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

            (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.

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SPECIAL PREFERRED SHARES

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.

ITEM 5 - NATURE OF TRADING MARKET

The Company's Ordinary Shares are quoted on the NASDAQ National Market under
the symbol "PGEO."

The following table shows the high and low sale prices of the Ordinary Shares
of the Company in the indicated quarters. Trading in the Company's Ordinary
Shares commenced on June 15, 1998.
1998                                                    HIGH                           LOW
--------------------------------------------------------------------------------------------
6/15/98-6/30/98                                         $7.375                        $7.00
Third Quarter                                           $7.125                        $4.50
Fourth Quarter                                          $5.875                        $4.19
1999                                                    HIGH                           LOW
--------------------------------------------------------------------------------------------
First Quarter                                           $5.125                        $4.25
Second quarter                                          $7.25                         $5.00
Third Quarter                                           $6.75                         $5.625
Fourth Quarter                                          $5.875                        $4.50
19
20
2000                                                    HIGH                           LOW
--------------------------------------------------------------------------------------------
First Quarter                                           $10.063                       $4.50
Second Quarter(through June 14, 2000)                   $7.813                        $5.20
As of May 31, 2000 there were 25 shareholders of record, of whom 11 have
addresses registered in the United States, holding 73% of the outstanding
Ordinary Shares of the Company.

ITEM 6 - EXCHANGE CONTROL REGULATIONS

The Israeli Currency Control Law, 1978 imposes certain limitations concerning
foreign currency transactions and transactions between Israeli and non-Israeli
residents, which limitations may be regulated or waived by the Controller of
Foreign Exchange at the Bank of Israel, through ""general" and ""special"
permits. In May 1998, a new ""general permit" was issued pursuant to which
substantially all transactions in foreign currency are permitted. Any dividends
or other distributions paid in respect of ordinary shares and any amounts
payable upon the dissolution, liquidation or winding up of the affairs of a
company, as well as the proceeds of any sale in Israel of the company's
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 any Israeli income tax owing has been paid on (or withheld from)
such payments. Because exchange rates between the NIS and the U.S. dollar
fluctuate continuously, U.S. shareholders will be subject to any such currency
fluctuation during the period from when such dividend is declared through the
date payment is made in U.S. dollars.

ITEM 7 - TAXATION

U.S. 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 discussion does not consider all aspects of U.S. federal income taxation
that may be relevant to particular U.S. Holders by reason of their particular
circumstances, including potential application of the alternative minimum tax,
or any aspect of state, local or non-

                                       20
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U.S. tax laws. In addition, this summary is directed only to U.S. Holders that
hold Ordinary Shares as capital assets and does not address the considerations
that may be applicable to particular classes of U.S. Holders who may be subject
to special rules, including, without limitation, financial institutions,
broker-dealers, tax-exempt organizations, U.S. Holders who own (directly,
indirectly or through attribution) 10% or more of the Company's outstanding
Ordinary Shares, U.S. Holders who acquired their Ordinary Shares pursuant to
the exercise of options or similar derivative securities or otherwise as
compensation, U.S. Holders who hold their Ordinary Shares as part of a
"straddle," "hedge" or "conversion transaction," or persons who own Ordinary
Shares through a partnership or other pass-through entity.

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 included 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

Sale or Exchange of Ordinary Shares

A U.S. Holder's sale or exchange of Ordinary Shares generally will result in
the recognition of capital gain or loss by such U.S. Holder in an amount equal
to the difference between the amount realized and the U.S. Holder's tax basis
in the Ordinary Shares sold. Such capital gain or loss will be long-term
capital gain or loss if the Ordinary Shares sold have been held for more than
one year at the time of the sale or exchange. If the U.S. Holder's holding
period on the date of the sale or exchange was one year or less, such gain or
loss will be short-term capital gain (generally subject to the same effective
federal income tax rates as ordinary income) or loss. See "Item 7:
Taxation-Israel -- Capital Gains Tax" for a discussion of taxation by Israel of
capital gains realized on the sale or exchange of Ordinary Shares. In general,
any capital gain or loss recognized by a U.S. Holder upon the sale or exchange
of Ordinary Shares will

                                       21
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be treated as U.S. source income for U.S. foreign tax credit purposes. Any
capital loss realized upon the sale, exchange or other disposition of Ordinary
Shares generally is deductible only against capital gains and not against
ordinary income, except that in the case of non-corporate taxpayers, a capital
loss is deductible only to the extent of capital gains plus ordinary income of
up to $3,000.

A U.S. Holder's tax basis in his, her or its Ordinary Shares generally will be
the purchase price paid therefor by such U.S. Holder. The holding period of
each Ordinary Share owned by a U.S. Holder will commence on the day following
the date of the U.S. Holder's purchase of such Ordinary Share and will include
the day on which the Ordinary Share is sold by such U.S. Holder.

Treatment of Dividend Distributions

For U.S. federal income tax purposes, the gross amount of any distribution made
with respect to, or in some cases a partial purchase or redemption of, Ordinary
Shares (including the amount of any U.S. taxes withheld therefrom) will be
included in a U.S. Holder's income as ordinary dividend income to the extent
that the dividends are paid out of current or accumulated earnings and profits
of the Company, as determined based on U.S. tax principles. Such dividends will
not be eligible for the dividends received deduction allowed to U.S.
corporations under Section 243 of the Code. Dividend distributions in excess of
the Company's current and accumulated earnings and profits will be treated
first as a non-taxable return of the U.S. Holder's tax basis in his, her or its
Ordinary Shares to the extent thereof and then as a gain from the sale of
Ordinary Shares. Dividends paid in NIS will be included in income in a U.S.
dollar amount based on the exchange rate at the time of their receipt. Any gain
or loss resulting from currency fluctuations during the period from the date a
dividend is paid to the date such payment is converted into U.S. dollars
generally will be treated as ordinary income or loss.

Dividends paid to a U.S. Holder with respect to Ordinary Shares will be treated
as foreign source dividend income for U.S. foreign tax credit limitation
purposes. Subject to certain conditions and limitations, any U.S. withholding
tax imposed on such dividends generally will be eligible for credit against
such U.S. Holder's U.S. federal income tax liability or, at the U.S. Holder's
election, may be claimed as a deduction against income in determining such tax
liability. However, a U.S. Holder will be denied a foreign tax credit with
respect to U.S. withholding tax deducted from dividends if such holder has not
held Ordinary Shares for a specified minimum period during which it is not
protected from risk of loss or to the extent such U.S. Holder is under an
obligation to make certain related payments with respect to positions in
substantially similar or related property. The limitations on claiming a
foreign tax credit include computation rules under which foreign tax credits
allowable with respect to specific classes of income cannot exceed

                                       22
23

the U.S. federal income taxes otherwise payable with respect to each such class
of income. Dividends with respect to the Ordinary Shares generally will be
classified as "passive income," or, in the case of certain holders, "financial
services income" for purposes of computing the foreign tax credit limitation.
Foreign income taxes exceeding the credit limitation for the year of payment or
accrual generally 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%. The calculation of allowable foreign tax credits and, in the
case of a U.S. Holder that elects to deduct foreign taxes, the availability of
deductions for foreign taxes paid involve the application of rules that depend
on a U.S. Holder's particular circumstances. Accordingly, U.S. Holders should
consult their own tax advisors regarding their eligibility for foreign tax
credits or deductions.

Passive Foreign Investment Company Status

Generally, the Company will treated as a passive foreign investment company
("PFIC") for U.S. federal income tax purposes for any tax year if, in such tax
year, either (i) 75% or more of its gross income is passive in nature, or (ii)
on average for the taxable year, 50% or more of its assets (by value) produce
or are held for the production of passive income. The Company does not believe
that it will satisfy either of the foregoing tests for PFIC status for 2000
because the nature of its income and its assets are not expected to be
sufficiently passive within the meaning of the PFIC rules. However, since the
determination whether the Company is a PFIC will be made annually based on
facts and circumstances that, to some extent, may be beyond the Company's
control, there can be no assurance that the Company will not become a PFIC for
2000 or at some time in the future.

If the Company were treated as a PFIC for U.S. federal income tax purposes for
any year during a U.S. Holder's holding period and such U.S. Holder does not
make either a QEF Election or a "mark to market" election (each as described
below), any gain recognized by such U.S. Holder upon the sale of Ordinary
Shares (or the receipt of certain distributions) would be treated as ordinary
income, such income would be allocated over such U.S. Holder's holding period
with respect to such Ordinary Shares and an interest charge would be imposed on
the amount of deferred tax on such income allocated to prior taxable years.
Although the Company generally will be treated as a PFIC as to any U.S. Holder
if it is a PFIC for any year during such U.S. Holder's holding period, if the
Company ceases to satisfy the requirements for PFIC classification, such U.S.
Holder may avoid such classification for years after such cessation if he, she
or it elects to recognize gain based on the unrealized appreciation in the
Ordinary Shares through the close of

                                       23
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the tax year in which the Company ceased to be a PFIC. Additionally, if the
Company were to become a PFIC, U.S. Holders who acquire Ordinary Shares from
decedents would be denied the normally available step-up in income tax basis
for such Ordinary Shares to fair market value at the date of death and instead
would have a tax basis equal to the decedent's.

For any tax year in which the Company is determined to be a PFIC, a U.S. Holder
could elect to treat his, her or its Ordinary Shares as an interest in a
qualified electing fund (a "QEF Election"), in which case, the U.S. Holder
would be required to include in income currently his, her or its proportionate
share of the Company's earnings and profits in years in which the Company is a
PFIC regardless of whether distributions of such earnings and profits are
actually distributed to such U.S. Holder, but any gain subsequently recognized
upon the sale by such U.S. Holder of his, her or its Ordinary Shares generally
would be taxed as capital gain and the denial of the basis step-up at death
described above would not apply. As an alternative to a QEF Election, a U.S.
Holder generally could elect to mark the Ordinary Shares to market annually,
recognizing ordinary income or loss (subject to certain limitations) equal to
the difference between the fair market value of its Ordinary Shares and the
adjusted basis of such stock. Losses would be allowed only to the extent of net
mark to market gain accrued under the election. If a mark to market election
with respect to Ordinary Shares is in effect on the date of a holder's death,
the normally available step-up basis to fair market value will not be
available. Rather, the tax basis of such shares in the hands of a U.S. Holder
who acquired them from the decedent will be the lesser of the decedent's basis
or the fair market value of the shares. U.S. Holders should consult their own
tax advisors regarding the eligibility, manner and advisability of making a QEF
Election or a mark to market election if the Company is treated as a PFIC.

Information Reporting and Backup Withholding

Any dividends paid on the Ordinary Shares to U.S. Holders may be subject to
U.S. information reporting requirements and the 31% U.S. backup withholding
tax. In addition, the proceeds of a U.S. Holder's sale of Ordinary Shares may
be subject to information reporting and the 31% U.S. backup withholding tax.
Backup withholding will not apply if the holder (i) is a corporation or other
exempt recipient or (ii) the holder provides a U.S. taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with any applicable backup withholding requirements. Any
amounts withheld under the U.S. backup withholding tax rules will be allowed as
a refund or a credit against the U.S. Holder's U.S. federal income tax,
provided the required information is furnished to the U.S. Internal Revenue
Service.

                                       24
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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 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 ("The Tax Reform Committee") 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 has approved the recommendation in principle, but implementation of the
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

                                       25
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The Income Tax Law (Adjustment for Inflation), 1985 (the "Adjustment for
Inflation Law") attempts to overcome some of the problems experienced in a
traditional tax system by an economy experiencing rapid inflation, which was
the case in Israel at the time the Adjustment for Inflation Law was enacted.
Generally, the Adjustment for Inflation Law was designed to neutralize, for
Israeli tax purposes, the erosion of capital investments in businesses and to
prevent unintended tax benefits resulting from the deduction of inflationary
financing expenses. The Adjustment for Inflation Law applies a supplementary
set of inflationary adjustments to a normal taxable profit computed according
to regular historical cost principles.

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

In addition, subject to certain limitations, depreciation on fixed assets and
loss carry forwards are adjusted for inflation based on changes in the Israeli
CPI. The net effect of the Adjustment for Inflation Law on 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.

                                       26
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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 taxes 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 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

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28

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

                                       28
29

which production commenced or fourteen years from the year of receipt of
Approved Enterprise status.

A company that has an Approved Enterprise status which was approved after April
1, 1986 may elect to forego any entitlement to the grants otherwise available
under the Investment Law and, in lieu of the foregoing, participate in an
alternative benefits program (the "Alternative Benefits Program"), under which
the undistributed income from the Approved Enterprise is fully tax exempt for a
defined period of time. The period of tax exemption ranges between 2 and 10
years, depending upon the location within Israel of the Approved Enterprise and
the type of Approved Enterprise. 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.

                                       29
30

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

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

TAX BENEFITS FOR RESEARCH AND DEVELOPMENT

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

                                       30
31

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.

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).

                                       31
32

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 face royalty obligations 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, 1999, the Company had
received grants from the Marketing Fund in the amount of approximately $430,000.
At March 31, 2000, the aggregate contingent liability was approximately
$418,000.

ITEM 8

SELECTED  FINANCIAL  DATA

The following table summarizes certain selected consolidated financial data and
should be read in conjunction with the Company's Consolidated financial
statements and accompanying notes for the years ended December 31, 1999,
1998,1997, 1996 and 1995. and with Management's Discussion and Analysis of
Financial Condition and Results of Operations included as part of this
document.

The Selected financial data is derived from the Consolidated financial
statements of the Company for the years stated . These Consolidated financial
statements have been prepared in accordance with United States generally
accepted accounting principles (US GAAP) and have been audited by Kost, Forer
and Gabbay, a member of Ernst & Young International.

The CogniSeis acquisition occurred in October 1997 and the PTM acquisition in
March 1999; the businesses of CogniSeis and

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33

of PTM have been included in the results of Paradigm from their respective
acquisition dates. Prior to the respective dates of acquisition, Paradigm's and
CogniSeis' businesses operated separately and PTM's business was a division of
Mincom Limited, an Australian entity. The selected financial data does not
include information for CogniSeis or PTM prior to their respective dates of
acquisition. Therefore, the historical financial data does not provide the
basis to assess the future financial position and results of operations of the
Company or what the financial position and results of operations of Paradigm,
CogniSeis and PTM would have been had the Combined Businesses been operated on
an integrated basis during all of the periods presented. Note 1 of the audited
Financial Statements includes pro-forma unaudited combined results of
operations of Paradigm and CogniSeis for the year ended December 31, 1997 as if
the CogniSeis acquisition had been completed on January 1, 1997 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.

                                       33
34
CONSOLIDATED INCOME STATEMENT DATA
 (IN THOUSANDS EXCEPT PER SHARE DATA)

                                                  1995           1996          1997          1998          1999
                                                  ----           ----          ----          ----          ----
REVENUES:

   Products                                          $7,336         $7,718       $19,979       $38,074       $43,023
   Services                                           2,056          3,884         4,886         7,288        11,483
                                              -----------------------------------------------------------------------
                 TOTAL REVENUES                       9,392         11,602        24,865        45,362        54,506
                                              -----------------------------------------------------------------------
                      YEAR -TO- YEAR % CHANGE                        23.5%         114.3%         82.4%         20.2%

OPERATING EXPENSES:

   Cost of products                                   1,561          2,450         5,070         8,559        12,418
   Cost of services                                   1,492          1,539         1,849         3,107         5,804
   Research and development                             340          1,466         4,728         7,660         9,306
   Selling, general and administrative                6,070          9,536         9,744        15,822        20,638
   Depreciation                                         306            997         2,012         2,298         3,865
   Amortization                                         955          1,040         1,185         2,347         3,064
   Non recurring expenses                                 -              -        10,676             -         2,705
                                              -----------------------------------------------------------------------
      TOTAL OPERATING EXPENSES                       10,724         17,028        35,264        39,793        57,800
                                              -----------------------------------------------------------------------

  OPERATING INCOME (LOSS)                           (1,332)        (5,426)      (10,399)         5,569       (3,294)
   Financial income (expenses), net                   (213)             57         (446)         (661)         (484)
                                              -----------------------------------------------------------------------
  INCOME (LOSS) BEFORE INCOME TAXES                 (1,545)        (5,369)      (10,845)         4,908       (3,778)
   Income tax                                             -              -             -           356             -
                                              -----------------------------------------------------------------------
  NET INCOME(LOSS)                                 $(1,545)       $(5,369)     $(10,845)        $4,552      $(3,778)
                                              -----------------------------------------------------------------------

    BASIC EARNINGS PER SHARE                        $(0.68)        $(2.33)       $(4.66)         $0.66       $(0.31)
    NUMBER OF SHARES USED IN COMPUTING BASIC
    EARNINGS(LOSS) PER SHARE                          2,270          2,300         2,328         6,850        12,205
    DILUTED EARNINGS PER SHARE                      $(0.68)        $(2.33)       $(4.66)         $0.49       $(0.31)
    NUMBER OF SHARES USED IN COMPUTING
    DILUTED EARNINGS(LOSS) PER SHARE                  2,270          2,300         2,328         9,306        12,205

SELECTED CONSOLIDATED  BALANCE SHEET DATA
(AT YEAR END - IN THOUSANDS EXCEPT PER SHARE DATA)
1995           1996          1997          1998          1999
                                                  ----           ----          ----          ----          ----
  CASH AND CASH  EQUIVALENTS                           $592         $7,113        $8,229        $3,463        $5,457
  WORKING CAPITAL(DEFICIENCY)                           963          7,958         (692)         9,154        15,346
  TOTAL ASSETS                                       12,964         19,383        47,883        46,135        66,165
  CURRENT DEBT                                        2,372          1,193         1,288         2,228         5,073
  NOTE PAYABLE                                            0              0         9,500             0             0
  BRIDGE LOAN  PAYABLE                                    0              0        12,000             0             0
  LONG TERM DEBTS(EXCLUDING CURRENT MATURITIES)         399            367           483            39         4,665
  SHAREHOLDERS'  EQUITY                               6,592         12,885         2,640        26,697        35,468
34
35
CASH FLOW  DATA
CASH  PROVIDED BY (USED IN) OPERATING ACTIVITIES  (1,782)        (1,658)         1,633       (1,773)       (1,089)
  CASH  PROVIDED BY (USED IN) INVESTING ACTIVITIES  (3,320)        (2,436)      (11,594)       (4,516)      (15,401)
  CASH  PROVIDED BY (USED IN) FINANCING ACTIVITIES    4,952         10,734        11,077         1,674        19,068
35
36

ITEM 9 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This section contains a discussion of the operating results and general
financial condition of Paradigm Geophysical Ltd., including:

  -   factors impacting Paradigm's  business;

  -   why Paradigm's  earnings and expenses  for the year  1999 differ from the
      years 1998 and 1997;

  -   Paradigm's capital expenditures ;

  -   factors impacting Paradigm's cash flows; and

  -   other items  that materially affect the  financial condition or earnings

FORWARD-LOOKING INFORMATION

The Private Securities Litigation Reform Act of 1995 provides safe harbor
provisions for forward-looking statements. Forward-looking statements involve
risks and uncertainties that may impact Paradigm's actual results of
operations. Statements in this Form 20-F annual report , which are
forward-looking and which provide other than historical information, involve
risks and uncertainties. The Company's forward-looking information reflects its
best judgement based on current information. From time to time the Company may
also provide oral or written forward-looking statements in other materials
released to the public. Your attention is drawn to the fact that any or all of
the forward-looking statements in this Form 20-F annual report and in any other
materials released to the public may not transpire at all or transpire
differently. In addition, forward-looking statements can be affected by
inaccurate assumptions the Company may make or by known or unknown risks and
uncertainties. There can be no assurance that other factors, other than those
listed below, will not affect the accuracy of forward-looking information. As a
result, no forward-looking statement can be guaranteed. While it is not
possible to identify all factors, the Company continues to face many risks and
uncertainties that could cause actual results to differ from those
forward-looking statements including:

GEOPOLITICAL AND LEGAL.

  -   trade  restrictions  and  economic  embargoes;

  -   unsettled political conditions, war, civil unrest, currency controls and
      governmental actions in the countries in which the Company operates;

  -   operations in countries with significant  amounts of political risk;

  -   changes in foreign exchange rates;

  -   changes in governmental regulations in the countries in which the Company
      operates; and

  -   litigation against the Company

                                       36
37

WEATHER RELATED.

  -   the impact of prolonged mild weather conditions on the demand for and
      price of oil and natural gas.

COMPETITION AND PRODUCTS.

  -   impact of competitive products and services and their pricing;

  -   increased investments by Paradigm and its competitors to support new
      product and service introductions;

  -   market acceptance of  Paradigm's, and its competitors' products and
      services; and

  -   product and services transitions and changes in product and services
      sales mix.

CUSTOMERS AND VENDORS.

  -   changes in capital and operational expenditures by customers in the oil
      and gas industry for exploration, development and production;

  -   timing of capital expenditures by customers in the oil and gas industry
      for exploration, development and production; and

  -   consolidation of customers in the oil and gas industry following mergers
      and acquisitions, tempering capital expenditures.

INDUSTRY.

  -   technological and structural changes in the oil and gas production
      companies and in the oil field services industry; and

  -   changes in the price of oil and natural gas, including:

            -     OPEC's ability to set and maintain production levels and
                  prices for oil; and

            -     the level of oil production by non-OPEC countries.

  -   the policies of governments regarding exploration for and production and
      development of their oil and natural gas reserves; and

  -   the level of demand for oil and natural gas.

PERSONNEL AND MERGERS.

            -     increased competition in the hiring and retention of
                  employees in specific areas which are critical to the
                  Company's operations; and

            -     integration of acquired  businesses into Paradigm operations.

In addition, future trends for pricing, margins, revenues and profitability
remain difficult to predict in the oil field services industry .

The Company does not assume any responsibility to publicly update any of its
forward-looking statements regardless of whether factors change as a result of
new information future events or for any other reason. You are advised to
review any additional disclosures the Company makes in it's 6-K reports to the
Securities and Exchange Commission. You are also advised to listen to
Paradigm's quarterly earnings release conference calls with financial analysts.
You may find information on how to access those calls at Paradigm's web site
www.paradigmgeo.com.

GENERAL

                                       37
38

The following discussion is based on the Consolidated Financial Statements
included in this report and should be read in conjunction with those Statements
and other financial information contained herein, primarily in Item 8 -
Selected Financial Data. The Company's accounting policies are discussed in
detail in the Consolidated Financial Statements contained in this report.

OVERVIEW

Paradigm Geophysical Ltd. is a geoscience knowledge solutions company, which
provides computer-aided exploration and production software products and
services to the oil and gas industry. Paradigm's enabling technologies through
its products and services facilitate the field asset teams of oil and gas
companies to explore, model, simulate and manage oil and gas reservoirs with
precision and accuracy, so as to reduce exploration and production costs,
minimize risk in drilling and resource exploitation and increase the
productivity of proven reserves. Paradigm achieves this objective by focusing
on two major categories of business activity in the oil and gas industry by
providing: (i) comprehensive software solution suites for the processing and
interpretation of prospect data for sub-surface modeling, prospect evaluation,
mapping, reservoir characterization and management; and (ii) geoscience
services, which includes geophysical, geological and petrophysical processing
and consultancy services. These activities contribute to extracting the most
geoscience knowledge from the seismic and geological, and well and reservoir
production data. Paradigm software solutions and services are in use in major
oil companies throughout the world and leading state owned oil and gas
companies, as well as independent producers and oilfield service providers.

1999 MARKET CONDITIONS

The Company's results in 1999 should be viewed within the context of the
developments and trends in the market in which it operates - the Oil Field
Services market. This, in turn, is 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.

INTERNATIONAL OIL PRICES were low and declined throughout much of 1998 with the
consequent mid-1998 cuts in some of the major oil producers' capital budgets.
1999 opened with low oil prices and continued uncertainty despite the oil price
rise that began in the second half of 1999.

Industry analysts assessed a 30% cut in capital budgets by the oil companies
over 1998 levels, i.e. to about $68 billion in 1999 vs. $93 billion in oil
field services capital spending in 1998. Despite the recovery of oil prices
after mid 1999, the capital budget levels remained essentially unchanged for
the full year.

                                       38
39

The market results demonstrate an industry-wide decline in expenditures, with a
consequent sector-wide decline in oil field service companies' turnover and
profitability.

The Company assesses that the declines in oil and gas companies' capital
spending were not evenly distributed over all the various oil field services.
Various indicators show that oil field capital expenditures significantly
declined in 1999 and 1998, and were preferentially allocated to maintaining
production levels and improving productivity. Expenditures on exploration
activities, including exploration software and services, declined more than the
overall average capital expenditure decline. The extent of this differential
capital expenditure in favor of production over exploration is difficult to
quantify, but can be illustrated by comparing worldwide seismic activity and
worldwide rig counts. Analyst reports assess the Exploration and Production
software and data management market for 1998 at $1.2 billion, and the seismic
data processing market at about $1 billion. The Company's investigations suggest
that in 1999 the actual amounts of expenditures were in the range of $650
million and $600 million, declines of 45% and 40% respectively.

Even within the industry software expenditures were preferentially allocated to
reservoir management and production-related software, again reflecting the
industry's priorities on production over exploration. Where investment was made
in exploration software, this was for high-end data analysis solutions, such as
depth inversion and seismic reflection signal strength inversion analysis, and
advanced subsurface structure visualization and model building tools.

INDUSTRY TRENDS AND THEIR SIGNIFICANCE FOR FUTURE MARKET DEVELOPMENT

The downward trend in the software market was fueled by a number of factors in
addition to the overall lower capital budgets:

            The creation of the new "super-majors" alongside Shell (BPAmoco,
            ExxonMobil, TotalFina) resulted in suspension of investment
            expenditures until the results of the consequent reorganizations
            and the assignment of management and profit responsibilities became
            clear.

            The low oil prices in 1998 and the first half of 1999, and thus the
            declines in cash flows and profits, caused significant downsizing
            of geosciences and other staffs, with a consequent lowering in the
            overall number of software licenses needed by the major industry
            players. The decline in staff resulted, in the latter half of 1999
            in increasing demand for out-sourcing of complex seismic data
            analysis projects.

                                       39
40

            Looking forward, the decline in the software market due, in part,
            to the severe lack of oil professionals coupled with an increasing
            demand for geophysical services appears to be indicative of the
            future trend in the oil and gas services industry, to which the
            Company is responding.

By the end of 1999, the disruptions from the industry consolidations appeared,
effectively, to be over. However the impact of staff downsizing remains
evident, and expert opinion is that this will have a long-term impact on the
way the major companies will be organizing their remaining staff. This, in
turn, will have consequences on the need to increase and widen the tasks
assigned to outsourcing contractors, and should lead to demands for wider and
deeper functionality and "expert systems" built into software used by the
industry.

Within the seismic data processing market, the trend that emerged was to
re-analyze archive and library data, not with traditional time-based methods,
but with the intent to extract more information and knowledge from the archive
using the high-end seismic data analysis, i.e. depth inversion and seismic
reflection signal strength inversion analysis methods. The concomitant trend
was the increase in outsourcing of this high-end data analysis, and, therefore,
the overall growth in market demand for depth and seismic reflection signal
strength inversion analysis services.

While these general trends have been observed, it should be noted that they are
evident to differing extents within the major sub-sectors of the Company's
markets, i.e., the super-majors, the majors, the independent oil producers, the
national oil companies, and the oil field services sector active in seismic
data processing and reservoir management services. For example, trends to
outsourcing are currently stronger within the independents, and less evident
among the super-majors and majors. The downsizing of staff and the consequent
changes in workflows and the manner in which software will be used is most
evident among the super-majors, majors and the large independents.

While the results of operations in 1999 have been negatively impacted by the
lower activity levels in the oil and gas industry, we believe the long-term
fundamentals of the oil and gas industry remain sound. Steadily rising
population and greater industrialization efforts should continue to propel
worldwide economic expansion, especially in developing nations. These factors
should cause increasing demand for oil and gas to produce refined products,
petrochemicals, fertilizers and power.

During the first half of 2000 there has been a continuing rise in international
oil prices, well above the "consensus level" of sustainable price level. There
is also a parallel expectation of significant increases in natural gas prices.

                                       40
41

These trends in commodity prices have also raised expectations of increases in
capital expenditures by the production companies. However these expectations
may well not be fully applicable to the purchase of software because of the
decrease in the number of geoscience personnel using advanced software, and the
levels of investment made in past years for basic software platforms for
seismic data processing and interpretation.

Therefore, looking forward, industry spending on exploration and production
related software could well focus on special applications, add-ons, and
software for areas of the workflow not previously well served, rather than
significant levels of additional sales of basic-suite licenses. The levels of
professional staff available for such analysis could further impact on the
demand, translating into outsourcing for services based on the new software,
rather than significant purchases of software licenses, with the majority of
the use of software within the production companies focusing on quality
assurance and the end-decision rather than the analysis work-flow.

RESULTS OF OPERATIONS - 1999 COMPARED TO 1998 AND 1997

CHANGE IN FORMAT OF FINANCIAL STATEMENTS

The Company reviewed its accounts reporting format and best practices of
comparable companies with the objective of finding a format that would provide
more transparency and better reflect our actual business and earnings drivers,
and take into account the expected trends in our industry and market. The survey
of comparable companies showed that best practices, adopted by the Company for
1999 reporting, and going forward, had the following common characteristics:

      1.    Operating Income, rather than Gross Margin, as the primary
            indicator of a company's financial health. This is especially
            relevant for companies such as Paradigm with high fixed and low
            variable costs, and where the fixed costs are mostly for Research
            and Development and the Marketing infrastructure.

      2.    Clear separation of Depreciation and Amortization from the
            Operating Expenses line items.

      3.    Treatment of Goodwill charges as being outside of Operating
            Expenses (and the need to take into account that in some
            jurisdictions Goodwill charges are not a taxable expense).

      4.    Disclosure of Earnings per share measures with and without Goodwill
            charges. Paradigm will adopt this accounting disclosure principle
            following its approval by one of the

                                       41
42

            authoritative bodies designated to establish accounting principles.

ACQUISITIONS
PTM - MARCH 1999

On March 31, 1999 the Company acquired the assets of the Petroleum Technologies
Division of Mincom, or PTM, a privately held Australian company. The primary
product asset is GeoLog(TM), a well-log and petrophysics analysis program.

The Company took over a staff of over 40 located in Brisbane, Houston, London,
Aberdeen and Calgary, which included management, research and development,
sales, customer support and administrative personnel. The PTM staff in Houston,
London and Calgary were integrated into the Company's offices in those
locations. The Company expanded its operations in Aberdeen through the PTM
office, and maintained the Brisbane operation as a research and development
center, transferring sales and support operations to the Company's offices in
Perth. Integration of the staff and sales and support operations and research
and development was completed by year-end.

While the GeoLog sells as a stand-alone product for well logging, the Company
is also integrating it into the ERGOS product suite, to provide integration of
geological data with seismic data for prospect interpretation. GeoLog will also
be integrated into the Company's new reservoir management product suite -
POROS.

COGNISEIS - OCTOBER 1997

The Company's acquisition of all of the outstanding stock of CogniSeis
Development Inc. in October 1997 permitted the Company to move from a supplier
of specialized depth-imaging products to integrated product suites that provide
a complete range of solutions in the time and depth domains for processing,
inversion and interpretation of seismic and non-seismic data. The integration
of CogniSeis and Paradigm products into coherent product suites was introduced
to the market in September 1998, transforming Paradigm into a total solution
provider of seismic and related data for oil and natural gas exploration.

The Company's acquisition of PTM in March 1999 and CogniSeis in October 1997
had a positive impact on year end 1999 and 1998 results. The 1999 results of
operations described in the Management's Discussion and Analysis of Financial
Condition and Results of Operations include the twelve months of operations of
Paradigm consolidated with nine months of post-acquisition operations (April
through December) of PTM.

The 1997 results of operations described in the Management's Discussion and
Analysis of Financial Condition and Results of Operations include the twelve
months of operations of Paradigm consolidated with only three months of
post-acquisition operations (October through December) of CogniSeis. The
contribution of

                                       42
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PTM and CogniSeis products and operations, as well as successful integration of
the Company's activities, cannot be adequately portrayed in a typical
year-by-year discussion. As a consequence, the financial results described in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations for these periods are not directly comparable. Note 1 of the audited
Financial Statements includes pro-forma unaudited combined results of
operations of Paradigm and CogniSeis for the year ended December 31, 1997 as if
the CogniSeis acquisition had been completed on January 1, 1997 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. Where it is considered relevant to understanding the
results of operations reference has been made to the consolidated pro forma
results.

REVENUES

The Company's revenues are derived mainly from the sale of software licenses
and related maintenance and support contracts (product sales) and from
providing geoscience processing and consultancy services. In choosing to market
both products and geoscience services, Paradigm's management has chosen to
diversify revenue sources to try to minimize risk in seasonal and regional
downturns. Maintenance and support revenues also provide a predictable revenue
stream.

The increase in total revenues by 20% over 1998, despite the overall weakness
of the market during 1999, can be accounted for by a number of factors.

Product revenues increased by 13% over 1998, and services revenues increased by
58%. There was a material change in 1999 over 1998 in the relative proportion
of revenue derived from services (at 21% of total revenue in 1999 vs. 16% in
1998). This increase was due both to the absolute growth in service revenues,
and the relatively slower growth in product revenues in 1999. By comparison,
total revenues in 1998 were 82% higher than in 1997 (21% higher on a pro-forma
comparison) with product revenues representing 80% of total revenues.

Looking forward to 2000, the Company expects the pace of growth for products to
improve, while the growth in services will also continue but not at the same
high pace of 1999. The Company therefore expects that for 2000 the relative
contribution of product revenues to total revenues will return back to a level
between the 1999 and 1998 levels of 79% and 84%, respectively.

For the longer term, the Company expects services and related revenues to form
a higher proportion of total revenues in line with the trend in the industry.

                                       43
44

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. In 1999, this category included a major contract
for a turnkey data processing project including the delivery and integration of
Paradigm's and third party software and training services for the operating
staff. See note 2j(1) of the Consolidated Financial Statements for details of
the Company's accounting policy on revenue recognition of products.

The major difference between the composition of 1999 versus 1998 revenues was
the turnkey project. This contract is valued at over $10 million, of which about
$6 million was recognized as product revenue, in 1999.

As noted previously, in March 1999, the Company acquired PTM. PTM's primary
product GeoLog, provided a significant addition to the Company's product
offerings and contributed about $5 million of the product revenue during the
latter three quarters of the fiscal year.

The positive impact of these two new revenues sources, materially different
from 1998, offset a decline in revenues for the Company's other products, for a
net increase in total product sales of 13% over 1998. On a pro-forma basis
product revenue growth was 2% over pro-forma 1998.

By comparison, product sales in 1998 were 90% higher than in 1997 (16% higher
on a pro-forma comparison).
The sales proportion of the three product suites
was Echos and Ergos 40% each and Poros 20%. In 1998 Echos and Ergos sales were
equal as Poros had not yet been introduced. This is a further reflection of
management's decision to emphasize the expansion of our installed base for
interpretation products and to include analysis and integration of non-seismic
data relevant to the characterization, management and simulation of oil and gas
reservoirs.

SERVICES

The services revenue category includes seismic data analysis, processing and
consultancy services. The Company operates ten service centers worldwide. See
note 2j(2) of the Consolidated Financial Statements for details of the
Company's accounting policy on revenue recognition of products.

Revenues from services increased by 58% over 1998, which was 49% higher than
1997. In 1999 there was a significant increase in outsourcing demand for
high-end seismic data processing services, primarily in the US and Russian
markets. However, this increase was offset by weakness throughout the year in
the North Sea and Far East markets. The high-end services market is also now

                                       44
45

becoming characterized by price pressures, a trend that the Company expects
will continue as high-end processing becomes more widely demanded by the
industry and the number of suppliers increases. On a pro-forma basis, service
revenue growth was 48% higher than pro-forma 1998.

To meet the increase in demand for high-end seismic data processing services
and to provide for faster turn-around time for large surveys, particularly in
the Gulf of Mexico, the Company continued its investment in computer hardware,
increasing computer capacity and expanding the Company's geoscience services
business worldwide.

OPERATING COSTS

COST OF  PRODUCTS

Cost of products 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.

The material change in the components of cost of revenue for products in 1999
over 1998 was the hardware component in the turnkey project. Of the $6 million
recognized in revenues for this project, $3.6 million was cost of hardware
provided. Hardware costs accounts for the decline in product gross margins in
1999 when compared to 1998. Gross margin on product sales in 1999 was 71%,
compared to 78% in 1998 and 75% in 1997.
The Company expects that cost of products and gross margins for product sales
will return to 1998 levels, in the absence of any additional turnkey projects.

COST OF  SERVICES

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

With the downturn in the service markets in the North Sea and the Far East,
Company computer capacity was under utilized during 1999, unfavorably impacting
on gross margins for services. This was offset by the full capacity utilization
of the US and Russian service centers and the cost-efficiencies realized with
the installation of the "super-computer" in Houston. Gross margin on services
in 1999 was 50%, compared to 57% in 1998 and 62% in 1997.

As high-end services become more widely available, the Company expects that
there will be price competition for services. We therefore do not expect that
the historic high gross margins, in excess of 50%, which were characteristic of
the 1997 and 1998 market, will be sustainable at these levels into the future.
In addition new services products, such as seismic reflection signal strength
inversion and interpretation, will have a higher proportion

                                       45
46

of staff-cost in relation to computer CPU time, also contributing to possible
future lower margins in services.

RESEARCH AND DEVELOPMENT, NET.

Research and development expenses consist primarily of salaries and other
related expenses and the cost of facilities. See note 2h of the Consolidated
Financial Statements for details of the Company's accounting policy on software
development costs.

The Company invested in research and development at the rate of 17% of annual
revenues in both 1999 and 1998, and 19% in 1997. Research and development
expenses in 1999 were 21% higher than 1998, in absolute dollar terms.

Research and development is managed out of the Tel-Aviv office, and carried out
at four centers, Tel Aviv, Houston, Moscow and Brisbane. These centers are
expertise-specialized rather than product-specialized. The Tel Aviv office
performs the integration and commercialization function for each product
release.

The material changes in research and development in 1999 over 1998, were the
establishment and expansion of the research and development group in Moscow
and, following the acquisition of PTM, the integration of the Australian-based
PTM research and development group into the worldwide research and development
group. The Company also made the decision to develop new reservoir simulation
products based on next generation technology. Looking to the future the Company
expects to continue this global approach to new product development,
capitalizing on the specialized expertise characteristic of each location. The
Company sees this global optimization of its research and development efforts
as an intrinsic strength and is expending management efforts to further
integrate and manage this global product development system. In the future
additional research and development centers may be established continuing the
policy of expertise-specific, rather that product-specific, centers.

The Company expects to maintain its current level of research and development
expenditure in 2000.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, 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.

Selling, general and administrative expenses in 1999 were 38% of annual
revenues, compared to 35% in 1998 and 39% in 1997. In

                                       46
47

absolute dollar terms selling general and administrative expenses were 30%
higher in 1999 than in 1998, 17% on a pro-forma basis. In 1999, the Company
continued strengthening its sales and marketing efforts worldwide, in
particular the addition of senior staff in all our major offices and the more
general expansion in Russia and Latin America, and the integration of the sales
infrastructure as a result of the PTM acquisition. This expansion was
undertaken in anticipation of the expected turn-around of the market in 2000
and beyond, and reflected management's view of the lead-time needed to
establish the sales and support infrastructure.

DEPRECIATION

The depreciation expense consists of the depreciation of capital equipment. See
note 2f of the Consolidated Financial Statements for details of the Company's
accounting policy on depreciation.

The depreciation expense in 1999 was $3,865,000 which was 68% higher than in
1998 at $ 2,298,000. Depreciation expense in 1998, was 14% higher than in 1997.
The main reason for the increase in 1999 was depreciation on the Company's
investment in computing capacity and equipment for the services department
which totaled $3.44 million in 1999.

AMORTIZATION

The amortization expense consists of amortization of acquired developed
technology and capitalized research and development costs, and amortization of
goodwill. See note 2g of the Consolidated Financial Statements for details of
the Company's accounting policy on amortization of acquired developed
technology and goodwill, and note 2h for details of the Company's accounting
policy on amortization of capitalized research and development costs.

The amortization expense in 1999 was $3,064,000. This was 31% higher than in
1998 at $ 2,347,000. The amortization expense in 1998, was 98% higher than in
1997. The increase in amortization in 1998 when compared to 1997 was primarily
due to the addition of acquired developed technology attributable to the
CogniSeis acquisition. 1998 was the first full year of amortization of this
acquired developed technology.

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 (see note 2g of the Consolidated Financial
Statements).

                                       47
48

In the future, if the Company is successful in acquiring complementary
businesses, accounted for as purchases, 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, the Company recorded non recurring expenses totaling $2,705,000. This
amount included $763,000 related to lease termination costs from the elimination
of duplicate facilities, $1,595,000 related to impairment costs of developed
technology, developed or acquired prior to the PTM acquisition, and $347,000
associated with personnel reductions.

In 1997, the Company recorded non recurring expenses totaling $10,676,000
resulting from or associated with the CogniSeis acquisition.

FINANCIAL EXPENSES, NET

Financial expenses for 1999 was $484,000, a decrease of $177,000 as compared to
1998. The decrease in 1999 was primarily attributable to a reduced overall level
of borrowings in 1999, as explained in the following paragraph, together with
lower interest rates and reduced commissions.

In the first half of 1998, the Company incurred substantial finance expenses in
connection with the bridge financing facility, totaling $12 million, for the
acquisition of CogniSeis. The bridge loan was repaid from the proceeds of the
Company's initial public offering early in the third quarter of 1998. Commencing
in the fourth quarter of 1998 and continuing in 1999, the Company drew down on
its bank financing facilities.

LIQUIDITY, CAPITAL RESOURCES AND FINANCING

The Company has historically financed its operations and capital requirements
through equity funding, bridge funding and bank credit facilities.

At the end of 1999, cash and cash equivalents were $5,457,000 compared to
$3,463,000 at the end of 1998. At the end of 1999 short term bank debt,
including current maturities of long term loans stood at $4,639,000 and long
term bank loans at $3,923,000 compared to $2,228,000 and $39,000 respectively,
at the end of 1998. Total lease obligations at the end of 1999 were $1,935,000
compared to $959,000 at the end of 1998.

At the end of March 2000, cash and cash equivalents were $5,239,000, short term
bank debt, including current maturities of

                                       48
49

long term loans, stood at $ 5,111,000, long term bank loans at $3,114,000 and
total lease obligations at $1,742,000.

In 1999, the Company increased its bank credit facilities for short-term and
long-term borrowings to a total of $18 million, of which $ 8.6 million had been
utilized at the end of 1999 and $8.2 million at the end of March 2000. The
interest rate on these borrowings is the London Inter Bank Offer Rate ("LIBOR")
plus 1.0%. As security for the credit facilities the Company has registered a
floating charge on all its assets in favor of the banks.

CASH FROM OR USED IN OPERATING ACTIVITIES

Cash used in operating activities totaled $1,089,000 in 1999 compared with
$1,773,000 in 1998 and cash from operating activities of $1,633,000 in 1997.

At December 31, 1999, the Company had working capital of $15,346,000 (of which
$5,457,000 was in cash and cash equivalents) compared to working capital of
$9,154,000 (of which $3,463,000 was in cash and cash equivalents) at December
31, 1998, an increase of $6,192,000 or 68%. Current assets increased by 49% in
1999 whilst current liabilities increased by only 38%. This is reflected by a
53% increase in trade receivables and accrued income and a 25% increase in trade
and other payables and deferred revenues.

In the first quarter of 2000, cash from operations totaled $2.6 million,
primarily resulting from a significant improvement in receivables collections.

CASH USED IN INVESTING ACTIVITIES

Cash used in investing activities in 1999 totaled $15,401,000 compared to
$4,516,000 in 1998 and $11,594,000 in 1997. In 1999, the Company continued its
investment in computer hardware, to expand the Company's geoscience services
business, and in office facility improvements.

In March 1999, Paradigm acquired PTM for a total investment of $ 8.4 million and
in June 1999, Paradigm acquired PlaNET, an integrated suite of software for
reservoir modeling and oil and gas field network planning for approximately $1.2
million.

The Company intends to continue to seek opportunities to expand its product line
and geoscience services business. Accordingly, future investing activities may
include acquiring complementary businesses that add key technologies or market
presence and enhance existing products and services.

                                       49
50

CASH FROM FINANCING ACTIVITIES

Cash from financing activities totaled $19,068,000 in 1999, compared with
$1,674,000 in 1998 and $11,077,000 in 1997. In April and May 1999, the Company
raised $12,973,000, net, from the sale and issuance of Ordinary Shares in three
private placements and from the exercise of warrants.

During 1999, the Company increased its long term and short term bank debt by
$6.3 million.

The Company's initial public offering in June 1998 raised $21,160,000. Of this
amount, $12,000,000 was used to repay the bridge loans incurred in connection
with the CogniSeis acquisition and $8,457,000 was used to complete the payment
for the acquisition of CogniSeis.

Surplus funds are deposited in short term interest bearing bank deposits.

CAPITAL COMMITMENTS

As of May 31, 2000, the Company had no material capital expenditure commitments.
However, the planned capital expenditure budget for 2000, for ongoing equipment
replacement and intrinsic growth needs, is estimated at about $7 million, of
which $2.5 million has been expended to date. Where appropriate, the Company has
availed, and will in the future consider availing itself of equipment leasing
facilities for the acquisition of fixed assets.

FUTURE FINANCING REQUIREMENTS

The Company's ability to maintain and grow its operating income and cash flow is
dependent upon continued capital spending.

Looking forward, the Company considers that its cash flow from operations and
its 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 sources external to the Company, either as additional
leverage on the balance sheet or through the issue of equity.

IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS

The inflation rate in Israel in 1999 was 1.3%, compared to 8.6% in 1998 and 7%
in 1997. The inflation rate between January and April 2000 is negative at -1%.
The impact of inflation on the Company's results of operations is insignificant.

Most of the Company's sales and a substantial portion of its costs (65%) are
denominated in United States dollars. Since the US

                                       50
51

dollar is the primary currency in the economic environment in which the Company
operates the dollar is its functional currency. Since the beginning of 1999, the
Company has entered into short-term hedging where foreign currency exposure was
anticipated (See Item 9A- Quantitative and Qualitative Disclosure about Market
Risk). In the future, the Company may enter into currency hedging transactions
to decrease the risk of financial exposure from fluctuations in exchange rates;
however, no assurance can be given that such measures will adequately protect
the Company from material adverse effects arising from exchange rate
fluctuation.

YEAR 2000

The Company did not experience any significant disruptions in its
operations during the transition into the Year 2000. The Company completed
necessary assessments, modifications or replacement and testing of systems
critical for the delivery of products and services and believes that it met its
Year 2000 readiness objectives. The company also prepared a contingency plan to
mitigate potential adverse effects which might have arisen from non-compliant
systems or third parties who had not adequately addressed the Year 2000 issue.
Because of these preparations, there were no significant disruptions in
operations. While the Company did not experience any significant Year 2000
disruptions during the transition into the Year 2000, it will continue to
monitor operations and systems and address any date-related problems that may
arise as the year progresses.

ITEM 9A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risks relating to the Company's operations may result from changes in
interest rates, foreign currency exchange rates and weak economic conditions in
foreign markets. In general, the Company does not invest in foreign currency or
engage in foreign currency hedging, interest-risk hedging or other risk-related
tradable financial instruments, and the Company has not held derivative
financial instruments. Since the beginning of 1999, the Company has entered into
short-term hedging where foreign currency exposure was anticipated.

FOREIGN CURRENCY EXPOSURE AND RISK:

Most of the Company's sales and expenses are in US dollars. A strengthening of
the US dollar could make the Company's products less competitive in foreign
markets. A minority of the sales are denominated in Canadian dollars, U.K
sterling, Australian dollars and Russian rubles. To-date, these foreign currency
exposures have been fully offset by expenses incurred in local currencies.

The Company does have foreign currency exposure with respect to the local
currencies in each of its office locations as local expenses are incurred in
local

                                       51
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currency. The Company has judged this exposure not to be material because most
of the Company's revenues are in US dollars. Only a future weakening of the US
dollar against UK sterling, the Canadian or the Australian dollars would change
this risk profile. The Company, because 15% of its expenses are in New Israeli
Shekels, does have an ongoing exposure to the risk of exchange rate changes
between the shekel and the US dollar, and therefore the company covers it's
exposure by forward Shekel/US Dollar transactions. See Management's Discussion
and Analysis of Financial Condition and Results of Operations-Impact of
Inflation and Currency Fluctuations.

Under these circumstances, there has been no material foreign currency exposure
and the over-all effect of foreign currency exchange rate fluctuations on the
Company in 1999 was not material.

INTEREST RATE RISK:

The Company's interest expenses are sensitive to changes in the London InterBank
offered rate (LIBOR), since all of its short and medium term borrowings bear a
LIBOR-based interest rate. Excess liquidity is invested in short term
investments which bear minimal interest rate risk.

As of December 31,1999, short term bank debt, including current maturities of
long term loans was $ 4.6 million and medium term bank loans were $3.9 million.
At the end of March 2000, short term bank debt, including current maturities of
long term loans was $5.1 million and medium term bank loans were $3.1 million
The Company has concluded that this risk is not material and has not availed
itself of financial instruments to hedge this risk. Under these circumstances no
quantitative tabular disclosures are required.

ITEM 10 - DIRECTORS AND OFFICERS OF REGISTRANT

Pursuant to the Articles of Association of the Company, Directors are elected at
each annual general meeting of shareholders of the Company (an "Annual
Meeting"), by a vote of the holders of a majority of the voting power
represented at such Annual Meeting. The Articles of Association provide that the
Chief Executive Officer of the Company must be a Director. Each Director holds
office until the first Annual Meeting following the Annual Meeting at which such
Director was elected. The number of Directors may not exceed eight. Currently
there are eight directors. Executive Officers are appointed by and serve at the
discretion of the Board of Directors.

As at May 31, 2000, the Company's executive officers and directors were as
follows:

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NAME:                      AGE:      POSITION:
----                       ---       --------
Eldad Weiss(2)             44        Chairman, Chief Executive Officer, Director
Yehezkel Marueli           46          President, Chief Operating Officer
Brian W. Berman            54        Chief Financial Officer
Mordechai Abir             70        Director
Elie Barr (1)              53        Director
Jacob Dunietz (2)          44        Director
Michael Geiger (2)         62        Director
Erel Margalit (1)          37        Director
Amos Nur                   62        Director
Jay Seid (1)               39        Director
Jonathan Keller            48        Corporate Secretary
(1)    Member of the Audit Committee
(2)    Member of the Compensation Committee

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.

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 Bachelor of Arts 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 B.Sc. in Chemistry and Physics, a B.Sc. (Honors)
in Chemistry and a M.Sc. 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.

MORDECHAI ABIR has served as a Director since August 1999 Since May 2000, Dr.
Abir is Director of Research, Energy and International Politics at Hoenig & Co.
International. From September 1995 until April 2000, Dr. Abir was Senior
Strategist in the field of energy and international relations at Schroder & Co.
Inc., having been a consultant to Schroder & Co. Inc. since 1991. From October
1988 until September 1995 Dr. Abir was a Professor of MidEastern & African
Studies at the Hebrew University in Jerusalem and has been a Professor Emeritus
since 1995. Dr. Abir is a

                                       53
54

consultant and guest lecturer in the fields of International and Middle East
affairs, the oil economy and oil politics at academic institutions and
government and non-government organizations in the United States, Europe, Israel
and Japan, including, the Woodrow Wilson and Brookings Institution in Washington
D.C., the U.S. Congress, the NATO Defense College in Rome and several East
European Institutions of Political Science. Professor Dr. Abir holds a Bachelor
of Arts Degree (with Honors) in MidEastern Islamic Studies and International
relations and a M.A (with Honors) in MidEastern Islamic Studies and Middle East
Economics, from the Hebrew University, Jerusalem and a Ph.D. from the University
of London School of Oriental and African Studies.

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 1995, Mr. Barr was an Executive Vice President of Teledata Communications
Ltd., a telecommunications Company. Mr. Barr has a B.A. in Economics and
Political Sciences from Tel Aviv University and a B.A. 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 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. Mr. Dunietz is a member of the Board of Directors of BVR
Technologies Ltd., a holding company, whose securities are publicly traded on
the Nasdaq National Market, and 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 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 B.S. (with Honors) 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 serves on the supervisory board of Netia Holdings and is a director
of Tel Ad Jerusalem studios and Formula Ventures Ltd. Mr. Geiger served as a
consultant to Occidental Petroleum Corporation for their energy and chemical
industry activities in Israel. Mr. Geiger holds a Bachelor of Science Degree in
Economics from Tel-Aviv University, of which he is a Governor, and a M.A. in
Economics from the University of California in Los Angeles.

EREL MARGALIT has served as a Director since May 1995. Mr. Margalit is the
General Partner of each of two venture capital funds, Jerusalem Pacific Ventures
(1994) L.P. and Jerusalem Venture Partners (1997) L.P., which he founded,
targeted at early stage communications and software and e-commerce companies in
Israel. Mr. Margalit also serves on the Boards of Directors of several
privately-held companies. From 1990 to 1993, Mr. Margalit was Director of
Business Development for the City of Jerusalem. Mr. Margalit has a B.A. in
Philosophy and an M.B.A. from the Hebrew University of Jerusalem, and a M.Phil.
from Columbia University in New York.

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AMOS NUR has served as a Director since October 1998. Professor Nur is Professor
of Earth Sciences at Stanford University. Professor Nur joined the faculty of
Stanford University in 1970, and has served as a Professor of Geophysics at
Stanford since 1979, and Chairman of the University's Department of Geophysics
between 1985 and 1991, and again since 1997. He was appointed to the Wayne Loel
chair of Earth Sciences in 1988. He is a director of the Stanford Rock Physics
project which he founded in 1977. In 1997 he was a distinguished lecturer of the
Society of Exploration Geophysicists and in 1988 he was a distinguished lecturer
for the American Association of Petroleum Geologists. Professor Nur holds a
Bachelor of Science Degree in geology from the Hebrew University, Jerusalem and
a Ph.D. in geophysics from M.I.T.

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
B.A., Summa Cum Laude, from Rutgers University and a J.D., with honors, from New
York University School of Law.

JONATHAN KELLER has served as 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.

Pursuant to the agreement between the Company and Shamrock Holdings Inc., 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
("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 annual general meeting
of shareholders of the Company to elect Mr. Erel Margalit to the Board of
Directors of the Company.

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EXTERNAL AND INDEPENDENT DIRECTORS

Under the new Israeli Companies Law which came into effect on February 1, 2000,
Israeli companies whose shares have been offered to the public in or outside of
Israel are required to appoint two people to serve as external directors on the
board of directors of a company. The Companies Law provides that a person may
not be appointed as an external director if the person or the person's relative,
partner, employer or any entity controlled by that person has at the date of
appointment, or has had at any time during the two years preceding that date,
any affiliation with the company, any entity controlling the company or any
entity controlled by the company or by this controlling entity. The term
"affiliation" includes:

       -      an employment relationship;

       -      business or professional relationship maintained on a regular
              basis;

       -      control; or

       -      service as an officer.

No person can serve as an external director if the person's position or other
business creates, or may create, conflict of interests with the person's
responsibilities as an external director or if such position or other business
may impair such director's ability to serve as an external director. No person
who is a director in one company can serve as an external director in another
company, if at that time a director of the other company serves as an external
director in the first company. The Companies Law further provides that when, at
the time of appointment of an external director, all members of the board of
directors of the company are of one gender, then the external director appointed
shall be of the other gender.

External directors are appointed by a majority vote at a shareholders' meeting,
provided that either: (1) the majority of shares voted at the meeting, including
at least one third of the shares of non-controlling shareholders voted at the
meeting, vote in favor of appointment of the director or (2) the total number of
shares of non-controlling shareholders voted against the election of the
director does not exceed one percent of the aggregate voting rights in the
company. The initial term of an external director will be three years and may be
extended for an additional three-year period. Each committee of a company's
board of directors will be required to include at least one external director
and all external directors must be members of the company's audit committee.
Regulations promulgated under the Companies Law provide that the applicability
of the Companies Law with respect to the nomination by an Israeli company whose
shares are publicly traded outside Israel only shall commence on August 1, 2000.
At such time, the Company shall be required to appoint two external directors.
These regulations also provide that, with respect to a company whose shares are
publicly traded outside Israel only, the external directors do not have to be
residents of Israel. None of the existing directors will qualify as external
directors under the Companies Law and the Company is currently engaged in
selecting suitable candidates for the position of external directors.

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In addition, we are obligated under the requirements for quotation on the Nasdaq
National Market to have at least two independent directors on our board of
directors, who also may serve as external directors under the Companies Law, and
to establish an audit committee, at least a majority of whose members are
independent of management. The audit committee should adopt a formal written
audit committee charter to be reviewed annually.

An external director is entitled to consideration and to the refund of expenses,
only as provided in regulations adopted under the Companies Law and is otherwise
prohibited from receiving any other consideration, directly or indirectly, in
connection with service provided as an external director. Nevertheless, the
grant of an exemption from liability for breach of fiduciary duty or duty of
care, an undertaking to indemnify, indemnification or insurance under the
provisions of the Companies Law shall not be deemed as consideration. Under the
Companies Law, an external director cannot be dismissed from the office unless:

       -      the board of directors determines that the external director no
              longer meets the requirements for holding such office, as set
              forth in the Companies Law or that the director is in breach of
              his or her fiduciary duties to the company and the shareholders of
              the company vote (by the same majority required for the
              appointment) to remove the external director after the external
              director has been given the opportunity to present his or her
              position;

       -      an Israeli court determines, upon a request of a director or a
              shareholder, that the director no longer meets the requirements
              for holding such office as set forth in the Companies Law or that
              the director is in breach of his or her fiduciary duties to the
              company; or

       -      the court determines, upon a request of the company or a director,
              shareholder or creditor of the company, that the external director
              is unable to fulfill his or her duty or has been convicted of
              certain crimes as specified in the Companies Law.

DUTY OF CARE AND FIDUCIARY AND LOYALTY DUTIES

The Companies Law codifies the duty of care and fiduciary and duties of loyalty
that an officer owes to a company. The term officer includes any director,
managing director, general manager, chief executive officer, executive vice
president, vice president, other managers who are directly subject to the
general manager and any other person fulfilling or assuming any of these
positions or responsibilities without regard to such person's title. The
fiduciary and loyalty duties of an officer include:

       -      avoiding any conflict of interest between the officer's position
              with the company and his personal affairs;

       -      avoiding any competition with the company;

       -      avoiding exploiting any of the company's business opportunities in
              order to receive personal advantage for himself or others; and

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       -      revealing to the company any information or documents relating to
              the company's affairs which the officer has received due to his
              position as an officer of the company.

In addition, the Companies Law requires disclosure by an officer to the company
in the event that an office holder is aware of a ""personal interest" in any
transaction or proposed transaction of the company (including, generally, a
personal interest of certain relatives in an extraordinary transaction of the
company).

AUDIT COMMITTEE, INTERNAL AUDITOR AND CERTIFIED PUBLIC ACCOUNTANT

The Companies Law provides that public companies must appoint an Audit Committee
of the Board of Directors. The number of members of the Audit Committee shall
not be fewer than three and it shall include all of the external directors. The
chairman of the Board of Directors, any director who is employed by the company
or gives services to the company, on a regular basis, a controlling shareholder
or his relative cannot be a member of the Audit Committee. These directors are
not external directors under the Companies Law. The Board of Directors must also
appoint an internal auditor in accordance with the recommendations of the Audit
Committee. The role of the internal auditor is to examine, among other matters,
whether the company's actions comply with the law, integrity and orderly
business procedure. The internal auditor may be an employee of the company but
not a person holding 5% or more of a company's capital, a person who has the
power to appoint one or more directors or the general manager, an officer, or a
relative of the foregoing or the company's certified public accountant or its
representative. The Company has appointed an internal auditor. In addition,
under the Companies Law, all companies must appoint a certified public
accountant to audit the company's financial statements and report any material
improprieties that he may discover to the chairman of the Board of Directors.

APPROVAL OF SPECIAL TRANSACTIONS UNDER ISRAELI LAW

Under the 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 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 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

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director or the general manager. The disclosure must be made without delay and
not later than the board of directors meeting as which the transaction is first
discussed. For these purposes, the definition of a controlling shareholder under
the Companies Law includes a shareholder that holds 25% or more of the voting
rights in a company, unless another shareholder holds more than 50% of the
voting rights (if two or more shareholders are interested parties in the same
transaction their shareholdings shall be deemed cumulative).

Once the officer or controlling shareholder complies with these disclosure
requirements, the company may approve the transaction in accordance with the
provisions of the 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, 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.

DUTY OF SHAREHOLDERS

Under the Companies Law, in exercising their rights and in fulfilling their
obligations to the company and the other shareholders, shareholders must act in
good faith and in a customary manner and refrain from abusing their power when,
among other things, voting at general or class meetings on any amendment of the
articles of association, an increase of the company's registered (authorized)
share capital, a merger or approval of certain acts and transactions which
require shareholder approval. The laws governing breach of contract apply, with
the necessary modifications, to breach of the above obligations. Furthermore, a
shareholder who may control the company, a

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shareholder who knows that his vote will be decisive at a general or class
meeting and a shareholder who has the power to appoint or prevent the
appointment of an office holder or who has any other power with respect to the
company, must act fairly towards the company. Any breach by any such shareholder
of these obligations is treated in the same way as a breach by an office holder
of his fiduciary duty, with the necessary modifications.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Companies Law permits a company to insure an officer in respect of
liabilities incurred by him by reason of acts or omissions committed in his
capacity as an officer with respect to: a breach of the officer's duty of care
to the company or to another person, or a breach of the officer's fiduciary duty
to the company, to the extent that he acted in good faith and had reasonable
cause to believe that the act would not prejudice the company. Furthermore, the
Companies Law provides that a company can indemnify an officer for monetary
liabilities or obligations imposed upon him in favor of other persons pursuant
to a court judgement, including a compromise judgement or an arbitrator's
decision approved by a court, and reasonable litigation expenses, including
attorney's fees, actually incurred by the officer or imposed upon him by a
court, in an action, suit or proceedings brought against him by or on behalf of
the company or by other persons, in connection with a criminal action from which
he was acquitted or in connection with a criminal action which does not require
proof of criminal intent in which he was convicted, in each case by reasons of
acts or omissions of such person in his capacity as officer.

Furthermore, the Companies Law provides that the company's articles of
association may provide for indemnification of an officer post-factum and may
also provide that a company may undertake to indemnify an officer in advance,
provided such undertaking is limited to types of occurrences which, in the
opinion of the company's board of directors, are, at the time of the
undertaking, foreseeable and, to an amount the board of directors has determined
is reasonable in the circumstances.

The Company's articles of association allows it to insure and indemnify officers
to the fullest extent permitted by law except that shareholders have not yet
approved the indemnification of officers in advance and the required amendments
to the articles of association. The Company carries Directors and Officers
Insurance up to a limit of $10 million in aggregate. The Company intends to
enter into indemnification agreements with each of it's officers and directors.

ANTI-TAKEOVER PROVISIONS; MERGERS AND ACQUISITIONS UNDER ISRAELI LAW

Pursuant to the 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 Companies Law provides

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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 Companies Law further provides that if following the tender offer such
acquiring shareholder holds more than 95% of the outstanding shares of any
class, the holders of all the remaining shares will be obligated to transfer
such shares to the acquiror at the tender offer price. This entails the
possibility of additional delay and the imposition of further approval
requirements at the court's discretion. The 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 Companies Law does not generally
require court approval of a merger. Pursuant to the Companies Law the articles
of association of companies such as Paradigm, 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 Companies Law,
companies, such as Paradigm, which have been incorporated prior to the
Companies Law coming into effect, must specifically amend their articles of
association to provide for the shareholder voting requirements contained in the
Companies Law.

The 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 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 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.

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ITEM 11 - COMPENSATION OF OFFICERS AND DIRECTORS

The aggregate remuneration paid by the Company to all persons as a group (11
persons) who served in the capacity of director or officer in the year ended
December 31, 1999, was approximately $ 662,000, which includes amounts paid to
provide pension, retirement or similar benefits, but does not include expenses
for automobiles made available to all of its officers, expenses reimbursed to
officers and other fringe benefits commonly reimbursed or paid by companies in
Israel. In 1999, the Company set aside approximately $ 83,000, for the pension
and severance fund benefits of its executive officers and directors.

The Company 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 Ordinary Shares of the Company. Mr. Weiss's employment
agreement also contains confidentiality and non-competition provisions.

The Company entered into an employment agreement with Mr. Brian Berman which is
terminable 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
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 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
Ordinary Shares of the Company. Mr. Marueli's employment agreement requires
compliance with confidentiality and non-competition provisions.

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ITEM 12 - OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES

STOCK OPTION PLANS

THE 1994 STOCK OPTION PLANS

In 1994, the Company 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, the Company granted options to six key employees of
the Company 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, the Company has 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 the 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 the 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, 226,184 options are vested and are exercisable immediately. Options
granted under the 1994 General Plan are vested, two thirds are exercisable
immediately and one-third on July 15, 2000. 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 the 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 the Board of
Directors or the 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.

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As of May 31, 2000, 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 60,176 Ordinary
Shares, respectively, were outstanding

As of May 31, 2000, the Company had granted options 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; 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 Company's 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"), the Company has reserved for issuance an
aggregate of 1,950,000 Ordinary Shares. The 1997 Plans are administered by the
Board of Directors or the Compensation Committee and will terminate on January
4, 2005. 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 the Company 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 the Company's
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 the Board of Directors or the Compensation
Committee. In addition, the Company may provide loans to employees to assist
them in purchasing shares upon exercise of the options. The 1997 Plans vest as
to 25% of the options granted after a period of employment with the Company or
its 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 the Board of Directors or the 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 s termination. In the event of the option
holder's retirement, any outstanding options shall, at the discretion of the
Board of Directors or the Compensation Committee, accelerate and become
immediately exercisable as of the later of the date of retirement or one year
following the date of the grant. The shares underlying any options which expire
or are cancelled prior to exercise are subject to future options grants under
the 1997 Plans.

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As of May 31, 2000 options to purchase a total of 1,737,322 Ordinary Shares
under the 1997 Plans were outstanding.

As of May 31, 2000, the Company had granted options under the 1997 Plans to
certain officers of the Company 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 the Company's Board of Directors.

1994 WARRANTS

In July 1994, the Company issued to certain investors and their affiliates
warrants (the "1994 Warrants") to purchase an aggregate of 539,244 Ordinary
Shares of the Company at an aggregate exercise price equal to the lesser of (i)
80% of the share price of the Company's most recent private placement or (ii)
80% of the initial public offering price of the Company's Ordinary Shares.

In 1999, the 1994 Warrants were fully exercised by the warrant holders,
including warrants held by Eldad Weiss, the Company's Chairman and Chief
Executive Officer.

1997  WARRANTS

In September 1997, the Company issued warrants to purchase an aggregate of
720,000 Ordinary Shares at an exercise price of $6.00 per Ordinary share (the
"1997 Warrants"). The 1997 Warrants contain anti-dilution protections and expire
on September 30, 2004.

Resulting from the completion of a share issuance in April and May 1999 of
2,017,544 Ordinary Shares at $5.70 per share to new and existing investors,
under the terms of the 1997 warrant agreements, the holders of the 1997 Warrants
will be entitled to a further 5,723 warrants. The exercise price on all of the
warrants will be $5.95 per Ordinary Share.

In April 2000, 119,782 Ordinary shares were issued following a "net cashless
exercise" of 362,861 1997 Warrants.

1999 WARRANTS

As compensation for services provided to the Company in connection with the
Company's private placement of Ordinary Shares in May 1999, Schroder & Co., Inc.
was issued warrants to purchase 250,000 Ordinary Shares exercisable during a
three year period at an exercise price of $5.70 per Ordinary Share. These
warrants have incidental registration rights with respect to the underlying
shares.

ITEM 13 - INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS

Certain principals of Mashov Gruss Investments Ltd. and Bachow & Associates Inc.
(including Jay Seid, a director of the Company and a Managing Director of Bachow
& Associates Inc.), principal shareholders of the Company, as part of the group
of

                                       65
66

lenders with whom the Company entered into bridge loans in connection with the
acquisition of CogniSeis at an interest rate of 10% per annum, were repaid
$1,180,000 and $87,000, respectively, of such bridge loans plus accrued interest
thereon.

The Company 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, the Company 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. Both loans are repayable on December 31,
2000.

ITEM 14 - DESCRIPTION OF SECURITIES TO BE REGISTERED

NONE

ITEM 15 - DEFAULTS UPON SENIOR SECURITIES

NONE

ITEM 16 - CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES AND USE OF PROCEEDS

None

ITEM 17 - FINANCIAL STATEMENTS

NOT APPLICABLE

ITEM 18 - FINANCIAL STATEMENTS

See - Item 19.

ITEM 19 - FINANCIAL STATEMENTS AND EXHIBITS

(a)    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

                                       66
67

       All schedules for which provision is made in the applicable accounting
       regulations of the Securities and Exchange Commission are not required
       under the related instructions or are inapplicable and therefore have
       been omitted.

(b)    Exhibits:
                  EXHIBIT NO.                EXHIBIT
                  3.1      Memorandum of Association of Registrant.++**
                  3.2      Amended and Restated Articles of Association of
                           Registrant.**
                  3.3      Proposed Amendment to the Amended and Restated
                           Articles of Association of the Registrant*******
                  10.      Form of Warrant Agreement dated as of October 10,
                           1997 between the Company and the Bridge Loan
                           lenders.**
                  10.2     Form of Warrant Certificate by the Company in favor
                           of the Bridge Loan lenders.**
                  10.3     Stock Purchase Agreement, dated as of September 5,
                           1997,** as amended September 24, 1997 among Paradigm
                           Geophysical Ltd., Paradigm Geophysical Corp. and
                           GeoScience Corporation.***
                  10.4     Key Employee Plan.**
                  10.5     May 1994 Stock Option Plan.**
                  10.6     1994 General Stock Option Plan.**
                  10.7     1997 Executive Stock Option Plan.**
                  10.8     1997 Stock Option Plan for Qualifying Israel
                           Employees.**
                  10.9     1997 Stock Option Plan for U.S. Employees.**
                  10.10    Form of 1994 Warrant issued in connection with a
                           private placement of the Company's securities.**
                  10.11    Amended and Restated Asset Purchase Agreement by and
                           among Geotech Joint Stock Company and Dr. Nikolai L.
                           Baransky, Dr. Evgenii A. Kozlov, Mr. Dimitry V.
                           Sulitsky, Mr. Christopher D. Kim, Paradigm
                           Geophysical (U.K.) Ltd., Paradigm Geophysical Europe
                           Ltd., Paradigm Geophysical Services Ltd. and Paradigm
                           Geophysical Ltd.********
                  10.12    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.********
                  10.13    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.********
                  10.14    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. ********
                  10.16    Share Purchase Agreement, dated April 14, 1999, by
                           and between Paradigm Geophysical Ltd. and Shamrock
                           Holdings, Inc.********
                  10.15    Registration Rights Agreement by and among Paradigm
                           Geophysical Ltd., Shamrock Holdings, Inc., Eastgate
                           Fund L.P., Eastgate International Limited, Mr. Harris
                           Kaplan and Berman Eastgate Growth Fund. ********

                                       67
68

                  10.17    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. ********
                  11.1     Statement regarding computation of per share earnings
                           (loss).***
                  21.1     Subsidiaries of the Registrant.
                  23.2     Consent of Kost Forer and Gabbay.
                  **       Incorporated herein by reference to the Company'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 the Company's Registration Statement on Form F-1
                           (File No. 333-7926), filed with the Commission on
                           November 21, 1997.
                  ****     Incorporated herein by reference to Amendment No. 2
                           to the Company's Registration Statement on Form F-1
                           (File No. 333-7926), filed with the Commission on
                           April 7, 1998.
                  *****    Incorporated herein by reference to Amendment No. 3
                           to the Company's Registration Statement on Form F-1
                           (File No. 333-7926), filed with the Commission on May
                           13, 1998.
                  ******   Incorporated herein by reference to Amendment No. 4
                           to the Company's Registration Statement on Form F-1
                           (File No. 333-7926), filed with the Commission on
                           June 2, 1998.
                  *******  Incorporated herein by reference to Amendment No. 6
                           to the Company's Registration Statement on Form F-1
                           (File No. 333-7926), filed with the Commission on
                           June 5, 1998.
                  ******** Incorporated herein by reference to Form 20-F Annual
                           Report pursuant to Section 13 or 15(d) of the
                           Securities Exchange Act of 1934 filed with the
                           Commission on June 30, 1999
                  ++       English translations from Hebrew original.
(c)               Financial Statement Schedule.
                  Not Applicable.

                                       68
69

                   PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 1999

                                 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 FINANCIAL STATEMENTS                         F-9 - F-29
- - - - - - - -

                                      F-1
70

[ERNST & YOUNG LOGO]

                         REPORT OF INDEPENDENT AUDITORS

                             TO THE SHAREHOLDERS OF

                            PARADIGM GEOPHYSICAL LTD.

        We have audited the accompanying consolidated balance sheets of Paradigm
Geophysical Ltd. ("the Company") and subsidiaries as of December 31, 1998 and
1999 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, 1999. 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.) Ltd. and Paradigm Geophysical
(Singapore) Pte (Ltd.), wholly-owned subsidiaries, whose statements reflect
total assets of $ 7,443 thousand as of December 31, 1998, and total revenues of
$ 3,642 thousand and $ 17,746 thousand for the years ended December 31, 1997 and
1998, respectively. We did not audit the financial statements of Paradigm
Geophysical (U.K.) Ltd., a wholly-owned subsidiary whose statements reflect
total assets of $ 8,892 thousand as of December 31, 1999, and total revenues of
$ 11,851 thousand, for the year ended December 31, 1999. Those statements were
audited by other auditors whose reports have been furnished to us and our
opinion, insofar as it relates to the amounts included for those other
subsidiaries is based solely on the reports of the other auditors.

        We conducted our audits in accordance with generally accepted auditing
standards 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 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 on the reports of other
auditors, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and
subsidiaries as of December 31, 1998 and 1999, and the related consolidated
results of operations and cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles in the United States.

Tel-Aviv, Israel                                          KOST FORER & GABBAY
January 25, 2000                                       A Member of Ernst & Young
                                                             International

                                      F-2
71

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
                                                                   ----------------------------------------------------
                                                                            1998                         1999
                                                                   ------------------------     -----------------------
ASSETS

CURRENT ASSETS:
Cash and cash equivalents                                                  $   3,463                     $  5,457
Trade receivables (net of allowance for doubtful accounts -
     $ 1,222 in 1998 and $ 1,666 in 1999)                                     14,281                       21,612
Accrued income                                                                 5,677                        9,012
Other receivables and prepaid expenses (Note 3)                                2,470                        2,443
                                                                   ------------------------     -----------------------

Total current assets                                                          25,891                       38,524
                                                                   ------------------------     -----------------------

LONG-TERM TRADE RECEIVABLES                                                      275                           54
                                                                   ------------------------     -----------------------

SEVERANCE PAY FUNDS                                                              605                          861
                                                                   ------------------------     -----------------------

FIXED ASSETS (Note 4)                                                          9,259                       12,007
                                                                   ------------------------     -----------------------

OTHER ASSETS:
Acquired developed technology (net of accumulated
     amortization of $ 1,878 in 1998 and $ 1,490 in 1999)
     (Note 1b and 1c)                                                           7,322                       9,805
Other assets, net (Note 5)                                                      2,783                       4,914
                                                                    -----------------------     -----------------------

                                                                               10,105                      14,719
                                                                    -----------------------     -----------------------

                                                                           $   46,135                    $ 66,165
                                                                    =======================     =======================
The accompanying notes are an integral part of the financial statements.

                                      F-3
72
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
                                                                     ------------------------------------------------------------
                                                                             1998                                  1999
                                                                     ----------------------               -----------------------
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term bank debt (Note 7)                                                $   1,778                            $   2,000
Current maturities of long-term bank loans (Note 7)                                450                                2,639
Current maturities of capital lease obligations                                      -                                  434
Trade payables                                                                   3,024                                2,774
Other payables and accrued expenses (Note 6)                                     7,811                                8,792
Deferred revenues                                                                3,674                                6,539
                                                                     ----------------------               -----------------------

Total current liabilities                                                       16,737                               23,178
                                                                     ----------------------               -----------------------

LONG TERM LIABILITIES:
Long-term bank loans (Note 7)                                                       39                                3,923
Capital lease obligations (Note 7)                                                   -                                  742
Other lease obligations                                                            959                                  759
Accrued severance pay                                                            1,151                                1,650
Deferred tax liability (Note 1c)                                                   552                                  445
                                                                     ----------------------               -----------------------

Total long-term liabilities                                                      2,701                                7,519
                                                                     ----------------------               -----------------------

SHAREHOLDERS' EQUITY (Note 8):
Ordinary shares:
     Authorized - 20,000,000 shares of NIS 0.5 par value at
     December 31, 1998 and at
     December 31, 1999
     Issued and outstanding - 10,514,484 shares at
        December 31, 1998 and 13,026,336 shares at
        December 31, 1999                                                        1,758                                2,064
Additional paid-in capital                                                      39,236                               51,903
Accumulated other comprehensive loss                                              (742)                              (1,166)
Accumulated deficit                                                            (13,555)                             (17,333)
                                                                     ----------------------               -----------------------

Total shareholders' equity                                                      26,697                               35,468
                                                                     ----------------------               -----------------------

                                                                             $  46,135                            $  66,165
                                                                     ======================               =======================
The accompanying notes are an integral part of the financial statements.

                                      F-4
73

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
YEAR ENDED DECEMBER 31,
                                             --------------------------------------------------------------------------------
                                                      1997                        1998                         1999
                                             -----------------------      ----------------------      -----------------------
Revenues: (Note 12)
  Products                                          $   19,979                  $    38,074                    $ 43,023
  Services                                               4,886                        7,288                      11,483
                                             -----------------------      ----------------------      -----------------------

                                                        24,865                       45,362                      54,506
                                             -----------------------      ----------------------      -----------------------

Operating expenses:
  Cost of products                                       5,070                        8,559                      12,418
  Cost of services                                       1,849                        3,107                       5,804
  Research and development                               4,728                        7,660                       9,306
  Selling, general and administrative                    9,744                       15,822                      20,638
  Depreciation                                           2,012                        2,298                       3,865
  Amortization                                           1,185                        2,347                       3,064
  Non recurring expenses (Note 13)                      10,676                            -                       2,705
                                             -----------------------      ----------------------      -----------------------

Total operating expenses                                35,264                       39,793                      57,800
                                             -----------------------      ----------------------      -----------------------

Operating income (loss)                                (10,399)                       5,569                      (3,294)
Financial expenses, net                                   (446)                        (661)                       (484)
                                             -----------------------      ----------------------      -----------------------

Income (loss) before income taxes                      (10,845)                       4,908                      (3,778)
Income taxes                                                 -                          356                           -
                                             -----------------------      ----------------------      -----------------------

Net income (loss)                                   $  (10,845)                 $     4,552                $     (3,778)
                                             =======================      ======================      =======================

Basic income (loss) per share (Note 14)             $    (4.66)                 $      0.66                $      (0.31)
                                             =======================      ======================      =======================

Number of shares used in computing
  basic income (loss) per share                          2,328                        6,850                      12,205
                                             =======================      ======================      =======================

Diluted income (loss) per share (Note 14)           $    (4.66)                 $      0.49                $      (0.31)
                                             =======================      ======================      =======================

Number of shares used in computing
  diluted income (loss) per share                        2,328                        9,306                      12,205
                                             =======================      ======================      =======================
The accompanying notes are an integral part of the financial statements.

                                      F-5
74

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
PREFERRED SHARES                             ORDINARY SHARES
                                       ----------------------------------------    -----------------------------------------
                                            SHARES                AMOUNT                SHARES                 AMOUNT
                                       ------------------    ------------------    ------------------     ------------------
Balance as of January 1, 1997                4,735,802         $       765                2,328,682         $       521
-----------------------------
Comprehensive income (loss):
  Net loss                                           -                   -                        -                   -
  --------
Comprehensive income (loss)

Debt issuance costs from
  warrants issued                                    -                   -                        -                   -
                                       ------------------    ------------------    ------------------     ------------------

Balance as of December 31, 1997              4,735,802                 765                2,328,682                 521
-------------------------------
Comprehensive income (loss):
  Net loss                                           -                   -                        -                   -
  --------
Other comprehensive income (loss),
  Foreign currency translation
    adjustment                                       -                   -                        -                   -

Other comprehensive income (loss)

Comprehensive income (loss)

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 income (loss):
  Net loss                                           -                   -                        -                   -
  --------

  Foreign currency translation
------------------------------
    adjustment                                       -                   -                        -                   -
--------------

Comprehensive income (loss)
---------------------------
Issuance of ordinary shares, net                     -                   -                2,017,544                 246
Exercise of warrants                                 -                   -                  479,908                  58
Exercise of options                                  -                   -                   14,400                   2
                                       ------------------    ------------------    ------------------     ------------------

Balance as of December 31, 1999                      -         $         -               13,026,336         $     2,064
-------------------------------        ==================    ==================    ==================     ==================
ACCUMULATED
                                        ADDITIONAL                OTHER                                              TOTAL
                                          PAID-IN             COMPREHENSIVE             ACCUMULATED              SHAREHOLDERS'
                                          CAPITAL             INCOME (LOSS)               DEFICIT                   EQUITY
                                     ------------------   -----------------------  ----------------------    ----------------------
Balance as of January 1, 1997           $    19,107             $      (246)            $   (7,262)              $       12,885
-----------------------------
Comprehensive income (loss):
  Net loss                                        -                       -                (10,845)                     (10,845)
  --------                                                                                                   ----------------------
Comprehensive income (loss)                                                                                             (10,845)
                                                                                                             ----------------------
Debt issuance costs from
  warrants issued                               600                       -                      -                          600
                                     ------------------   -----------------------  ----------------------    ----------------------

Balance as of December 31, 1997              19,707                    (246)               (18,107)                       2,640
-------------------------------
Comprehensive income (loss):
  Net loss                                        -                       -                  4,552                        4,552
  --------
Other comprehensive income (loss),
  Foreign currency translation
    adjustment                                    -                    (496)                    -                         (496)
                                                                                                             ----------------------
Other comprehensive income (loss)                                                                                         (496)
                                                                                                             ----------------------
Comprehensive income (loss)                                                                                               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 income (loss):
  Net loss                                        -                       -                 (3,778)                      (3,778)
  --------
                                                                                                             ----------------------
  Foreign currency translation
------------------------------
    adjustment                                    -                    (424)                     -                         (424)
--------------
                                                                                                             ----------------------
Comprehensive income (loss)                                                                                              (4,202)
---------------------------                                                                                  ----------------------
Issuance of ordinary shares, net             10,736                       -                      -                       10,982
Exercise of warrants                          1,861                       -                      -                        1,919
Exercise of options                              70                       -                      -                           72
                                     ------------------   -----------------------  ----------------------    ----------------------

Balance as of December 31, 1999         $    51,903             $    (1,166)            $  (17,333)              $       35,468
-------------------------------      ==================   =======================  ======================    ======================
The accompanying notes are an integral part of the financial statements.

                                      F-6
75

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
                                                                      ---------------------------------------------
                                                                           1997            1998            1999
                                                                      -------------   -------------   -------------
Cash flows from operating activities:
-------------------------------------
Net income (loss)                                                     $     (10,845)  $       4,552   $      (3,778)
-----------------
Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
    Depreciation and amortization                                             3,197           4,778           6,929
    Loss on disposal of property                                                139               -               -
    Write-off of intangible assets                                              207               -           1,595
    In process research and development write-off upon
        acquisition of CogniSeis                                              6,577               -               -
    Decrease (increase) in other assets                                        (183)              -              84
    Increase in trade receivables, and accrued income                        (5,486)         (5,035)         (8,866)
    Decrease (increase) in other receivables and
        prepaid expenses                                                     (2,742)          1,432             (98)
    Decrease (increase) in deferred tax assets and
        liabilities, net                                                       (363)           (202)            203
    Increase (decrease) in deferred revenues                                  1,612          (1,929)          1,004
    Increase (decrease) in trade and other payables
        and accrued expenses                                                  9,374          (5,384)          1,795
    Increase in accrued severance pay, net                                      146              15             243
    Payment of other lease obligations                                            -               -            (200)
                                                                      -------------   -------------   -------------

Net cash provided by (used in) operating activities                           1,633          (1,773)         (1,089)
                                                                      -------------   -------------   -------------
Cash flows from investing activities:
-------------------------------------
Purchase of fixed assets                                                     (2,575)         (4,516)         (5,847)
------------------------
Purchase of developed technology                                                  -               -          (1,175)
--------------------------------                                                                      -------------
Investment in CogniSeis, net of cash acquired (1)                            (8,541)              -
Investment in PTM, net of cash acquired (2)                                       -               -          (8,379)
Capitalization of computer software costs                                      (649)              -               -
Cash received on disposal of fixed assets                                       171               -               -
                                                                      -------------   -------------   -------------

Net cash used in investing activities                                       (11,594)         (4,516)        (15,401)
                                                                      -------------   -------------   -------------
Cash flows from financing activities:
-------------------------------------
Amortization of debt issuance costs from warrants issued                        125             475               -

Issuance of share capital, exercise of warrants and exercise of                   -          21,160          12,973
Deferred offering expenses                                                     (759)              -               -
Proceeds from long-term loans                                                 1,089               -           6,500
Proceeds from bridge loans                                                   12,000               -               -
Repayment of bridge loan                                                          -         (12,000)              -
Repayment of note payable                                                         -          (8,457)              -
Repayment of long-term loans                                                   (883)           (571)           (427)
Short-term bank debt, net                                                      (495)          1,067             222
Payments on capital lease obligations                                             -               -            (200)
                                                                      -------------   -------------   -------------
Net cash provided by financing activities                                    11,077           1,674          19,068
                                                                      -------------   -------------   -------------

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

Increase (decrease) in cash and cash equivalents                              1,116          (4,766)          1,994
Cash and cash equivalents at the beginning of the year                        7,113           8,229           3,463
                                                                      -------------   -------------   -------------
Cash and cash equivalents at the end of the year                      $       8,229   $       3,463   $       5,457
                                                                      =============   =============   =============
The accompanying notes are an integral part of the financial statements.

                                      F-7
76

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
                                                                       -----------------------------------------------------------
                                                                             1997                1998                 1999
                                                                       ------------------  ------------------   ------------------
(1)       On October 14 1997, the Company acquired all of the
             outstanding shares of CogniSeis, Development Inc.
             The net fair value of assets acquired was as
               follows (see Note 1c):
               Working capital, excluding cash and cash equivalents        $    (455)
               Fixed assets                                                    1,943
               Excess of cost over net fair value upon acquisition            16,553
                                                                       ------------------

                                                                              18,041
               Less - amounts financed by a note payable                      (9,500)
                                                                       ------------------

                                                                           $   8,541
                                                                       ==================

(2)       On March 31, 1999, the Company acquired the net assets of
            the Petroleum Technology Division of Mincom Limited
            ("PTM")
             The net fair value of liabilities acquired was as
               follows (see Note 1b):
               Working capital, excluding cash and cash equivalents                                                $     (672)
               Fixed assets, net                                                                                          318
               Excess of cost over net fair value upon acquisition                                                      8,733
                                                                                                                ------------------

                                                                                                                   $    8,379
                                                                                                                ==================
Supplemental disclosure of cash flow information:
   Cash paid during the period for:
     Interest                                                              $     491           $     721           $       42
                                                                       ==================  ==================   ==================

     Income taxes                                                                  -                   -                  379
                                                                       ==================  ==================   ==================

Non-cash transactions:
   Purchase of fixed assets                                                $   1,007           $     863           $    1,376
                                                                       ==================  ==================   ==================

   Note payable in the acquisition of CogniSeis(see Note 1b)               $   9,500           $       -           $        -
                                                                       ==================  ==================   ==================

   Offering expenses                                                       $     400           $   1,159           $        -
                                                                       ==================  ==================   ==================

Reduction of note payable to CogniSeis as a result of
   reevaluation of certain assets purchased                                $       -           $   1,043           $        -
                                                                       ==================  ==================   ==================

Additional acquired technology associated with the CogniSeis
   acquisition                                                             $       -           $   2,343           $        -
                                                                       ==================  ==================   ==================
The accompanying notes are an integral part of the financial statements.

                                      F-8
77

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

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 software and service solutions to the oil and gas
                industry which facilitate the exploration and development of oil
                and gas reserves. The Company's customers include all of the
                major international oil and gas companies as well as leading
                state-owned oil companies, independent producers and oil field
                service providers.

                Paradigm operates worldwide through wholly-owned subsidiaries in
                the U.S.A., Canada, Venezuela, Argentina, U.K., Australia and in
                Singapore and through representative offices in Russia,
                Indonesia, Bahrain, Latin America and in 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
                and South America.

        b.      Acquisition of PTM:

                On March 31, 1999, Paradigm acquired (the "Acquisition") the net
                assets of the Petroleum Technology Division of Mincom Limited
                ("PTM"), an Australian entity for US$ 8.38 million in cash.

                PTM's flagship product, Geolog, is a complete suite of well
                information software tools for log analysis and petrophysics,
                widely used throughout the exploration and production industry,
                Gelolog has a long history of development and refinement through
                user cooperation and input.

                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 has been allocated to
                identifiable intangible assets and to goodwill, as follows:
Net tangible liabilities of PTM             $     (353)
                Developed technology                             5,146
                Assembled work force                               851
                Goodwill                                         2,736
                                                       ----------------------

                                                            $    8,380
                                                       ======================
The results of operations of PTM were consolidated with the
                accounts of the Company commencing on March 31, 1999.

                                      F-9
78
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

                Pro-forma information:

                The following are pro-forma unaudited results of operations for
                the years ended December 31, 1998 and 1999 representing the
                combined results of operations as if the PTM acquisition had
                been completed on January 1, 1998, as follows:
1998                       1999
                                                                ---------------------      ---------------------
Revenues                                               $    51,337                 $   56,105
                                                                =====================      =====================
                Income (loss) before income taxes                      $     4,833                 $   (3,795)
                                                                =====================      =====================
                Net income (loss)                                      $     4,190                 $   (3,867)
                                                                =====================      =====================
                Basic net income (loss) per share                      $      0.61                 $    (0.32)
                                                                =====================      =====================

                Number of shares used in computing basic net
                  income (loss) per share                                    6,850                     12,205
                                                                =====================      =====================

                Diluted net income (loss) per share                    $      0.45                  $   (0.32)
                                                                =====================      =====================
                Number of shares used in computing
                  diluted net income (loss) per share                        9,306                     12,205
                                                                =====================      =====================
c.      Acquisition of CogniSeis:

                On October 14, 1997 (the "Closing Date"), Paradigm acquired (the
                "Acquisition") all of the outstanding shares of CogniSeis
                Development, Inc. ("CogniSeis"), a multinational company whose
                product line complements products offered by Paradigm for total
                acquisition costs of $ 18,913.

                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. In 1998, the purchase price was
                retroactively reallocated and the development technology was
                increased by approximately $900 to correct an overstatement of
                certain accounts receivable balances included at the date of the
                acquisition. The excess of the purchase price over the fair
                value of the tangible assets has been allocated to identifiable
                intangible assets of acquired development software, in-process
                research and development and assembled work force, as follows:
Net tangible assets of CogniSeis              $   2,360
                Developed technology                              9,355
                In-process research and development               6,577
                Assembled work force                              1,428
                Deferred tax liability                             (807)
                                                        ----------------------

                                                              $  18,913
                                                        ======================
The in-process research and development was charged to the
                statement of operations at the date of acquisition.

                                      F-10
79

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

                The financial statements of CogniSeis were consolidated with the
                accounts of the Company, commencing on October 1, 1997.

                Pro forma information:

                The following are pro forma unaudited results of operations for
                the year ended December 31, 1997 representing the combined
                results of operations as if CogniSeis acquisition had been
                completed on January 1, 1997 as follows:
1997
                                                                    ---------------------
Revenues                                                    $   42,440
                                                                    =====================

                Loss before income taxes (including goodwill
                  charges)                                                  $  (10,748)
                                                                    =====================
                Net loss                                                    $  (10,748)
                                                                    =====================
                Basic and diluted net loss per share                        $    (4.62)
                                                                    =====================

                Number of shares used in computing basic and
                  diluted net loss per share                                     2,328
                                                                    =====================
These pro-forma unaudited results of operations do not include a
                non-recurring charge of in-process research and development in
                the amount of $ 6,577, related to the CogniSeis acquisition.

        d.      Geotech acquisition:

                In June 1998, the Company entered into a contract, which was
                completed and signed in February 1999, with Geotech Joint Stock
                Company ("Geotech") and its shareholders to acquire certain
                assets and assume certain liabilities of Geotech for a minimum
                payment of $ 485. Geotech is a Russian-based seismic software
                development company which markets CAEX in the countries of the
                former Soviet Union. The Company recorded goodwill in the amount
                of $ 325 which is being amortized over a period of five years.

        e.      CogniSeis acquisition

                During the fourth quarter of 1997, following the acquisition of
                CogniSeis, the Company incurred costs of $ 4,099 through the
                implementation of its 1997 worldwide restructuring plan (see
                Note 13c).

                Those costs included substantial severance pay costs incurred in
                the process of reducing its combined workforce. In addition,
                while consolidating workforces, duplicate offices were vacated
                resulting in a substantial lease write-off, as well as the
                write-off of all obsolete fixed assets.

                                      F-11
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                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

                The following is a breakdown of the restructuring costs
                incurred:
Employee termination expense            $    1,394
                 Lease write-off                              1,765
                 Fixed asset write-off                          733
                 Other                                          207
                                                 ----------------------

                                                         $    4,099
                                                 ======================
As of December 31, 1999, the Company had paid all the
                termination costs, and the remaining liability of the leases
                will be paid over their respective periods.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

        The consolidated financial statements have been prepared in accordance
        with generally accepted accounting principles in the United States.

        a.      Use of estimates:

                The preparation of financial statements in conformity with
                generally accepted accounting principles requires management to
                make estimates and assumptions that effect 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 parent Company's sales are made in United
                States dollars. In addition, a substantial portion of its costs
                are incurred in dollars. Since the dollar is the primary
                currency in the economic environment in which the parent Company
                operates, the dollar is its functional currency, and,
                accordingly, monetary accounts maintained in currencies other
                than the dollar are remeasured using the foreign exchange rate
                at the balance sheet date. Operational accounts and non-monetary
                balance sheet accounts are measured and recorded at the rate in
                effect at the date of the transaction. The effects of foreign
                currency remeasurement are reported in current operations.

                The functional currency of all subsidiaries has been determined
                to be the local currency. 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 a separate
                component of "Other comprehensive income".

        c.      Consolidation:

                The financial statements of the Company are consolidated with
                the accounts of its subsidiaries. Intercompany balances and
                transactions have been eliminated (see also Note 1b and 1c).

                                      F-12
81

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

        d.      Cash and cash equivalents:

                The Company considers all highly liquid investments with a
                maturity of three months or less, when purchased, to be cash
                equivalents. The carrying amounts of cash and cash equivalents
                approximate their fair values.

        e.      Asset impairment:

                The Company accounts for asset impairment in accordance with the
                provisions of FASB Statement No. 121, "Accounting for the
                Impairment of Long-Lived Assets and for Long-Lived Assets to be
                Disposed Of", which requires impairment losses to be recorded on
                long-lived assets used in operations, certain identifiable
                intangibles, and the goodwill related to those assets, when
                indicators of impairment are present and the undiscounted cash
                flows estimated to be generated by those assets are less than
                the assets' carrying amount. In this case, an impairment loss is
                recognized to the extent that the carrying amount exceeds the
                fair value of the assets. Statement No. 121 also addresses the
                accounting for long-lived assets that are expected to be
                disposed of. Such assets are reported at the lower of their
                carrying amount or fair value, less costs to sell the assets.

        f.      Fixed assets:

                Fixed assets are stated at cost. Depreciation is computed using
                the straight-line method over the estimated useful lives of the
                assets at the following annual rates:
%
                                                     ---------------------------------
Computers and related equipment                   20 - 33
                Furniture and equipment                           6 - 15
                Motor vehicles                                      15
                Leasehold improvements                  over the term of the lease
g.      Other assets:

                Other assets include goodwill, developed technology and other
                identified intangibles and are amortized using the straight-line
                method over the estimated useful life, which ranges from five to
                ten years.

                The Company regularly performs reviews to determine whether the
                carrying value of the assets is impaired. The reviews take into
                consideration circumstances, which indicate that the carrying
                value of the asset cannot be recovered. In 1999 following the
                PTM acquisition such impairment was indicated, and the Company
                recognized an impairment loss in the amount of $ 1,595 related
                to developed technology.

                                      F-13
82

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

        h.      Software development costs:

                Research and development costs incurred in the process of
                software development before the establishment of technological
                feasibility, are charged to the statement of operations as
                incurred. Based on the Company's product development process,
                technological feasibility is established upon the completion of
                a detailed program design. Costs of the development of a
                product's master incurred subsequent to the establishment of
                technological feasibility are capitalized.

                Amortization of capitalized costs is at the greater of the
                amount computed using the:

                1.      Ratio that current gross revenues from sales of the
                        software bear to the total of current and anticipated
                        future gross revenues from sales of that software.

                2.      Straight-line method over the remaining estimated useful
                        life of the product (not to exceed three years).

                Amortization expense for capitalized software development costs
                for 1997, 1998 and 1999 was $ 724, $ 503 and $ 504,
                respectively.

        i.      Accounting for stock-based compensation:

                The Company has chosen to continue accounting for stock-based
                compensation in accordance with the provisions of Accounting
                Principles Board Opinion No. 25 ("APB-25"), "Accounting for
                Stock Issued to Employees". Under APB-25, when the exercise
                price of the company's share options equals or is higher than
                the market price of the underlying shares on the date of grant,
                no compensation expense is recognized. The pro forma information
                with respect to the fair value of the options is provided in
                accordance with he provisions of Statement No. 123 (see Note
                8b). The Company has adopted the accounting treatment of FAS
                123, with respect to equity compensation to non-employees of the
                Company.

        j.      Revenue recognition:

                The Company generates revenues from licensing the rights to use
                its software products directly to end-users. In 1999 the Company
                generated substantial revenues from the sale of software
                licenses requiring significant customization, integration and
                installation. The Company also generates revenues from sales of
                professional services.

                1.      Products:

                        Revenues from software license agreements are
                        recognized, according to SOP 97-2, as amended, upon
                        delivery of the software, and (i) if collection is
                        probable, (ii) the license fee is fixed and
                        determinable, (iii) vendor-specific evidence exists to
                        allocate the total fee to the elements of the
                        arrangement, and (iv) there is a signed contract. If an
                        acceptance period is included in an arrangement,
                        revenues are recognized at the earlier of customer
                        acceptance or expiration of the acceptance period.

                                      F-14
83
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

                        Revenues from software licenses that require significant
                        customization, integration and installation are
                        recognized using contract accounting on a percentage of
                        completion method, based on the relationship of actual
                        costs incurred to total estimated costs.

                        Provisions for estimated losses on uncompleted contracts
                        are made in the period in which such losses are first
                        determined, in the amount of the estimated loss on the
                        entire contract.

                        Maintenance and support revenue is recognized ratably
                        over the term of the maintenance period. If maintenance
                        is included in a software license arrangement, the
                        amounts related to maintenance are segregated from the
                        software license fees and recognized ratably over the
                        maintenance period, based on their fair value as
                        established by the independent sale of maintenance to
                        customers.

                2.      Services:

                        Revenues from Seismic data processing and interpretation
                        services are recognized as the services are performed.

        k.      Basic and diluted income (loss) per share:

                Basic income (loss) per share is computed based on the weighted
                average number of ordinary shares outstanding during each year.
                Diluted income (loss) 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 FASB Statement
                No. 128, "Earnings Per Share".

        l.      Income taxes:

                The Company accounts for income taxes in accordance with
                Statement of Financial Accounting Standards (SFAS) No. 109,
                "Accounting for Income Taxes". This statement prescribes the use
                of the liability method, whereby deferred tax asset 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 provides a valuation allowance, if
                necessary, to reduce deferred tax assets to their estimated
                realizable value.

        m.      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.

                                      F-15
84

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

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

        n.      Concentrations of credit risk:

                Financial instruments that potentially subject the Company to
                concentrations of credit risk consist principally of trade
                receivables and cash and cash equivalents. The Company's cash
                and cash equivalents are invested in deposits with major Israeli
                and U.S. banks. 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 accounts receivable are derived from sales to
                customers located primarily in the United States, Europe and the
                Far East. The allowance for doubtful accounts is calculated on
                both specific customers and on an aging basis in respect of
                those debts where, in management's opinion, collection is
                doubtful.

        o.      Fair value of financial instruments:

                The fair market value of the Company's financial instruments
                approximate their carrying value as of December 31, 1999, due to
                the short-term maturities of such items.

        p.      Impact of recently issued accounting standards:

                In June 1998, the Financial Accounting Standards Board issued
                Statement of Financial Accounting Standards No. 133 ("SFAS
                133"), "Accounting for Derivative Instruments and Hedging
                Activities" ("SFAS No. 133"). This statement establishes
                accounting and reporting standards requiring that every
                derivative instrument (including certain derivative instruments
                embedded in other contracts) be recorded in the balance sheet as
                either an asset or liability measured at its fair value. The
                statement also requires 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.
                Statement 133 is effective for fiscal years beginning after June
                15, 2000 and can not be applied retroactively.

                                      F-16
85

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

                In March 1998, the American Institute of Certified Public
                Accountants issued SOP98-1, "Accounting for the Costs of
                Computer Software Developed or Obtained for Internal Use" ("SOP
                98-1"), which provides guidance on accounting for the costs of
                computer software developed or obtained for internal use. The
                pronouncement identifies the characteristics of internal-use
                software and provides guidance on new cost recognition
                principles. SOP 98-1 is effective for financial statements for
                fiscal years beginning after December 15, 1998.

                The adoption of SOP 98-1 did not have any significant impact on
                the Company's consolidated financial position, results of
                operations or cash flows.

        q.      Reclassification:

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

NOTE 3:- OTHER RECEIVABLES AND PREPAID EXPENSES
DECEMBER 31,
                                             --------------------------------------------------------
                                                      1998                             1999
                                             -----------------------          -----------------------
Government authorities             $     264                        $     274
                Prepaid expenses                         714                              777
                Deposits                                 553                              262
                Other                                    939                            1,130
                                             -----------------------          -----------------------

                                                   $   2,470                        $   2,443
                                             =======================          =======================
NOTE 4:- FIXED ASSETS
Cost:
                  Computers and related equipment              $ 12,265                        $  17,130
                  Furniture and equipment                         1,369                            1,925
                  Motor vehicles                                    194                              173
                  Leasehold improvements                          1,169                            2,383
                                                        -----------------------          -----------------------

                                                                 14,997                           21,610
                                                        -----------------------          -----------------------
                Accumulated depreciation:
                  Computers and related equipment                 4,910                            8,248
                  Furniture and equipment                           434                              762
                  Motor vehicles                                    112                              118
                  Leasehold improvements                            282                              475
                                                        -----------------------          -----------------------

                                                                  5,738                            9,603
                                                        -----------------------          -----------------------

                Depreciated cost                                $ 9,259                        $  12,007
                                                        =======================          =======================
Depreciation expense amounted to $ 2,012, $ 2,298 and $ 3,865 for the
        years ended December 31, 1997, 1998 and 1999, respectively. (See also
        Note 7c).

                                      F-17
86
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 5: - OTHER ASSETS, NET
DECEMBER 31,
                                                                        --------------------------------------------------------
                                                                                 1998                             1999
                                                                        -----------------------          -----------------------
Assembled work force (net of accumulated
                  amortization of $ 346 in 1998 and $ 644 in 1999)           $    1,042                        $   1,595
                Goodwill (net of accumulated amortization of
                  $ 218 in 1998 and $ 527 in 1999)                                  433                            2,909
                Computer software development costs (net of
                  accumulated amortization of $ 1,041 in 1998
                and $ 1,545 in 1999)                                                679                              175
                Deferred tax asset                                                  310                                -
                Other                                                               319                              235
                                                                        -----------------------          -----------------------

                                                                             $    2,783                        $   4,914
                                                                        =======================          =======================
NOTE 6:- OTHER PAYABLES AND ACCRUED EXPENSES
Accrued expenses                                $      933                        $   2,195
                Employee and related payroll accruals                1,784                            2,583
                Royalties                                            2,519                            1,421
                Employee termination expense                             -                               54
                Lease termination costs                                335                              366
                Income and other taxes                               1,353                            1,632
                Other payables                                         887                              541
                                                           -----------------------          -----------------------

                                                                $    7,811                        $   8,792
                                                           =======================          =======================
NOTE 7:- FINANCING ARRANGEMENTS

        a.      Short-term loans consist of bank loans, primarily revolving
                credit lines which bear interest rates of 6.5%.

                The weighted average interest rate on the short term debt for
                the two years ended December 31, 1998 and 1997, was
                approximately 9% and 6.5% for the year ended December 31, 1999.

                                      F-18
87

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

        b.      Long-term loans represent other bank loans which are linked to
                the U.S. dollar and bear interest rates of 7%.

                Aggregate maturities of long-term loans:
First year (current maturities)                 $    450                     $  2,639
                                                         -----------------------      --------------------

                Second year                                           39                        3,145
                Third year                                             -                          778
                                                         -----------------------      --------------------

                                                                 $    39                     $  3,923
                                                         =======================      ====================
The fair market value of the Company's short-term loans and
                long-term loans approximated the carrying value as of December
                31, 1998 and 1999. Fair values were estimated using discounted
                cash flow analyses, based on the Company's incremental borrowing
                rates for similar types of borrowing arrangements.

        c.      In 1999, the Company increased its credit arrangements and now
                has available unused short- and long-term credit lines in the
                amount of approximately $ 18 million.

                This amount includes its bank debt as of December 31, 1999, of
                approximately $ 8M, and the additional $ 10M can be either
                short- or long-term.

        d.      In August 1999, the Company entered into a three years lease
                agreement to acquire computer equipment, which has appropriately
                been recorded as a capital lease in accordance with FASB 13.

                Future obligations under the arrangement are as follows:
Current                                  $     535
                Less - interest portion                       (101)
                                                -----------------------------

                                                               434
                                                -----------------------------

                Second year                                    535
                Third years                                    267
                                                -----------------------------

                                                               802
                Less interest portion                          (60)
                                                -----------------------------

                                                         $     742
                                                =============================
The equipment acquired in the amount of $ 1.3 million is
                included in fixed assets and depreciation expense relating to
                this equipment was approximately $ 115 for the year ended
                December 31, 1999.

                                      F-19
88

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 8:- SHARE CAPITAL

        a.      In April and May 1999, the Company completed a share issuance of
                2,017,544 Ordinary Shares to new and existing investors, and
                raised approximately $ 11m.

        b.      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 engage in the performance of
                services for the Company or any subsidiary.

                Pursuant to the Plans, a total of 2,300,000 ordinary shares of
                the Company are reserved for issuance.

                Each option granted under the Plans may expire no later than
                eight years from the date of the grant. Options granted under
                the Plans are generally exercisable in installments during the
                option term. Options which are canceled or not exercised before
                expiration become available for future grants.

                The following is a summary of the options granted among the
                various Plans.
YEAR ENDED DECEMBER 31,
                      -------------------------------------------------------------------------------------------------------------
                                    1997                                 1998                                 1999
                      ----------------------------------- ------------------------------------ ------------------------------------
                                             WEIGHTED                             WEIGHTED                             WEIGHTED
                                              AVERAGE                              AVERAGE                              AVERAGE
                           NUMBER         EXERCISE PRICE         NUMBER        EXERCISE PRICE        NUMBER         EXERCISE PRICE
                      ------------------ ---------------- ------------------- ---------------- ------------------  ----------------
Outstanding at the
  beginning of year           265,474         $  3.35             1,043,104       $  4.88              1,592,616       $  5.65
Granted                       785,426         $  5.55               629,000       $  7.00                121,500       $  7.00
Canceled                       (7,796)        $  2.50               (79,488)      $  6.31                (96,500)      $  7.00
Exercised                           -            -                        -          -                   (14,400)      $  5.00
                      ------------------ ---------------- ------------------- ---------------- ------------------  ----------------

Outstanding at the
  end of year               1,043,104         $  5.01             1,592,616       $  5.65              1,603,216       $  5.67
                      ================== ================ =================== ================ ==================  ================
The number of options exercisable as of December 31, 1997, 1998
                and 1999 was 371,781, 664,430 and 978,486, respectively.

                In June 1998, the Company re-priced certain options at an
                exercise price of $ 7, the fair market value at the date of the
                re-pricing, following of which the exercise price of the options
                outstanding as of December 31, 1999 was between $ 0.59 and $ 7.

                All options granted were at an exercise price, equal to or
                exceeding the fair market value of the Company's ordinary shares
                on the date of grant. The weighted expected life of the options
                as of December 31, 1999 was eight years.

                                      F-20
89

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

                Under FASB Statement No. 123, "Accounting for Stock-Based
                Compensation" ("SFAS 123") pro-forma information regarding net
                income is required (for grants issued after December 1994) and
                has been determined as if the Company had accounted for its
                employee stock option under the fair value method of that
                Statement.

                The fair value for these options was estimated at the date of
                grant using a Black-Scholes option pricing model with the
                following weighted-average assumptions for 1997, 1998 and 1999:
                risk-free interest rates of 6%, dividend yields of 0%,
                volatility factors of the expected market price of the Company's
                ordinary shares of 0.5-0.567 and expected life of the options of
                eight years.

                The weighted average fair value of the options at their dates of
                grant in 1997, 1998 and 1999 was $ 3.48, $ 3.99 and $ 4.38,
                respectively.

                Because changes in the subjective input assumptions can
                materially effect the fair value estimate, it is management's
                opinion that the existing option pricing models do not
                necessarily provide a reliable single measure of the fair value
                of its employee stock options.

                Pro-forma information under FAS 123:
YEAR ENDED DECEMBER 31,
                                                           ----------------------------------------------------------------------
                                                                 1997                     1998                      1999
                                                           ------------------      --------------------     ---------------------
Net income (loss) as reported                  $    (10,845)          $     4,552                  $    (3,778)
                Pro-forma net income (loss)                    $    (11,423)          $     3,488                  $    (5,035)
                Pro-forma basic income (loss) per share        $       (4.9)          $      0.51                  $     (0.41)
                Pro-forma diluted net income (loss)
                  per share for SFAS 123                       $       (4.9)          $      0.37                  $     (0.41)
Because SFAS 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.

        c.      Warrants:

                In 1994, the Company issued 539,244 warrants to purchase
                ordinary shares of the Company to various shareholders, in
                connection with their loan guarantees to the Company. These
                warrants are exercisable over five years, which terminated on
                July 21, 1999, at an exercise price of the lower of either: (i)
                80% of the price of the last private placement or (ii) 80% of
                the IPO price of the Company's shares. In the year ended
                December 31, 1999, 479,908 warrants were exercised, at an
                exercise price of $ 4.00 per share and, as of December 31, 1999,
                all of the warrants were exercised.

                                      F-21
90

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

                In October 1997, the Company issued 720,000 warrants in
                connection with bridge loans received in relation to the
                acquisition of CogneSeis (see Note 7c), at an exercise price of
                $ 6.00 per ordinary share. These warrants are exercisable over
                seven years. The fair value of these warrants in the amount of $
                600 was amortized as additional interest expense in 1997 and
                1998, amounting to $ 125 and $ 475, respectively.

                As compensation for services provided to the Company in
                connection with the share issuance (see a), investment bankers
                received 250,000 warrants exercisable during a three year period
                at an exercise price of $ 5.70 per Ordinary Share.

NOTE 9:- INCOME TAXES

        a.      Domestic:

                1.      Tax benefits under the Law for the Encouragement of
                        Capital Investments, 1959 ("the law"):

                        The Company's production facilities and its two
                        expansion programs have been granted the status of
                        "Approved Enterprise", under the law. According to the
                        provisions of this law, the Company has chosen to enjoy
                        "alternative benefits" - waiver of grants in return for
                        tax exemption - and, accordingly, the Company's income
                        is tax-exempt for a period

                        of two to four years commencing with the year it first
                        earns taxable income. In the remaining six to eight
                        years of benefits, the Company will be liable to
                        corporate tax at the rate of 25%.

                        In the event of distribution of cash dividends from
                        income which is tax exempt due to the above, the Company
                        would have to pay tax at the rate of 25% on an amount
                        equal to the amount distributed. The Company currently
                        has no plans to distribute dividends and intends to
                        retain future earnings to finance the development of its
                        business. 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.

                        The period of tax benefits, detailed above, is subject
                        to limits of 12 years from the commencement of
                        production, or 14 years from the approval date,
                        whichever is earlier.

                        The law also grants entitlement to claim accelerated
                        depreciation on buildings, machinery and equipment used
                        by the "Approved Enterprise", during the first five tax
                        years.

                        Should the Company derive income from sources other than
                        the "Approved Enterprise" during the relevant period of
                        benefits, such income will be taxable at regular
                        corporate tax rates of 36%.

                                      F-22
91

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

                2.      Tax benefits under the Law for the Encouragement of
                        Industry (Taxation), 1969:

                        The Company currently qualifies as an "industrial
                        company", under the above law and, as such, is entitled
                        to certain tax benefits.

                3.      Tax assessments:

                        The Company is currently being reviewed by the Israeli
                        income tax authorities, pertaining to tax assessments
                        for the years 1994-1997.

                        The Company has currently not yet received any final tax
                        assessments from the Israeli income tax authorities.

        b.      Foreign:

                Carryforward tax losses:

                The Company has an available tax loss carryforward in the amount
                of approximately $ 2 million in the UK subsidiary, $ 300 in the
                Singapore subsidiary and $ 1 million in the Australian
                subsidiary. These losses can be carried forward indefinitely.

        c.      Deferred tax assets:

                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.
DECEMBER 31,
                                                        --------------------------------------------
                                                               1998                     1999
                                                        --------------------      ------------------
Various accrued liabilities
                  (including a provision for
                  restructuring charges in 1997)               $    466            $        -
                Net operating loss carryforward                   1,991                 4,511
                                                        --------------------      ------------------

                                                                  2,457                 4,511
                Valuation allowance                              (2,147)               (4,511)
                                                        --------------------      ------------------

                Net deferred tax asset                         $    310            $        -
                                                        ====================      ==================
The Company has provided valuation allowances against the
                deferred tax assets in respect of its tax loss carryforwards and
                other temporary differences, due to a history of losses and
                current uncertainty concerning its ability to realize these
                deferred tax assets in the future.

                                      F-23
92

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

        d.      Income tax reconciliation:

                A reconciliation of the theoretical tax expense, assuming all
                income is taxed at the statutory rate applicable to income of
                the Company, and the actual tax expense are as follows:
YEAR ENDED DECEMBER 31,
                                                                ---------------------------------------------------------------
                                                                       1997                  1998                 1999
                                                                --------------------  -------------------  --------------------
Theoretical tax (benefit) computed
                    at the statutory rate of 36%                       $ (3,904)              $ 1,767             $ (1,360)
                Increase (decrease) in income
                    taxes resulting from:
                    Tax adjustment in respect of
                      inflation in Israel                                    64                  (309)                (710)
                    Non-deductible expenses                                  87                    61                  211
                    Utilization of tax loss carryforwards
                      previously not recognized                            (438)                    -                    -
                    Write-off of in-process research
                      and development                                     2,368                     -                    -
                    Losses for which benefits
                      are not recognized                                  1,823                   189                2,520
                    Prior year's accrued restructuring
                                                                              -                  (623)                (180)

                    Amortization of prior year's

                                                                              -                  (474)                (474)
                    Amortization of deferred tax liabilities
                      recorded upon acquisition of CogniSeis                  -                  (255)                (107)
                                                                --------------------  -------------------  --------------------

                Income tax expense                                    $       -             $     356           $        -
                                                                ====================  ===================  ====================
e.      Income taxes consist of the following:
Current                                                $    363              $    558             $   725
                Deferred                                                   (363)                 (202)               (467)
                Prior year                                                    -                     -                (258)
                                                                --------------------  -------------------  --------------------

                                                                       $      -              $    356           $       -
                                                                ====================  ===================  ====================
f.      Income (loss) before income taxes consists of the following:
Domestic                                             $   (2,716)             $  2,452          $   (3,255)
                Foreign                                                  (8,089)                2,496                (523)
                                                                --------------------  -------------------  --------------------

                                                                      $ (10,805)             $  4,948          $   (3,778)
                                                                ====================  ===================  ====================
F-24
93

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 10:- CONTINGENT LIABILITIES AND COMMITMENTS

        a.      Under the Company's research and development agreements with the
                Office of the Chief Scientist of the Government of Israel 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 has expensed royalties in the amounts of $ 402, $
                400 and $ 100 for the years ended December 31, 1997, 1998 and
                1999, respectively, relating to the repayment of such grants.

                As of December 31, 1999, the Company had a contingent liability
                to pay royalties in the amount of approximately $ 818.

        b.      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, 1997, 1998
                and 1999.

                The Company has expensed royalties in the amounts of $ 181, $ 49
                and $ 0 for the years ended December 31, 1997, 1998 and 1999,
                respectively, relating to the repayment of such grants.

                As of December 31, 1999, the Company had a contingent liability
                to pay royalties in the amount of approximately $ 418.

        c.      The Company and its subsidiaries have entered into rental
                agreements in regard to space for their operations. The rental
                fees are linked in part to the dollar and in part to the Israeli
                Consumer Price Index.

                Future minimum commitments under non-cancelable rental
                agreements as of December 31, 1999 are as follows:
YEAR ENDING DECEMBER 31,
                ------------------------
2000                                                        $      2,158
                2001                                                               1,967
                2002                                                               1,992
                2003                                                               1,091
                2004                                                               1,718
                2005 and thereafter                                                2,499
                                                                      ------------------------------

                                                                            $     12,425
                                                                      ==============================
Rent expense for the years ended December 31, 1997, 1998 and
                1999 amounted to $ 1,052, $ 1,753 and $ 2,020, respectively.

                                      F-25
94

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

        d.      Legal:

                1.      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 suit for a
                        declamatory 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 and declamatory 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 takes nothing on
                        its counterclaim. On December 7, 1998, GMA filed the
                        above-referenced appeal, which has not yet been
                        considered by the court, although briefing is complete.

                        The Company believes that the outcome of the above claim
                        will not have an adverse effect on the company's
                        consolidated financial statements.

                2.      On December 10, 1999, the Company's 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. 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. Based on the information
                        available at this early stage and having regard to some
                        of the material seized pursuant to the Anton Pillar
                        order, there appears to be merit to the claim.

                        The Company believes that the outcome of the litigation
                        will not have an adverse effect on the company's
                        business, operating results and financial condition

                                      F-26
95
                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 11:- CHARGES (ASSETS PLEDGED)

        a.      The Company has a floating charge on all of its assets and on
                its outstanding share capital, with respect to its short- and
                long-term loans and credit lines to two individual banks.

        b.      All financed equipment is pledged to the related financial
                institution.

NOTE 12:- SEGMENT REPORTING AND GEOGRAPHIC OPERATION INFORMATION

        a.      Segment reporting

                The Company operates in a single industry as a provider of
                software licenses, seismic data processing and interpretation
                services which facilitate the exploration of oil and gas
                resources.

        b.      Geographic operational information

                Summary information about geographic areas:

                The following presents total revenues for the year ended
                December 31, 1997, 1998 and 1999 and long-lived assets as of
                December 31, 1998 and 1999.
1997                         1998                       1999
                             --------------------------  --------------------------  --------------------------
                                              LONG-                       LONG-                       LONG-
                                TOTAL         LIVED         TOTAL         LIVED         TOTAL         LIVED
                              REVENUES*)      ASSETS      REVENUES*)      ASSETS      REVENUES*)      ASSETS
                             ------------  ------------  ------------  ------------  ------------  ------------
North and South
  America                    $     17,627  $     12,337  $     21,721  $     13,896  $     24,219  $      7,986
Europe, Africa
  Middle East                       3,642         4,996        12,962         5,673        14,604        18,581
Far East                            3,596           320        10,679           675        15,683         1,074
                             ------------  ------------  ------------  ------------  ------------  ------------

                             $     24,865  $     17,653  $     45,362  $     20,244  $     54,506  $     27,641
                             ============  ============  ============  ============  ============  ============
*)      Net revenues are attributed to countries based on invoicing of
                customers.

        c.      Major customers:

                In 1999, the Company had one major customer, which accounted for
                approximately 12% of the Company's revenues.

NOTE 13:- NON RECURRING EXPENSES
YEAR ENDED DECEMBER 31,
                                                         -----------------------------------------------------------------------
                                                                1997                      1998                     1999
                                                         --------------------      -------------------      --------------------
In-process research and development
                  write off (Note 1c)                          $   6,577                $        -                $       -
                Lease termination costs                                -                         -                      763
                Impairment of intangible assets
                  (Note 2g)                                            -                         -                    1,595
                Other                                                  -                         -                      347
                Restructuring costs (Note 1e)                      4,099                         -                        -
                                                         --------------------      -------------------      --------------------

                                                               $  10,676                $        -                $   2,705
                                                         ====================      ===================      ====================
F-27
96

                                      PARADIGM GEOPHYSICAL LTD. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 14: - INCOME (LOSS) PER SHARE DATA

        The following table sets forth the reconciliation of basic and diluted
        income (loss) per share.
YEAR ENDED DECEMBER 31,
                                                              -------------------------------------------------------------------
                                                                     1997                    1998                    1999
                                                              -------------------     -------------------     -------------------
Numerator:
        ----------

        Net income (loss) to shareholders of
           ordinary shares                                           $ (10,845)            $     4,552              $   (3,778)
        Effect of conversion of preferred shares                             -                       -                       -
                                                              -------------------     -------------------     -------------------
        Numerator for diluted income (loss)
           per share - income (loss) available to
           shareholders of ordinary shares                           $ (10,845)             $    4,552              $   (3,778)
                                                              ===================     ===================     ===================

        Denominator:
        ------------

        Weighted average number of ordinary
           shares (denominator for basic income
           (loss) per share)                                             2,328                   6,850                  12,205
                                                              -------------------     -------------------     -------------------
        Effect of securities:
           Employee stock options                                            -                     145                       -
           Warrants issued to third parties                                  -                     196                       -
           Convertible preferred shares
              for the period outstanding prior to conversion
           into ordinary shares                                              -                   2,115                       -
                                                              -------------------     -------------------     -------------------

        Dilutive potential ordinary shares                                   -                   2,456                       -
                                                              -------------------     -------------------     -------------------
        Denominator for diluted income (loss)
           per share - adjusted weighted average number
           of shares, assumed conversions and
           exercise of options and/or warrants                           2,328                   9,306                  12,205
                                                              ===================     ===================     ===================
- - - - - - - -

                                      F-28
97
                                  SIGNATURES

        Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this registration statement to be
signed on its behalf by the undersigned, thereto duly authorized.

                                        PARADIGM GEOPHYSICAL LTD.

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

Date: June 26, 2000
98
                                 EXHIBIT INDEX

               EXHIBIT NO.                  DESCRIPTION

                  3.1      Memorandum of Association of Registrant.++**

                  3.2      Amended and Restated Articles of Association of
                           Registrant.**

                  3.3      Proposed Amendment to the Amended and Restated
                           Articles of Association of the Registrant*******

                  10.      Form of Warrant Agreement dated as of October 10,
                           1997 between the Company and the Bridge Loan
                           lenders.**

                  10.2     Form of Warrant Certificate by the Company in favor
                           of the Bridge Loan lenders.**

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

                  10.4     Key Employee Plan.**

                  10.5     May 1994 Stock Option Plan.**

                  10.6     1994 General Stock Option Plan.**

                  10.7     1997 Executive Stock Option Plan.**

                  10.8     1997 Stock Option Plan for Qualifying Israel
                           Employees.**
                  10.9     1997 Stock Option Plan for U.S. Employees.**

                  10.10    Form of 1994 Warrant issued in connection with a
                           private placement of the Company's securities.**

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

                  10.12    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.********

                  10.13    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.********

                  10.14    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. ********

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

                  10.15    Registration Rights Agreement by and among Paradigm
                           Geophysical Ltd., Shamrock Holdings, Inc., Eastgate
                           Fund L.P., Eastgate International Limited, Mr. Harris
                           Kaplan and Berman Eastgate Growth Fund. ********
99

                  10.17    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. ********

                  11.1     Statement regarding computation of per share earnings
                           (loss).***

                  21.1     Subsidiaries of the Registrant.

                  23.2     Consent of Kost Forer and Gabbay.

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

                  ****     Incorporated herein by reference to Amendment No. 2
                           to the Company's Registration Statement on Form F-1
                           (File No. 333-7926), filed with the Commission on
                           April 7, 1998.

                  *****    Incorporated herein by reference to Amendment No. 3
                           to the Company's Registration Statement on Form F-1
                           (File No. 333-7926), filed with the Commission on May
                           13, 1998.

                  ******   Incorporated herein by reference to Amendment No. 4
                           to the Company's Registration Statement on Form F-1
                           (File No. 333-7926), filed with the Commission on
                           June 2, 1998.

                  *******  Incorporated herein by reference to Amendment No. 6
                           to the Company's Registration Statement on Form F-1
                           (File No. 333-7926), filed with the Commission on
                           June 5, 1998.

                  ******** Incorporated herein by reference to Form 20-F Annual
                           Report pursuant to Section 13 or 15(d) of the
                           Securities Exchange Act of 1934 filed with the
                           Commission on June 30, 1999

                  ++       English translations from Hebrew original.

(c)               Financial Statement Schedule.
                  Not Applicable.