<PAGE>

===============================================================================
                                 UNITED STATES
                      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

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

    for the fiscal year ended June 30, 2000

[_] 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: 0-29144

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

                                   ILOG S.A.
            (Exact name of Registrant as specified in its charter)

                            The Republic of France
                (Jurisdiction of incorporation or organization)

                   9, rue de Verdun, 94253 Gentilly, France
                   (Address of principal executive offices)

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

Securities registered or to be registered pursuant to Section 12(b) of the Act:
                                     None

Securities registered or to be registered pursuant to Section 12(g) of the Act:
                                     None

         Title of each class:         Name of each exchange on which registered:
         --------------------         ------------------------------------------
   American Depositary Shares, each            Nasdaq National Market
    Representing one Ordinary Share
            Ordinary Shares                    Nasdaq National Market*
--------
*  Not for trading, but only in connection with the American Depositary
   Shares.
                               ----------------

Securities for which there is a reporting obligation pursuant to Section 15 of
                                   the Act:
                                     None

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

  The number of outstanding shares of each of the issuer's classes of capital
or common stock as of June 30, 2000 was 15,362,719 Ordinary Shares of FF 4.00
nominal value, including 4,881,094 American Depositary Shares (as evidenced by
American Depositary Receipts), each corresponding to one Ordinary Share.

  Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [_] No

  Indicate by check mark which financial statement item the registrant has
elected to follow. [_] Item 17 [X] Item 18
===============================================================================
<PAGE>

  Unless the context otherwise requires, references herein to "the Company" or
to "ILOG" are to ILOG S.A. and its consolidated subsidiaries.

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

  The Company's name together with its logo is registered as a trademark in
France, the United States and a number of other countries. This Annual Report
on Form 20-F may also contain tradenames or trademarks of companies other than
ILOG.

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

                                EXCHANGE RATES

  ILOG publishes its financial statements in dollars. In this Annual Report on
Form 20-F, references to "dollars" or "$" are to U.S. dollars and references
to "francs" or "FF" are to French francs. Except as otherwise stated herein,
all monetary amounts in this Annual Report on Form 20-F have been presented in
dollars.

  The table below sets forth, for information purposes only, for the periods
indicated, the high, low, average and end of period noon buying rates in New
York City for cable transfers in French francs as certified for customs
purposes by the Federal Reserve Bank of New York ("Noon Buying Rate") for the
franc against the dollar. Such rates are not used by the Company in the
preparation of its consolidated financial statements included elsewhere in
this Annual Report on Form 20-F. See Note 1 of Notes to Consolidated Financial
Statements.

<TABLE>
<CAPTION>
                                                                  Average End of
   Year Ended June 30,                                  High Low  Rate(1) Period
   -------------------                                  ---- ---- ------- ------
                                                          (francs per dollar)
   <S>                                                  <C>  <C>  <C>     <C>
   1996................................................ 5.19 4.78  5.02    5.15
   1997................................................ 5.87 5.00  5.42    5.87
   1998................................................ 6.20 5.77  6.03    6.05
   1999................................................ 6.37 5.39  5.92    6.36
   2000................................................ 7.38 6.03  6.56    6.87
</TABLE>
--------
(1) The average of the Noon Buying Rates on the last business day of each
    month during the year. From January 1, 1999, the above rates reflect those
    of the Euro converted into francs at the official fixed conversion rate of
    6.55957 francs = one Euro.

  For information regarding the effects of currency fluctuations on the
Company's results, see Items 9, "Management's Discussion and Analysis of
Financial Condition and Results of Operations", and 9A, "Quantitative and
Qualitative Disclosures about Market Risks".

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

                          AMERICAN DEPOSITARY SHARES

  Pursuant to a program sponsored by the Company, Ordinary Shares of the
Company (the "Shares") are traded in the United States in the form of American
Depositary Shares ("ADSs"), each ADS representing one Share placed on deposit
with Morgan Guaranty Trust Company of New York, as depositary (the
"Depositary") and issued and delivered by the Depositary through its principal
office in New York City at 60 Wall Street, (36th Floor), New York, New York,
10260. Under the terms of the Deposit Agreement, dated as of February 13, 1997
and amended on August 13, 1998, among the Company, the Depositary and the
holders from time to time of ADSs (the "Deposit Agreement"), Shares may be
deposited with the Paris office of BNP Paribas, as custodian (the
"Custodian"), or any successor or successors to such Custodian. The Depositary
provides a variety of services to registered holders of American Depositary
Receipts, as more fully set forth in the form of the Deposit Agreement which
was filed as an exhibit to the Company's Registration Statement on Form F-6
effective with the Securities and Exchange Commission on February 13, 1997 and
amended on August 13, 1998.

                                       3
<PAGE>

                               TABLE OF CONTENTS

                                    PART I
<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
 <C>        <S>                                                            <C>
   Item 1.  Description of Business.....................................    5

   Item 2.  Description of Property.....................................   18

   Item 3.  Legal Proceedings...........................................   18

   Item 4.  Control of Registrant.......................................   19

   Item 5.  Nature of Trading Market....................................   19

   Item 6.  Exchange Controls and Other Limitations Affecting Security
            Holders.....................................................   22

   Item 7.  Taxation....................................................   22

   Item 8.  Selected Financial Data.....................................   27

   Item 9.  Management's Discussion and Analysis of Financial Condition
            and Results of Operations...................................   28

   Item 9A. Quantitative and Qualitative Disclosures about Market
            Risks.......................................................   43

   Item 10. Directors and Officers of Registrant........................   43

   Item 11. Compensation of Directors and Officers......................   48

   Item 12. Options to Purchase Securities from Registrant or
            Subsidiaries................................................   48

   Item 13. Interest of Management in Certain Transactions..............   50

                                    PART II

   Item 14. Description of Securities to be Registered..................   51

                                   PART III

   Item 15. Defaults Upon Senior Securities.............................   51

   Item 16. Changes in Securities and Changes in Security for Registered
            Securities..................................................   51

                                    PART IV

   Item 17. Financial Statements........................................   51

   Item 18. Financial Statements........................................   51

   Item 19. Financial Statements and Exhibits...........................   51
</TABLE>

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

                          FORWARD-LOOKING STATEMENTS

  In addition to historical information, this Annual Report contains forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Risk Factors." Readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. ILOG
undertakes no obligation to publicly revise these forward-looking statements
to reflect events or circumstances that arise after the date hereof. Readers
should carefully review the risk factors described in other documents the
Company files from time to time with the Securities and Exchange Commission,
including reports on Form 6-K filed by the Company.

                                       4
<PAGE>

                                    PART I

Item 1. Description of Business

Business

  ILOG develops, markets and supports software components for visual
interface, resource optimization and business rules functions that are
fundamental to the development of strategic business applications. By creating
pre-built and pre-tested software components to address these common software
functions, the Company's object oriented components reduce the time, cost and
risk in the development process, and allow users to focus their own efforts on
value-added, business specific programming tasks. The Company's components
provide high performance and scalability, run on the most popular Windows and
Unix platforms, and can be used to facilitate client-side, server-side or web
development efforts. The Company also offers a range of consulting, customer
training and maintenance services.

Background

  Increasing global competition and rapid changes in technology are
accelerating the demand by organizations for strategic business applications
to achieve competitive advantage. However, organizations face significant
challenges in developing strategic business applications that can keep pace
with this changing environment. These challenges include meeting the demand
for new applications, adapting these applications as business needs evolve and
taking advantage of new technologies such as distributed computing and the
internet/intranet.

  Software development is a lengthy and difficult process. Developers must
build visual interfaces, provide resource optimization and business rules
functions into their applications as well as other structural layers of
development. The Company believes that these common programming functions
typically represent between 15% and 40% of the number of lines of code for
strategic business applications. The challenge of undertaking all these
programming tasks increases the risk of failure and time to market, and
requires significant additional expertise and maintenance.

  The shortage and high cost of software developers has created a need for a
hybrid approach to software development that combines the advantages of custom
developed software with pre-built and pre-tested software components or
libraries. The emergence of object oriented technology allows for the creation
of pre-built software components that address common programming tasks, thus
allowing programmers to shorten development time by combining these components
with their own programming. In order for these software components to meet the
evolving business and technology requirements of the specific organization,
they must provide high performance and scalability and yet be open and
adaptable.

The ILOG Solution

  ILOG develops, markets and supports software components for visual
interface, resource optimization and business rules functions that are
fundamental to the development of strategic business applications. The
Company's object oriented components, which are written in the C, C++ and/or
Java languages, can be readily adapted to application development
requirements. Since ILOG has effectively pre-written many of the complex
portions of each application, enterprises can concentrate on the development
of other portions of the application that are specific to their respective
businesses. The Company believes that its components provide users with the
following benefits:

  Time to Market and Cost Reduction. ILOG components allow independent
software vendors ("ISVs") and enterprises to accelerate development time of
their applications. The cost of a development license for an ILOG component is
substantially less than the cost for an organization to develop those same
features internally. Moreover, ILOG's continuing maintenance and improvement
of its components ensures periodic performance and functionality enhancements
for its customers.

                                       5
<PAGE>

  High Performance and Scalability. The proprietary algorithms embedded in
ILOG components are highly efficient and scale well to specific application
needs. Applications using ILOG components can run efficiently on small PCs as
well as on the most powerful parallel workstations and servers because ILOG
components are both CPU and memory efficient. Intensive users can display or
manage tens of thousands of objects. ILOG components are currently being used
in demanding applications such as telecommunication network management, real-
time air traffic control, industrial control and military command and control.

  Ease of Use. The Company's components consist of layers of components that
can be used without modification if the customer so elects. With a few lines
of code, developers can implement their enterprise specific components on top
of the Company's high level components.

  Flexibility. The Company's components are built as documented layered
classes. The lower layers can be exposed to allow programming changes at all
levels of the component's behavior to meet individual business specific
requirements.

  Development Risk Reduction. The common development task components provided
by the ILOG components enable software developers to rapidly prototype and
test the performance of an application. Developers are able to quickly confirm
that the envisioned system successfully addresses the problems and will
withstand its final design load before they enter into the detailed
specification and design of the actual application. This approach greatly
decreases the technical risks associated with the creation of a new
application by providing a sound, pre-built infrastructure.

  Hardware and Operating System Independence. The programming interfaces for
ILOG components are identical for all platforms that the Company addresses,
which makes deploying applications across PCs and workstations easier.

  Development Strategy Independence. ILOG components are open (i.e.,
compatible with most development environments, compilers or methodologies and
software testing tools). The Company's customers can choose components from
other vendors and combine them with ILOG components in a true open
environment.

Strategy

  ILOG's objective is to be the leading worldwide provider of visualization,
optimization and rules software components. Key elements of the Company's
strategy to achieve this objective include the following:

  Expand ISV Business. The Company has agreements with over 200 ISVs and
intends to sell its components to additional ISVs for inclusion in packaged
software products. Approximately 40% of the Company's revenues in 2000 were
from ISVs. The Company is currently increasing its marketing efforts to ISVs
because of the ability to generate initial large license fees and/or royalties
from ISVs that include one or more ILOG components in their products.

  Increase Penetration of Existing Customer Base. The Company intends to
expand revenues from its components used by its existing customers. Since the
Company's components are initially licensed to a few developers for
application development projects inside an enterprise, the successful
completion of these projects and the launching of additional software design
projects within a customer's organization create additional sales and royalty
opportunities for the Company. The Company uses the success of projects with
existing customers as an internal reference for horizontal expansion within
that organization through seminars and other marketing events.

  Extend Technological Leadership. The Company intends to maintain and extend
its current technological leadership as a provider of object oriented software
components. The Company intends to focus its development efforts on enhancing
the performance and scalability of its current components, porting them to
different platforms and additional programming languages and expanding the
number of components to address common software development needs.

                                       6
<PAGE>

  Expand Sales Geographically. The Company's sales have historically been
concentrated in Europe, particularly in France. The North American and Asian
markets represent growth opportunities for the Company's components. The
Company has significantly expanded its sales effort by adding substantially to
its U.S. and Japan direct sales forces, which has resulted in rapid growth in
these regions particularly in North America which in 2000 represented 45% of
the Company's revenues compared to 33% in 1999. The Company intends to
continue to add to its direct sales and consulting forces in all of its three
principal geographic regions.

  Penetrate Vertical Market Base. Starting in 1997 the Company has devoted
significant sales efforts to three vertical markets: (i) graphic tools for
telecommunications network management, (ii) optimization engines for supply
chain management software applications and most recently (iii) business rules
engines for e-commerce applications. The Company has become a leader in these
markets and may continue this strategy by adding further vertical markets.

Software Component Technology

  The Company believes that the software component technology development path
is analogous to the integrated circuit revolution of the 1970s. At that time,
the components used to build circuit boards were elementary fine-grain
components such as capacitors, resistors and transistors. The advent of
packaged larger-grain integrated circuits precipitated a shift in the computer
manufacturing industry, from a model where every computer manufacturer built
its own boards from self-defined designs that assembled fine-grain components
to a model where much larger components were integrated onto much smaller
boards. This shift considerably reduced the time and risk of designing new
boards, as well as the cost of mass-producing them. The result was less
expensive computers.

  The Company believes that software component technology offers to the
software industry a similar potential to that which integrated circuits
offered the computer hardware industry. Software components are predefined
pieces of readily reusable software. These components provide ready-made, high
level functions without requiring software developers to understand the
internals of the components. This allows developers to focus on the use of
these higher-level functions to achieve the business-specific results that the
application requires. For example, a Gantt diagram (a standard scheduling
graphic) component will display the use of resources by activities over time
in a predefined fashion. The application developer using such a component will
not have to program the details of the diagrams, but rather can concentrate on
the definition of the activities, the resources and their relationships. The
developer will therefore be able to develop a scheduling application that
includes a Gantt diagram more rapidly.

  Components have been used in user interfaces for more than ten years. Menu
bars, push buttons and selection boxes are reusable components that are
available on operating systems such as Windows, Unix and Macintosh. The
inflexible black-box nature of many of these components, however, can prevent
software developers from obtaining the desired effect. For example, a
developer may wish to create a read-only Gantt diagram that only displays
information. If the component has been built without this feature, the
development speed gained by the use of the predefined component is lost by the
difficulty encountered in designing around some of its predefined behaviors.

  Components created using object oriented technology add significant
flexibility. Using a component for a specific application often requires
adding new behaviors. Object oriented programming involves a cloning process
that allows developers to add new behaviors to existing classes of objects.
This "extensibility" is the principal reason that well-implemented object
oriented code has a longer life than traditional code. Object attributes
(data) and methods (behaviors) can be added to or changed without altering the
original "base classes," so that changes as the object environment evolves are
transparent to applications dependent on the base class. As a result of the
ability to further specify the behavior of code after it has been designed,
written and tested, object oriented technology allows the large-scale reuse of
components without sacrificing the flexibility needed for application-specific
behavior and optimization.

                                       7
<PAGE>

  Object oriented techniques greatly simplify the development of complex
strategic business applications. Each coherent part of the task is represented
as a set of interdependent classes assembled together using a protocol. Some
of these classes will be reused as large grain components, others as fine-
detail implementation classes useful only for extension purposes.

  In the example of the Gantt diagram, the elementary bars that appear in the
drawing can be thought of as instances of classes that are more fine-grained
than the Gantt diagram top level class. With this design, flexibility is
pushed one step further. It is now possible not only to extend the global
Gantt object, but also to extend some of its internals as well. For example,
the developer may wish to draw activities in a Gantt diagram in a different
way, where a new element of information is added to each of the bars. In that
case, the developer will extend the bar class of the Gantt-diagram library,
instead of the Gantt-diagram class. This is the flexibility that object
oriented components are intended to achieve.

  Object oriented components, or class libraries, are coherent sets of
predefined components written in an object oriented language in such a way
that black-box components become clear-box components that can be redefined
locally when some behaviors do not match the exact needs of the application.
Therefore, object oriented components that cover a particular infrastructure
task, such as user interface programming, are more than a set of independent
components. Object oriented components consist of layers of components, where
each layer relies on documented extensible lower components.

Products

  The Company's products are high-performance C, C++ or Java software
components sold in binary form delivered on CD-ROMs or over the internet. The
Company's software components are sold to C, C++ or Java developers within
information technology (IT or MIS) departments of end-user enterprises or to
system integrators, ISVs, VARs and OEMs. The components facilitate rapid
development and deployment of complex applications by providing pre-written
portions of the software in order to reduce the time, cost and risk of the
application development cycle. The Company's components are independent and
can be purchased for integration into new or existing applications
individually or in combination with other components. The components run on
the most popular Windows and Unix platforms and can be used to facilitate
client-side, server-side or internet development efforts.

  The Company typically commences a customer relationship with one or more
licenses to use one or two of the Company's products for a given customer
development project. A single development license for one of the Company's
products normally ranges from $2,500 to $15,000, with a typical basic
development sale usually totaling approximately $20,000. Once the customer
completes its development projects, it must enter into run time licenses with
the Company in order to use any of the Company's components needed to deploy
the developed application within or outside its organization. A customer will
either prepay at the time of the initial contract or purchase the run time
licenses upon deployment following the successful completion of the
application development process, which typically takes between three and nine
months from the initial order. Pricing for run time licenses are based upon
the number of users of the application, the number of different sites on which
the application will be deployed and the number and type of ILOG components
used in the application.

                                       8
<PAGE>

  The following table sets forth certain information regarding the components
licensed by the Company:

<TABLE>
<CAPTION>
                         Year of First
Product Category and      Commercial
Name                       Shipment    Product Description
--------------------     ------------- -------------------
<S>                      <C>           <C>
Visualization
ILOG Views..............     1993      Data visualization and graphical user interface in C++
ILOG DB-Link............     1994      Access to relational and object relational data from C++
ILOG Server.............     1995      Application integration and real-time event notification
ILOG InForm.............     1996      Data visualization for database applications
ILOG TGO................     1997      Graphic components for the telecommunications industry
ILOG JViews.............     1997      Data visualization in Java
ILOG JTGO...............     1998      ILOG TGO in Java
ILOG TGF................     1999      Presentation layers for network management applications

Optimization
ILOG Solver.............     1993      Constraint-based reasoning for resource allocation
ILOG Scheduler..........     1994      Add-on product for Solver for short-term scheduling
ILOG Dispatcher.........     1997      Add-on product for Solver for the transportation industry
ILOG CPLEX..............     1997      High performance components for linear programming in C
ILOG OPL Studio.........     1999      Optimization modeling
ILOG Configurator.......     1999      Embeddable engine for configuration applications

Rules
ILOG Rules..............     1993      Real-time agents for filtering and alarm management
ILOG JRules.............     1997      Real-time agents for filtering and alarm management in Java
</TABLE>

  Historically, the Company has made minor revisions to its products
approximately every six months and has released new versions of its products
every 12 to 18 months.

  The following describes the Company's software components by product
category.

 Visualization Products

  The Company currently markets eight user interface components which in 2000
comprised approximately 43% of the Company's revenues from license fees. See
"Risk Factors--Product Concentration Risk."

  ILOG Views and JViews are each a comprehensive data visualization and
graphical user interface environment providing components for structured two-
dimensional graphics. ILOG Views is used to solve a wide range of graphics
problems in industrial and commercial environments.

  ILOG Views is composed of a core technological layer and a number of pre-
defined, high-level graphical components. The core layer provides performance
and portability (i.e., the ability to implement platform independent
interfaces) and the object oriented representations of all the basic graphical
entities. This layer provides developers with hundreds of classes of graphical
objects and methods to construct highly interactive graphical environments,
allowing real-time display of several million graphical objects in a single
display space. Applications can rapidly pan and zoom within this virtual
display area, allowing selection and manipulation of objects anywhere in the
display. The Company believes its emphasis on performance represents an
important advantage of ILOG Views for implementing the graphical user
interface of complex applications such as real-time network supervision. ILOG
Views also includes graphic objects such as controls, charts, Gantts,
spreadsheets, network graphers, and more. It displays and interacts with maps,
networks and other complex 2D representations. Users can visually create
panels, business graphic objects and C++ or JavaScript code. Dedicated

                                       9
<PAGE>

add-on modules, ILOG Views Maps, ILOG Views Charts, ILOG Inform, ILOG DB-Link,
ILOG TGO and ILOG TGF, are available to facilitate the access to data sources
and RDBMS, and ease the development of mapping or telecommunications specific
applications. ILOG Views supports ActiveX and Netscape Plugs-Ins.

  ILOG DB-Link is a set of libraries, which provide access to relational and
object-relational data. ILOG DB-Link includes native support for Informix,
Ingres, Oracle and Sybase on UNIX and Windows platforms, and supports
Microsoft SQL Server, Centura SQL Base, and ODBC on PCs. The API of ILOG DB-
Link is platform and database independent, allowing application code to be
fully portable onto UNIX and Microsoft Windows. ILOG DB-Link connects to
O/RDBMS handling SQL statements, including proprietary extensions. It passes
SQL requests from C++ applications to the O/RDBMS, and supports transaction
management, data handling and access to data dictionaries. ILOG DB-Link allows
the user to call stored procedures and apply multiple executions of
parameterized queries. It supports large object handling to enable C3I, GIS
and text processing applications to use native data formats. It permits access
to the internal O/RDBMS client structures when applications require specific
O/RDBMS extensions.

  ILOG Server facilitates the implementation of distributed applications by
introducing the concept of sharing objects in real time. ILOG Server provides
both high level object oriented modeling tools simplifying the implementation
of business processes and integration services allowing the different
components of an application to be shared in real time in a coordinated
manner. These characteristics enable it to be an excellent medium for solving
system integration and business process operational problems.

  ILOG InForm is an extension of ILOG Views that facilitates the development
of graphic-intensive database applications. Client server applications
involving multiple databases can be built almost entirely in a drag-and-drop
environment, without requiring Structured Query Language ("SQL") or
significant C++ coding. The Company believes that ILOG InForm has an advantage
over competing products because it works with ILOG Views C++ objects, which
facilitates higher performance and more efficient development. ILOG InForm
also exploits all of a customer's prior ILOG Views development and
automatically generates C++ objects that can be used in other development
projects. ILOG InForm allows routine applications to be constructed by users
or developers with limited C++ knowledge or related tools. ILOG InForm
provides three advancements to the underlying ILOG Views feature set: Studio,
Data Sources and Data-Aware gadgets. ILOG InForm Studio provides an intuitive
environment for rapid application development and testing, and adds new visual
items that are useful for common database applications such as data entry and
review. Because ILOG InForm Studio is a superset of ILOG Views, the Company's
customers can rapidly take advantage of it even if their application does not
involve a database. ILOG Data Sources' innovation allows easy definition of
the tables and views needed in a client server application. Instead of
requiring SQL code manipulation, ILOG InForm Data Sources' GUI allows more
rapid selection of the rows and columns to be accessed. Once Data Sources are
set up, ILOG InForm's Data-Aware gadgets (e.g., spreadsheets, selection
buttons, data-entry fields) automatically connect to the relevant database
records for read or write access. This combination of features allows ILOG
Views' users to accelerate application development and customization whether
the user needs to work with relational or non-relational data.

  ILOG TGO (Telecom Graphic Objects) is an extension to ILOG Views dedicated
to the creation of graphical user interfaces for telecommunication network
management and data applications. ILOG TGO provides in a single product
graphical objects representing dedicated industry behaviors and thus offers
major productivity improvements to telecommunication network software
developers and users. ILOG JTGO is a Java version of ILOG TGO and allows the
development of pure Java telecom graphical user interfaces.

  ILOG TGF (Telecom Graphic Framework) is an integrated framework that enables
the developers of network and service management applications to create state-
of-the-art graphical user interfaces. ILOG TGF embeds predefined presenters
for displaying in real time network topology, events or other kinds of service
information. It imparts to an application an advanced look and feel with
sophisticated navigation to make its use intuitive for the operator.

                                      10
<PAGE>

 Resource Optimization Products

  The Company currently markets five resource optimization components and one
optimization modeling product which in 2000 comprised 44% of the Company's
revenue from license fees. See "Risk Factors--Product Concentration Risk."

  The ILOG Solver constraint-programming component provides the basic
programming layer embedding the core constraint processing technology, and the
ILOG Scheduler and ILOG Dispatcher components are vertical add-ons. ILOG
Solver provides developers with an off-the-shelf engine for solving a wide
variety of industrial problems, such as short-term scheduling (e.g. MRP).
Finding a high-quality solution was impractical until the advent of
constraint-based reasoning. ILOG Solver provides a problem-definition and
nonlinear modeling system that allows for accurate characterization of real-
world problems. ILOG Solver's solution algorithms (constraint propagation,
branch-and-bound, and numerical and logical processing) can then be used by
programmers to solve these difficult problems in telecommunications, defense,
transportation and manufacturing.

  The ILOG Scheduler time-constraint component is an extension to ILOG Solver
for solving complex scheduling problems quickly. ILOG Scheduler integrates
algorithms specific to scheduling and predefines a set of classes that model
scheduling activities. Constraints specific to scheduling define the different
ways to link activities and resources; an activity may either produce or
consume a resource. Furthermore, a typology of resources is defined that
allows a direct representation of domain specific data, freeing the developer
from the difficult task of analyzing the scheduling activity. ILOG Scheduler
gives the developer a pre-defined object oriented model that may be easily
extended to suit application specific needs. ILOG Scheduler also adds an "edge
finder" algorithm that improves the speed of finding solutions. By extending
ILOG Solver algorithms and supplying templates for common scheduling problems
(e.g., bottlenecks, conflicts and sequencing preferences), ILOG Scheduler
further reduces the application development effort for programmers in a number
of application domains. ILOG Scheduler has been used for resource allocation,
personnel rostering, maintenance scheduling, labor-cost optimization and other
finite-capacity problems in utilities, transportation, medical and
manufacturing companies.

  ILOG Configurator is an embeddable engine for customer relationship
management (CRM) and/or web-based configuration applications. Running in
conjunction with ILOG Solver, it is based on constraint programming applied to
structured objects. A hierarchical, dynamic tree describes the taxonomy of
component types with each component described by type, attributes, connection
ports and constraints. Types, attributes and ports are constrained variables,
and their domains represent the set of feasible values. For ports, a wildcard
allows the description of extensible domains. ILOG Configurator allows
automatic generation of a product either partially or completely, and the
computation of an optimized configuration. ILOG Configurator's capabilities
are designed for online selling applications to enable optimized selections
between buyers' needs and current offerings.

  ILOG Dispatcher is an optimization engine based on ILOG Solver for creating
vehicle routing and personnel dispatching applications. ILOG Dispatcher brings
specialized modeling and optimization technology to these types of
transportation applications.

  ILOG CPLEX components provide a comprehensive set of linear programming C
routines. These algorithms solve large and difficult linear programs, mixed
integer programs, quadratic programs and network problems at a high level of
performance. The CPLEX base system encompasses primal Simplex, dual Simplex,
and network Simplex solvers for linear programming problems in an interactive
format. The CPLEX Mixed Integer Solver solves problems with mixed integer
variables (general or binary) using algorithms and techniques such as cuts
(cliques & covers), heuristics, and a variety of branching and node selection
strategies. It is designed to handle large and difficult integer problems. The
CPLEX Barrier is a primal-dual log barrier algorithm with predictor corrector
designed to solve certain classes of linear programming models and quadratic
programming problems. CPLEX Simplex, mixed integer, and barrier solvers are
available in parallel forms for certain parallel computing environments.

                                      11
<PAGE>

  ILOG OPL Studio combines linear and constraint-based optimization methods in
a single modeling language, allowing the user to identify the best approach
for a particular application. This development framework includes an online
model library, database connectivity tools, debugging tools and an automatic
code generator within a graphical environment.

 Rules Products

  The ILOG Rules and JRules components allows the development of intelligent
agents for monitoring data flows in real time. ILOG Rules is used in
applications such as network management, process monitoring and fraud
detection. ILOG JRules is a rule engine that enables the seamless integration
of business rules into Java applications. JRules is used in multi-threaded
application servers to create rule-based personalization, customer
relationship management, pricing, and workflow solutions for eCommerce and
eBusiness web-based applications. JRules is also used to develop network
management applications and business applications containing complex business
procedures and policy. In 2000 business rules components comprised
approximately 13% of the Company's license revenues.

Services

  ILOG provides a number of services to assist customers in the design,
development and deployment of their object oriented software implementations.
Consulting services are available for designing, analyzing, implementing and
optimizing applications. In addition, the Company provides custom development
services to customers that request unique or proprietary product extensions.
Depending on the nature, complexity and duration of the project, these
services may be performed by third-party integrators, consultants or the
Company. Training is offered on a regular basis for customers needing to
accelerate their mastery of ILOG technologies and interfaces. Maintenance and
technical support are available for all ILOG components at an annual fee of
15% of the standard software list price.

                                      12
<PAGE>

Customers and Applications

  As of September 30, 2000, ILOG components had been licensed by over 2,000
customers for development and/or deployment in a wide range of applications
described below.

Telecommunications         Aerospace and Defense      Transportation

Network and Systems        Command, Control,          Resource Optimization
 Management                 Communications and        .  Airport counter, gate
 .  Network Visualization    Intelligence (C3I)           and belt allocation
 .  Configuration            systems                   .  Command and control
   management              .  Data fusion             .  Crew allocation
 .  Fault management        .  Geographic              .  Distribution planning
 .  Performance                information systems     .  Equipment scheduling
   management              .  Image processing        .  Fleet management
 .  Security management     .  Logistics mapping       .  Maintenance planning
                                                         and scheduling
Service Management         Process Monitoring         .  Timetabling
 .  Dynamic tariff policy   .  Data flow monitoring    .  Traffic planning
   management              .  Radar visualization     .  Warehouse management
 .  On-demand service       .  Test bench monitoring
   provisioning               simulation              Supervision & Data
 .  Flexible invoicing      .  Capability analysis      Visulations
                           .  Flight simulators       .  Geographic
Network Planning           .  Scenario analysis          information systems
 .  Economic analysis                                  .  Traffic monitoring
 .  Ground and space        Resource Allocation and    .  Vehicle tracking
   equipment scheduling     Optimization                 systems
 .  Satellite mission       .  Frequency and
   planning                   bandwidth allocation    E-Business
 .  Network modeling        .  Mission planning
                           .  On-board resource       .  CRM configuration
Manufacturing                 scheduling              .  Web personalization
                           .  Payload optimization    .  Online production
Supervision and Data       .  Supply chain logistics     scheduling
 Visualization                                        .  Online investment
 .  Equipment performance                                 management
   analysis                                           .  E-merchandising
 .  Geographic                                            management
   information systems                                .  E-supply chain cockpit
 .  Process monitoring                                 .  E-marketing
   and control                                        .  On line lending
 .  Quality analysis

Resource Optimization
 .  Equipment
   configuration and
   diagnostics
 .  Logistics and
   distribution planning
 .  Manpower planning and
   crew scheduling
 .  Production line
   scheduling

Production planning
 .  Supply chain
   logistics
 .  Warehouse management








                                      13
<PAGE>

Sales and Marketing

  The Company derives its revenues from the sale of development licenses to
application developers and from run time or deployment licenses once
applications are developed and deployed and related services. Revenues from
license fees and services represented 66% and 34% respectively of the
Company's total revenues in 2000. Services revenue consist of consulting to
facilitate the adoption of the Company's products, maintenance and customer
training. Consulting, maintenance and training accounted for 16%, 16% and 2%,
respectively, of the Company's total revenues in 2000.

  Total revenues increased to $71.3 million in 2000 from $63.7 million in
1999, and from $55.3 million in 1998, representing increases of 12% and 15%,
respectively, over the previous year. The rate of growth in 2000 reflects the
transition of the Company's channels of distribution from end users to ISVs,
which have a longer selling cycle, and the impact of spending diversions by
customers from new application development to Year 2000 readiness. The rate of
growth in 1999 reflects the restructuring of the U.S. sales organization and
spending diversions by customers from new application development to Year 2000
readiness.

  During 2000, 1999 and 1998, revenues generated from customers in North
America totaled approximately in $32.0 million, $22.5 million and $22.4
million; in Europe $32.6 million, $34.5 million and $27.9 million; and in Asia
$6.7 million, $6.7 million and $5.0 million; respectively. The 43% growth in
North American revenues and the 6% decrease in European revenues in 2000 over
1999 reflects the decline of the Euro and the transition of the Company's
channel of distribution from end users to ISVs, which have a greater
proportion located in North America, combined with the general strength of the
internet driven economy in the U.S.

  ILOG markets and sells its products worldwide principally through its direct
sales force, ISVs and OEMs to two types of customers: end users and solution
providers, which integrate the components into specific software applications
or as system enhancements.

  The Company has sales offices and/or subsidiaries in France, U.S., Germany,
Japan, Singapore, Spain and U.K. The sales organization includes field sales
representatives, who bear primary responsibility for customer relationships;
field sales engineers, who answer technical questions, perform demonstrations
and develop prototypes or proof-of-concept projects for customers and inside
telesales representatives.

  Due to the strategic nature of ILOG products, potential customers typically
conduct extensive evaluations of the available technologies before making
product acquisition decisions. Common objectives of such evaluations are to
determine the degree of leverage provided by purchasing ILOG products versus
rewriting their salient features. Consequently, ILOG's sales cycle is
generally three to six months or more and varies substantially from customer
to customer.

  A prospective customer typically has a specific strategic need for one or
more specialized software applications to help it gain a competitive advantage
in its market, as well as adequate technical expertise and resources in-house
to support a software development effort to meet that need. During the
evaluation period, meetings involving ILOG's field sales and technical staff
are typically conducted at the customer's site and at ILOG's offices. Upon
completion of the evaluation, the customer may purchase one or more
development licenses for ILOG products, as well as associated training
courses, consulting services and product maintenance. There is no advance
guarantee that any particular customer's application development process will
be successful and will ever yield deployment license revenues to ILOG.

  An important part of ILOG's sales strategy is the cultivation of indirect
sales channels. Of the approximately 2,000 total ILOG customers, more than 200
are ISVs and/or OEMs that develop and resell software based on ILOG
technologies. In 2000 approximately 40% of the Company's license revenues were
from ISVs and/or OEMs. The Company also sells through systems integrators and
VARs, and distributors in Europe, Asia and South America. Substantially all of
the Company's indirect sales channels add significant value to the product in
the form of application development, integration with other software and/or
hardware products, consulting and/or training.

                                      14
<PAGE>

  The Company markets its products and services through its three worldwide
business divisions that serve the Company's core industry segments. The
Company also has a business division dedicated to direct selling through the
telephone and internet in support of the three market-focussed divisions. This
organization became effective in 1999. Previously the Company's sales and
marketing activities were structured on a geographic basis. The structure is
designed to bring the Company closer to customers, foster more repeat sales,
improve profitability and develop opportunities within the electronic commerce
arena.

  The three market-focused divisions handle industry marketing, sales,
consulting and some product development. Their charter is to meet and
anticipate customer needs while maintaining a tight industry focus. These
business divisions are Telecommunications, Value Chain Management and Industry
Solutions.

  The Telecommunications Business Division is dedicated to the web-enabled
network management customer care and customer relationship management sectors.
The Value Chain Management Business Division is focussed on supply chain
management (SCM) applications for the allocation of equipment, planning and
scheduling production, assigning personnel, and managing supply chains with
the greatest possible efficiency. The Industry Solutions Division focuses on
the e-commerce, finance, transportation and defense industries.

  The ILOG Direct Division is a direct sales organization with the mission of
delivering product from orders received via the telephone and the internet to
customers not requiring consulting, personal account management or product
customization.

  ILOG's software is typically shipped to customers promptly upon receipt of
an order and the execution of a license agreement. Consequently, ILOG seldom
experiences a material backlog of unfulfilled orders, and does not consider
backlog to be a meaningful indicator of future performance. See "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations."

  Marketing and selling expenses increased to $35.6 million in 2000 from $31.5
million in 1999 and from $27.3 million in 1998, representing 50%, 49% and 50%
of total revenues, respectively. The level of marketing and selling expenses
as a percentage of total revenues is attributable to the on-going worldwide
expansion of the Company's marketing and selling organization.

Research and Development

  The Company has committed, and expects to continue to commit in the future,
substantial resources to research and development. During 2000, 1999 and 1998,
net research and development expenses were $12.2 million, $9.8 million, and
$6.6 million, respectively. Gross research and development expenses before the
offsets of funding provided by the European Union and agencies of the French
government were $13.1 million, $10.6 million, and $7.2 million in 2000, 1999
and 1998, respectively. See "Risk Factors--Risk of Loss of Government Research
and Development Funding" and "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations."

  Since its inception, the Company has maintained a research and development
focus on the solution of complex problems using object oriented technology.
This focus requires the fusion of different programming cultures, including
object oriented developers, who tend to be attracted by high-level modeling,
and developers working on complex algorithms, who tend to focus on tight math
oriented code. This ILOG culture has arisen from fourteen years of day-to-day
development, algorithmic optimization and object oriented design. The
Company's engineers work with customers to ensure that the customer's problem
is solved efficiently. The Company's engineers also interact closely with the
scientific and academic communities, which the Company believes is the best
way to obtain and maintain high performance algorithms.

                                      15
<PAGE>

  The Company's future success will depend in large part on its ability to
improve its current technologies and to acquire, develop and market new
products and product enhancements that address these changing market
requirements on a timely basis. There can be no assurance that the Company
will be successful in acquiring, developing and marketing new products or
product enhancements, that the Company will not experience difficulties that
delay or prevent the successful acquisition, development, introduction or
marketing of such products or enhancements or that any new products or product
enhancements will adequately address market requirements and achieve market
acceptance. As is customary in the software industry, the Company has in the
past experienced delays in the introduction of new products and features, and
may experience such delays in the future. If the Company is unable, for
technological or other reasons, to integrate acquired products, develop new
products or enhancements of existing products in a timely manner in response
to changing market conditions or customer requirements, the Company's
business, operating results and financial condition would be materially
adversely affected. See "Risk Factors--Rapid Technological Change and
Introduction of New Products and Product Enhancements."

Competition

  The Company believes that the primary competitive factors in its markets are
product performance and features, sales and distribution capabilities and
total cost. The Company's present direct competitors include a number of
private and public companies such as Brokat A.G., Cosytech, Dash Associates
Limited, Dash Optimization, Inc., Dynatech Corporation, IBM, Selectica, Inc.,
SL Corporation, Trilogy Software, Inc., and 2order.com. The Company also
competes with companies that provide packaged software with respect to
specific applications. In addition, virtually all of the Company's customers
have significant investments in their existing solutions and have the
resources necessary to enhance existing products and to develop future
products. These customers have or may develop and incorporate competing
technologies into their systems, thereby replacing the Company's current or
proposed components. This would eliminate their need for the Company's
services and components and limit future opportunities for the Company. The
Company therefore is required to persuade development personnel within these
customer organizations to outsource the development of their software and to
provide products and solutions to these customers that cost-effectively
compete with their internally developed products. The Company expects to face
additional competition from other established and emerging companies if the
market for its components continues to develop and expand. In addition,
current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase
the ability of their products to address the needs of the Company's current
and prospective customers. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly gain significant market
share. New or enhanced products introduced by existing or future competitors
could increase the competition faced by the Company's products. Increased
competition could result in fewer customer orders, price reductions, reduced
transaction size, reduced gross margins and loss of market share, any of which
could have a material adverse effect on the Company's business, operating
results and financial condition. There can be no assurance that the Company
will be able to maintain prices for its products at levels that will enable
the Company to market its products profitably. Any decrease in prices, as a
result of competition or otherwise, could have a material adverse effect on
the Company's business, operating results and financial condition.

  Some of the Company's current, and many of the Company's potential
competitors have longer operating histories, significantly greater financial,
technical, marketing, service and other resources, significantly greater name
recognition, broader product offerings and a larger installed base of
customers than the Company. In addition, the Company's current and potential
competitors may have well-established relationships with current and potential
customers of the Company. As a result, such competitors may be able to devote
greater resources to the development, promotion and sale of their products,
may have more direct access to corporate decision-makers based on previous
relationships and may be able to respond more quickly to new or emerging
technologies and changes in customer requirements. There can be no assurance
that the Company will be able to compete successfully against current or
future competitors or that competitive pressures will not have a material
adverse effect on its business, operating results and financial condition.

                                      16
<PAGE>

Intellectual Property and Other Proprietary Rights

  The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology. For example, the Company licenses its
software pursuant to signed license agreements and, "shrink-wrap" licenses
included in product packaging, which impose certain restrictions on the
licensee's ability to use the software. In addition, the Company seeks to
avoid disclosure of its trade secrets, including requiring those persons with
access to the Company's proprietary information to execute confidentiality
agreements with the Company and restricting access to the Company's source
codes. The Company seeks to protect its software, documentation and other
written materials under the laws relating to trade secrets and copyright,
which afford only limited protection. The Company has no patents or pending
patent applications.

  Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products,
obtain or use information that the Company regards as proprietary or use or
make copies of the Company's products. Policing unauthorized use of the
Company's products is difficult. In addition, the laws of many jurisdictions
do not protect the Company's proprietary rights to as great an extent as do
the laws of France and the U.S. In particular, "shrink-wrap" licenses may be
wholly or partially unenforceable under the laws of certain jurisdictions, and
copyright and trade secret protection for software may be unavailable in
certain countries. Under French intellectual property laws, rights over
software are not patentable but are protected under copyright law and
infringements by third parties can be enjoined. There can be no assurance that
the Company's means of protecting its proprietary rights will be adequate or
that the Company's competitors will not independently develop similar
technology.

  There can be no assurance that the Company will not receive communications
in the future from third parties asserting that the Company's products
infringe, or may infringe, on their proprietary rights. There can be no
assurance that licenses to disputed third-party technology would be available
on reasonable commercial terms, if at all. In addition, the Company may
initiate claims or litigation against third parties for infringement of the
Company's proprietary rights or to establish the validity of the Company's
proprietary rights. Litigation to determine the validity of any claims could
result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from productive tasks, whether or
not such litigation were determined in favor of the Company. In the event of
an adverse ruling in any such litigation, the Company might be required to pay
substantial damages, discontinue the use and sale of infringing products,
expend significant resources to develop non-infringing technology or obtain
licenses to infringing technology. In the event of a successful claim against
the Company and the failure of the Company to develop or license a substitute
technology, the Company's business, operating results and financial condition
would be materially adversely affected. As the number of software products in
the industry increases and the functionality of these products further
overlaps, the Company believes that software developers may become
increasingly subject to infringement claims. Any such claims against the
Company, with or without merit, as well as claims initiated by the Company
against third parties, could be time consuming and expensive to defend or
prosecute and to resolve.

Employees

  As of September 30, 2000, the Company had 518 full-time employees, including
328 in sales and marketing, consulting and customer support, 128 in research
and development, and 62 in finance and administration. As of September 30,
2000, 329 of the Company's employees were located in Europe, 138 in North
America and 51 in Asia.

  The Company has never experienced a work stoppage and believes that its
relationships with its employees are good. The future success of the Company
depends in large part on its ability to attract and retain highly skilled
technical, sales and managerial personnel. Competition for such personnel in
the software industry is intense, particularly with respect to technical
personnel with expertise in object oriented technology, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel.

                                      17
<PAGE>

  Management is required under the French Labor Code to hold monthly meetings
with a delegation of elected employee representatives to discuss, in
particular, employment matters and the economic condition of the Company and
to provide appropriate information and documents relating thereto. As required
under the French Labor Code, two representatives of the employees are entitled
to attend meetings of the Board of Directors of the Company, but do not have
any voting rights.

  Pursuant to French laws dated June 13, 1998 and January 19, 2000 which took
effect on February 1, 2000, all employers of more than 20 employees in France
are required to implement a 35-hour work week. In order to implement the 35-
hour work week regulations, the Company signed an agreement with the
representatives of its employees on September 18, 2000 by which the reduction
in the number of working hours was established with effect from October 1,
2000.

Item 2. Description of Property

  The Company's corporate headquarters are located in Gentilly, France, a
suburb of Paris, in premises consisting of approximately 54,000 square feet
under leases expiring in 2004. The Company maintains a research and
development facility in Sophia-Antipolis, in the south of France, in premises
consisting of approximately 2,000 square feet under a lease expiring in 2005.
The Company has its U.S. headquarters in Mountain View, California in premises
consisting of approximately 37,000 square feet under a lease expiring in 2007.
The Company maintains a sales office and research and development facility in
Incline Village, Nevada, in premises consisting of approximately 4,000 square
feet under a lease expiring in October 2002, and a sales office in
Southborough, Massachusetts. In addition, the Company maintains sales and
customer support offices in Bracknell, near London, England; in Bad Homburg,
near Frankfurt, Germany; in Madrid, Spain; in Singapore; and in Tokyo, Japan.

Item 3. Legal Proceedings

  The Company is a party to legal proceedings from time to time. There is no
such proceeding currently pending which the Company believes is likely to have
a material adverse effect upon the Company's business. Any litigation,
however, involves potential risk and potentially significant litigation costs,
and therefore there can be no assurance that any litigation which may arise in
the future will not have a material adverse effect on the Company's business.

                                      18
<PAGE>

Item 4. Control of Registrant

  To the Company's knowledge, it is not owned or controlled by another
corporation or by any foreign government.

  The table below sets forth certain information with respect to the
beneficial ownership of shares of the Company as of September 30, 2000 by any
person known to the Company to be the owner of more than ten percent of the
Shares:

<TABLE>
<CAPTION>
                                                     Shares         Percentage
   Name and Address of Beneficial Owner       Beneficially Owned(1)   Owned
   ------------------------------------       --------------------- ----------
   <S>                                        <C>                   <C>
   All directors and executive officers as a
    group (16 persons)(2)....................       1,728,623         11.2%
</TABLE>
--------
(1) Number of Shares and percentage ownership is based on: (i) 15,496,132
    Shares outstanding as of September 30, 2000. Beneficial ownership is
    determined in accordance with the rules of the U.S. Securities and
    Exchange Commission and includes voting and investment power with respect
    to such shares. Shares subject to options and warrants that are currently
    exercisable or exercisable within 60 days of September 30, 2000 are deemed
    to be outstanding and to be beneficially owned by the person holding such
    options or warrants for the purpose of computing the percentage ownership
    of such person, but are not deemed to be outstanding and to be
    beneficially owned for the purpose of computing the percentage ownership
    of any other person.
(2) Includes 521,661 shares issuable upon exercise of options and warrants to
    purchase shares granted to executive officers and directors of the Company
    which are exercisable within 60 days of September 30, 2000.

Item 5. Nature of Trading Market

  The ADSs are quoted on the Nasdaq National Market under the symbol "ILOG".
The shares are also listed on the Nouveau Marche, Paris.

The Paris Bourse

  On September 22, 2000, upon successful completion of an exchange offer, the
Paris BourseSBF S.A. (the "SBF"), the Amsterdam Stock Exchanges and the
Brussels Exchanges merged to create Euronext, the first Pan-European exchange.
Through the exchange offer, all the shareholders of SBF, the Amsterdam
Exchanges and the Brussels Exchanges contributed their shares to Euronext
N.V., a Dutch holding company. Securities quoted on exchanges participating in
Euronext will be traded over a common Euronext platform, with central
clearinghouse, settlement and custody structures. However, these securities
will remain listed on their local exchanges. As part of Euronext, the SBF
retains responsibility for the admission of shares to the Paris Bourse's
trading markets as well as the regulation of those markets.

  Securities listed on the Bourse de Paris (the "Paris Bourse" or Paris Stock
Exchange) are traded in one of three markets. The securities of most large
public companies are listed on the Premier Marche, with the Second Marche
available for small and medium-sized companies. Trading on the Nouveau Marche
was introduced in March 1996 to allow companies seeking development capital to
access the stock market. In addition, securities of certain other companies
are traded on a non-regulated over-the-counter market, the Marche Libre OTC.

  The Nouveau Marche is a regulated market managed and operated by the SBF,
the organization which manages and operates the Paris Bourse. The Nouveau
Marche, however, is neither a new section of an existing market, nor a
stepping stone to the Paris Bourse's Second Marche. The Nouveau Marche is an
electronic market that combines a central order book with market-making to
ensure greater liquidity. Member firms of the Nouveau Marche may act in one or
more capacities: Listing Advisers/Market-Makers (Introducteurs/Teneurs de
Marche, or "ITMs") or broker-dealers (Negociateurs-Courtiers). Admission to
the Nouveau Marche is subject to certain capital adequacy and liquidity
requirements determined by the SBF. In addition, companies applying for
listing

                                      19
<PAGE>

on the Nouveau Marche are required to publish comprehensive information
regularly and to keep the public informed of events likely to affect the
market price of their securities. The Nouveau Marche may also require certain
current shareholders to enter into lock-up arrangements at the time of
offerings of securities.

  In October 1998, the SBF introduced continuous trading for the most actively
traded shares on the Nouveau Marche. Such trading takes place on each business
day from 9:00 a.m. to 5:30 p.m. local time, with a pre-opening session from
7:30 a.m. to 9:00 a.m. and a post-closing session from 5:30 p.m. to 5:35 p.m.
during which transactions are recorded but not executed, and a closing auction
at 5:35 p.m. For shares that are not traded continuously, retail orders on the
Nouveau Marche are matched by the central system at two daily fixings, at 9:00
a.m. and 5:00 p.m. Between such fixings, ITMs display bid/asked spreads for a
minimum number of each of the securities for which they act as market-makers,
and trades with the ITM are executed from time to time throughout the day. The
Shares are traded continuously. Trading in the securities listed on the
Nouveau Marche may be suspended by the SBF if quoted prices fall outside
certain price limits defined by the regulations of the SBF. In particular,
unless market conditions otherwise require, the SBF may suspend trading of a
security for up to 30 minutes if the SBF believes that the bids and offers for
such security would cause the next quoted price of a security to vary by more
than 10 percent from the quoted price resulting from the last fixing or the
last trading price for the shares which are traded on a continuous basis. In
the latter case, further suspensions for up to 30 minutes are also possible if
the price varies again by more than 5 percent. The SBF may also suspend
trading of a listed security in certain other limited circumstances,
including, for example, the occurrence of unusual trading activity in such
security.

  Prior to any transfer of securities held in registered form on the Nouveau
Marche, such securities must be converted into bearer form and inscribed in an
account maintained by an accredited intermediary with Sicovam. Transactions in
securities are initiated by the owner giving instructions (through an agent,
if appropriate) to the relevant accredited intermediary. Trades of securities
listed on the Nouveau Marche are cleared and settled through Sicovam, a
registered clearing agency, using a continuous net settlement system. A fee or
commission is payable to the ITM or broker-dealer or other agent involved in
the transaction.

  SG Securities (Paris) S.A. acts as Teneur de Marche with respect to the
Shares traded on the Nouveau Marche.

Closing Sale Prices of ILOG Shares

  The following table sets forth the range of quarterly high and low closing
sale prices of the ADSs (each ADS representing one Share) on the Nasdaq
National Market for each full quarterly period within the last two fiscal
years.

<TABLE>
<CAPTION>
                                                                    In Dollars
                                                                  --------------
                                                                   High    Low
                                                                  ------- ------
   <S>                                                            <C>     <C>
   1999:
   First Quarter.................................................  16.500  7.125
   Second Quarter................................................  14.000  7.000
   Third Quarter.................................................  12.125  5.125
   Fourth Quarter................................................   5.813  4.438

   2000:
   First Quarter.................................................   8.500  5.000
   Second Quarter................................................  26.125  6.625
   Third Quarter................................................. 104.500 21.000
   Fourth Quarter................................................  59.500 24.750
</TABLE>

  On September 29, 2000, the last sale price for the ADSs as reported on the
Nasdaq National Market was $63.250 per ADS.

                                      20
<PAGE>

  The following table sets forth the range of quarterly high and low closing
sale prices of the Shares on the Nouveau Marche for each quarterly period
within the last two fiscal years from the time trading in the Shares commenced
on the Nouveau Marche.

<TABLE>
<CAPTION>
                                                                      In Euros
                                                                    ------------
                                                                     High   Low
                                                                    ------ -----
   <S>                                                              <C>    <C>
   1999:
   Second Quarter (from December 3, 1998)..........................  12.65 10.64
   Third Quarter...................................................  11.00  6.57
   Fourth Quarter..................................................   5.50  4.40

   2000:
   First Quarter...................................................   8.70  5.01
   Second Quarter..................................................  26.90  6.64
   Third Quarter................................................... 107.90 20.20
   Fourth Quarter..................................................  71.50 29.10
</TABLE>

  On September 29, 2000, the last sale price for the Shares as reported on the
Nouveau Marche was 72.50 Euros per Share.

  The Depositary in respect of the ADSs is Morgan Guaranty Trust Company of
New York. Each ADS registered on the books of the Depositary corresponds to
one Share. As of September 30, 2000 there were 22 record holders of American
Depositary Receipts evidencing 4,700,976 ADSs. As of September 30, 2000 there
were approximately 11,300 holders of record of the Company's 15,496,132
Shares.

Trading by the Company in Its Shares

  Under French law a company may not subscribe its own shares, but it may,
either directly or through an intermediary acting on its behalf, acquire its
own shares (a) to reduce its share capital by canceling such acquired shares,
with approval of the shareholders at an extraordinary meeting, (b) to obtain
shares for distribution to employees under a profit-sharing plan or stock
option plan after obtaining shareholders' approval at an ordinary
shareholders' meeting, and (c) if the company's shares are listed on a
regulated market (i.e., on the Premier Marche, the Second Marche or the
Nouveau Marche), subject to the filing of a note d'information that has
received a visa of the COB and after obtaining approval from the shareholders
at an ordinary meeting, to acquire up to 10 percent of its share capital in
connection with a corporate share repurchase program. In this latter case, the
company may decide to (i) keep these shares, (ii) to sell or transfer them
(including to employees under a profit-sharing or stock option plan) or (iii)
with the approval of the shareholders at an extraordinary shareholders'
meeting, to cancel them within a limit of 10 percent of the outstanding
capital over a 24 month-period. In addition, pursuant to Regulation No. 90-04
(as modified) of the COB, all purchases by the Company of its own shares are
subject to certain limitations, including as to timing, price and quantity so
as not to disrupt the normal trading of the shares. Furthermore, the Company
must inform the CMF on a monthly basis of any purchase, sale, transfer or
cancellation of its own shares. The CMF makes this information public.

  In addition, under French law an issuer may not directly or through a person
acting on its own behalf, own more than 10 percent of its outstanding share
capital, except in certain limited circumstances. If a company acquires its
own shares, they must be held in registered form and fully paid up at the time
of their acquisition by the company. Such shares are deemed outstanding under
French law but, as long as held by the company, they are not entitled to
dividends, voting rights or preferential rights.

  Pursuant to an authority granted by its shareholders at an ordinary general
meeting held on December 14, 1999, the Company was authorized to trade its own
shares, up to 10 percent of the total outstanding share capital, for a period
ending on the date of the annual ordinary meeting of shareholders that will
approve the French statutory financial statements for the fiscal year ended
June 30, 2000. In addition, on December 14, 1999, the Company received
shareholder approval to cancel Shares so repurchased up to a limit of 10
percent of the outstanding capital over a 24-month period.

                                      21
<PAGE>

  The Company will submit a resolution at the Shareholders meeting on December
18, 2000, convened to approve the French statutory financial statements for
the fiscal year ended June 30, 2000, to be authorized to trade in its own
shares for a period ending on the date of the annual ordinary meeting of
shareholders that will approve the French statutory financial statements for
the fiscal year ended June 30, 2001.

Item 6. Exchange Controls and Other Limitations Affecting Security Holders

Exchange Controls

  The payment of any dividends to foreign shareholders must be effected
through an authorized intermediary bank. All registered banks and credit
establishments in The Republic of France are authorized intermediaries.

  Under current French exchange control regulations, there are no limitations
on the amount of cash payments that may be remitted by ILOG to residents of
the United States. Laws and regulations concerning foreign exchange controls
do require, however, that all payments or transfers of funds made by a French
resident to a non-resident be handled by an authorized intermediary bank.

Ownership of shares by Non-European Union Persons

  Pursuant to a Decree dated February 14, 1996, the acquisition of a
controlling interest in ILOG by any Non-European Union ("EU") resident is
generally no longer subject to an autorisation prealable or prior
authorization of the French Ministry of the Economy, Finance and the Budget.
Under the new regulations, the acquisition of a controlling interest in ILOG
by either an EU or non-EU person or group of persons is subject to a simple
declaration containing the details of the acquisition. The declaration must be
filed at the time the investment is made. Direct and indirect ownership of 20%
or more of a quoted company is generally regarded as a controlling interest,
but a lower interest may be held to be a controlling interest in certain
circumstances (such as an option to purchase additional shares).

  Under French law, there is no limitation on the right of non-resident or
foreign shareholders to vote securities of a French company.

Item 7. Taxation

  The following is a general summary of certain material French tax and U.S.
federal income tax consequences to certain holders of ADSs that are U.S.
citizens and residents, U.S. corporations, and certain other entities and
organizations potentially affected by U.S. Federal income taxation
(collectively, "U.S. Holders"). This summary does not purport to address all
of the material consequences to these U.S. Holders or to any other holders.
This summary also does not take into account the specific circumstances of any
particular U.S. Holder although such circumstances might materially affect the
general tax treatment of such U.S. Holder. Therefore, all prospective
purchasers of ADSs are advised to consult their own tax advisor with respect
to the U.S. federal, state and local tax consequences, French tax
consequences, or foreign tax consequences of the ownership of ADSs and the
Shares corresponding thereto.

  This summary is based on the Internal Revenue Code of 1986 as amended (the
"Internal Revenue Code"), French law, U.S. Treasury and French tax
regulations, and the Convention between the Government of the United States of
America and the Government of the French Republic for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income
and Capital of August 31, 1994 (the "Treaty").

  The statements of French and U.S. tax laws set out below assume that each
obligation in the Deposit Agreement and any related agreement will be
performed in accordance with its terms. In addition, all statements are based
on the Treaty, the laws, judicial decisions, administrative regulations, in
force as of the date of this Annual Report on Form 20-F, and as a consequence
are subject to any changes in United States or French law, or in the double
taxation conventions between the U.S. and France, occurring after such date,
possibly with retroactive effect.

                                      22
<PAGE>

  In order to be entitled to benefits conferred by the Treaty, a U.S. holder
must be a "resident" of the United States (hereafter referred to as a "U.S.
Resident Holder") within the meaning of the Treaty. Included in the category
of "U.S. Resident Holders" would generally be: (i) citizens or residents of
the United States; (ii) corporations organized under the laws of the United
States, or of any State thereof; (iii) certain pension trusts and other
retirement or employee benefits organizations established in the United States
by a "resident" thereof but generally exempt from U.S. tax; (iv) certain not-
for-profit organizations established in the U.S. but generally exempt from
U.S. tax; (v) U.S. regulated investment companies, U.S. real estate investment
trusts, and U.S. real estate mortgage investment conduits; and (vi)
partnerships or similar pass-through entities, estates, and trusts to the
extent the income of such partnerships, similar entities, estates, or trusts
is subject to tax in the United States as income of a resident in its hands or
the hands of its partners, beneficiaries, or grantors. In addition, in order
to be entitled to benefits conferred by the Treaty, a U.S. Resident Holder
must also qualify for such benefits under the limitation on benefits
provisions of Article 30 of the Treaty. The discussion below is based on the
assumption that a U.S. Resident Holder would so qualify but each U.S. Holder
should consult with their own advisor to ensure that this is the case.

  For most purposes of the Treaty and the Internal Revenue Code as in effect
as of the date of this Annual Report on Form 20-F, U.S. Holders of ADSs will
be treated as the owners of the Shares corresponding to such ADSs.
Accordingly, the French and U.S. federal tax consequences discussed below will
generally be applicable to U.S. Holders of Shares.

Taxation of Dividends

  Under French law, dividends paid to non-residents of France are subject to
French withholding tax at a rate of 25%. A resident of France is entitled to
an avoir fiscal, or a tax credit, in respect of a dividend received from a
French corporation, such as ILOG.

  The amount of the avoir fiscal is generally equal to:

  . 50% of the dividend paid for individuals and companies which would
    qualify under the French parent-subsidiary regime if they were located in
    France, or

  . 40% of the dividend paid for shareholders who are not individuals.

  In addition, in case the dividends are subject to the precompte,
shareholders entitled to the avoir fiscal at the rate of 40% are generally
entitled to an additional amount of avoir fiscal equal to 20% of any such
precompte, actually paid in cash by the company (see below, French Taxation--
The Precompte).

  The draft budget law for 2001 provides for a reduction of the avoir fiscal
to 25% if used by companies in 2001 and to 15% if used by companies
thereafter. Consequently, the additional amount of avoir fiscal mentioned
above would be adjusted and increased as follows:

  . up to 50% of the precompte paid in cash by the company for shareholders
    entitled to use the avoir fiscal at the rate of 25%, and

  . up to 70% of the precompte paid in cash by the company for shareholders
    entitled to use the avoir fiscal at the rate of 15%.

  Under French domestic law, dividends paid to non-residents are usually
subject to a 25% withholding tax and are not eligible for the benefit of the
avoir fiscal. The benefit of the reduced rate of withholding tax, and if
applicable, of the avoir fiscal may, under certain conditions be allowed to
shareholders who are not residents of France if they are entitled to and they
comply with procedures for claiming benefits under the applicable tax treaty
between France and such non-resident's country of residence.

  Assuming dividends paid to a U.S. Resident Holder are not attributable to a
permanent establishment or fixed base maintained by such holder in France and
that such holder holds less than 10% of the capital of ILOG

                                      23
<PAGE>

under the Treaty, the rate of French withholding tax on such dividends is
generally reduced to 15%. The rate of French withholding tax may be further
reduced to 5% if the U.S. Resident Holder is a company that owns directly or
indirectly at least 10% of the capital of ILOG.

  The French tax authorities established an instruction on June 7, 1994 (the
"Instruction") providing that dividends paid to a U.S. Resident Holder which
is entitled to either a full or partial refund of avoir fiscal as described
below will no longer be subject to the French withholding tax of 25% (with
this tax reduced at a later date to 15% subject to filing formalities), but
will be immediately subject to the reduced rate of 15% provided that such U.S.
Resident Holder establishes before the date of payment that such holder is a
"resident" of the United States under the Treaty.

  In addition, assuming again that dividends are not attributable to a
permanent establishment or fixed base maintained in France, certain U.S.
Resident Holders described below are also entitled to a payment equal to the
avoir fiscal, less a 15% withholding tax, with respect to such dividends.
These U.S. Resident Holders are: (i) individuals or other non-corporate
persons; (ii) U.S. corporations, other than regulated investment companies,
that do not directly or indirectly own 10% or more of the capital of ILOG; and
(iii) regulated investment companies that do not directly or indirectly own
10% or more of the capital of ILOG but only if less than 20% of their shares
are beneficially owned by persons who are not citizens or residents of the
United States. It is important to note that a U.S. Resident Holder described
immediately above may receive a payment of the avoir fiscal only if such
holder is subject to U.S. federal income tax on the payment of the avoir
fiscal and the related dividend. Nevertheless, a partnership or trust may also
qualify but only to the extent that the partners, beneficiaries, or grantors
would qualify under (i) or (ii) immediately above (and are subject to U.S.
federal income tax on the payment of the avoir fiscal and the related
dividend). In addition, in order to receive payment of the avoir fiscal, the
U.S. Resident Holder may be required to demonstrate to the French authorities
that such holder is the beneficial owner of the dividend and that the
shareholding does not have as its principal purpose, or one of its principal
purposes, to allow another person to obtain the refund of avoir fiscal.

  Under the Treaty, any payment of the avoir fiscal (whether full or partial)
is subject to a 15% withholding tax. Thus, for example, provided that the
requirements of the Instruction are satisfied, if ILOG pays a dividend of 100
to an individual U.S. Resident Holder entitled to a refund of avoir fiscal,
such holder will initially receive 85 and will be entitled to an additional
payment of 42.5 (resulting in an aggregate payment of 127.5) consisting of the
avoir fiscal of 50, less a 15% withholding tax on that amount equal to 7.50.
As noted below, the payment of the avoir fiscal less a 15% withholding tax on
that amount will not be received until, at the earliest, January 15th
following the close of the calendar year in which the dividend was paid.

  The Treaty provides that certain tax-exempt U.S. pension trusts and other
organizations established and maintained to provide retirement or employee
benefits and certain tax-exempt organizations (as well as certain individuals
with respect to dividends beneficially owned by such individuals and derived
from an investment retirement account and the United States, its political
subdivisions or local authorities, and any agencies or instrumentalities
thereof, from the investment of retirement assets) which are U.S. Resident
Holders are entitled to receive a payment equal to 30/85 of the avoir fiscal,
less a 15% withholding tax, provided that these entities own, directly or
indirectly, less than 10% of the capital of ILOG. The net effect of the
partial refund of the avoir fiscal is to offset the economic effect of the 15%
French withholding tax imposed on the gross amount of the dividend.

  Under the Instruction, in order to benefit from the reduced withholding tax
rate of 15% immediately upon payment of a dividend and to receive, where
applicable, the payment of the avoir fiscal less the 15% withholding tax on
that amount, a U.S. Resident Holder must complete and file a French Treasury
form RF IA EU-No. 5052, entitled "Application for Refund", before the date of
payment of the dividends. The form, together with instructions, will be
provided by the Depositary to all U.S. Holders registered with the Depositary
and may also be available from the U.S. Internal Revenue Service. However,
should a U.S. Resident Holder not be able to complete and file the French
Treasury form RF IA EU-No. 5052 on the date of payment of the dividends at the
latest, such U.S. Resident Holder could benefit from the favorable treatment
provided by the Treaty if the holder

                                      24
<PAGE>

completes and files a simplified application form before the date of payment
of the dividends. A model of such simplified application form is provided by
the Instruction. The Depositary will arrange for the filing with the French
fiscal authorities of all forms completed by U.S. Holders registered with the
Depositary and returned to the Depositary in time to be filed with the French
fiscal authorities prior to the payment of the dividend. The payment of the
avoir fiscal (net of withholding tax) is generally expected to be made within
12 months of filing the form, but not before January 15 following the close of
the calendar year in which the related dividend is paid.

  In addition, U.S. pension funds must, inter alia, provide the Centre des
Impots des Non-Residents with a tax certificate from the U.S. Internal Revenue
Service indicating that such pension funds have been established and are
operated in accordance with Sections 401(a), 403(b) or 457 of the Internal
Revenue Code. A mutual fund or other investment company must provide a
certification by the Service of such Company's status as a regulated
investment company under Section 851 of the Internal Revenue Code.

  Amounts distributed as dividends by French companies out of profits which
have not been taxed at the ordinary corporate income tax rate or which have
been earned and taxed more than five years before the distribution are subject
to a tax knows as the precompte. The precompte is paid by the distributing
company to the French tax authorities. The amount of the precompte is equal to
50% of the net dividends before withholding tax.

  If a U.S. Resident Holder is not entitled to the avoir fiscal payment
described above (or is entitled to only a partial payment of the avoir
fiscal), such a holder generally may obtain from the French tax authorities a
refund of precompte paid in respect of the dividends, less French withholding
tax on the amount thereof, and the partial avoir fiscal, if any.

  For U.S. federal income tax purposes, the gross amount of any distribution
as well as the gross amount of any avoir fiscal (or precompte) paid to a U.S.
Resident Holder (before reduction for French withholding taxes) will generally
be treated as a dividend to the extent paid or deemed paid out of the current
or accumulated earnings and profits of ILOG (as determined for U.S. tax
purposes) and will be included in gross income of the U.S. Holder as ordinary
income in the year actually or constructively received. A dividend received
deduction will generally not be allowed with respect to dividends paid by the
Company. For purposes of determining the amount included in gross income, any
distribution or avoir fiscal payment (or precompte refund) in Euros or French
francs will be converted to U.S. dollars at the spot exchange rate on the date
so included. Generally, gain or loss (if any) resulting from currency exchange
fluctuations during the period from the date the dividend is included in
income to the date such dividend payment is actually converted into U.S.
dollars will be treated as ordinary income or loss from sources within the
United States.

  French withholding tax imposed on dividends paid by ILOG and imposed on
related payments of avoir fiscal (or precompte) may, subject to certain
generally applicable conditions and limitations, be taken as a deduction or as
a foreign tax credit against such U.S. Holder's U.S. federal income tax
liability. Dividends and related payments of avoir fiscal (or precompte) will,
in most cases, be considered "passive income" from sources outside of the
United States for purposes of these U.S. foreign tax credit provisions.

Taxation of Capital Gains

  In general, a U.S. Resident Holder will not be subject to French tax on any
capital gain derived from the sale or exchange of ADSs, except where such gain
is attributable to a permanent establishment or fixed base maintained by the
U.S. Resident Holder in France.

  For U.S. tax purposes, U.S. Holders will generally recognize gain or loss
upon the sale or exchange of ADSs equal to the difference between the amount
realized from the sale or exchange of the ADSs and the U.S. Holder's basis in
such ADSs. In general, such gain or loss will be U.S. source capital gain or
loss. In the case of individual U.S. Holders, capital gains are subject to
U.S. federal income tax at preferential rates if specified minimum holding
periods are met.


                                      25
<PAGE>

French Estate and Gift Taxes

  Under the Convention Between the United States of America and the French
Republic for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Estates, Inheritance and Gifts of November
24, 1978, a transfer of ADSs by gift or by reason of the death of a U.S.
Holder that is an individual that would otherwise be subject to French gift or
inheritance tax, respectively, will not be subject to such French tax unless
the donor or the transferor is domiciled in France at the time of making the
gift, or of his or her death, or the ADSs were used in, or held for use in,
the conduct of a business through a permanent establishment or fixed base in
France.

French Wealth Tax

  Under the Treaty, the French wealth tax applicable to individuals does not
apply to U.S. Resident Holders owning alone or with related persons, directly
or indirectly, ADSs giving the right to less than 25% of ILOG's share capital.

Passive Foreign Investment Company Considerations

  ILOG believes that its ADSs should not be treated as stock of a passive
foreign investment company (a "PFIC") for United States federal income tax
purposes, but this conclusion is a factual determination made annually and
thus is subject to change.

  ILOG will be a PFIC with respect to a U.S. Holder if, for any taxable year
in which the U.S. Holder holds ADSs, either (i) at least 75% of the gross
income of ILOG for the taxable year is passive income; or (ii) at least 50% of
the average fair market value (assuming ILOG is not a "controlled foreign
corporation" as defined under U.S. law) of ILOG's assets consists of assets
that produce or are held for the production of passive income. For this
purpose, passive income generally includes dividends, interest, royalties,
rents (other than rents and royalties derived in the active conduct of a trade
or business and not derived from a related person), annuities and gains from
assets that produce passive income. For the purpose of the PFIC tests, ILOG
will be treated as owning directly its percentage share (presently 100%) of
the assets of its subsidiaries and of receiving directly its percentage share
of each of those subsidiaries' income, if any, so long as ILOG owns, directly
or indirectly, at least 25% by value of the particular subsidiary's stock.

  If ILOG were to become a PFIC, a U.S. Holder of ADSs or Shares generally
would be subject to adverse tax consequences with respect to certain
distributions on, and gains realized from a disposition of, ADSs or Shares.
U.S. Holders should consult their own tax advisors regarding the potential
application of the PFIC ruled to their ownership of ADSs or Shares.

Foreign Currency Issues

  If dividends are paid in Euros or French francs, the amount of the dividend
distribution to be included in the income of a U.S. Holder will be the U.S.
dollar value of the payments made in Euros or French francs, determined at a
spot rate applicable to the date such dividend is to be included in the income
of the U.S. Holder, regardless of whether the payment is in fact converted
into U.S. dollars. Generally, gain or loss (if any) resulting from currency
exchange fluctuations during the period from the date the dividend is included
in income to the date such payment is converted into U.S. dollars will be
treated as ordinary income or loss.

                                      26
<PAGE>

Item 8. Selected Financial Data

  The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," the Consolidated Financial Statements and related Notes thereto
and other financial information appearing elsewhere in this Annual Report on
Form 20-F. The selected statement of operations data set forth below for each
of the years ended June 30, 2000, 1999 and 1998 and the balance sheet data at
June 30, 2000 and 1999 have been derived from the Consolidated Financial
Statements of the Company, which have been prepared in accordance with U.S.
GAAP and audited by Ernst & Young Audit, independent auditors, and included
herein. The selected statement of operations data for the years ended June 30,
1997 and 1996 and balance sheet data at June 30, 1998, 1997 and 1996 are
derived from audited financial statements not included herein.

<TABLE>
<CAPTION>
                                           Year Ended June 30,
                                 --------------------------------------------
                                  2000     1999      1998     1997     1996
                                 -------  -------  --------  -------  -------
                                  (in thousands, except per share data)
<S>                              <C>      <C>      <C>       <C>      <C>
Statement of Operations Data:
Revenues:
  License fees.................. $46,776  $38,657  $ 34,652  $23,053  $19,056
  Services......................  24,519   25,066    20,604   10,877    7,226
                                 -------  -------  --------  -------  -------
    Total revenues..............  71,295   63,723    55,256   33,930   26,282
Cost of revenues:
  License fees..................   1,065    1,149     1,183      917    1,105
  Services......................  13,090   14,429    10,867    6,015    4,500
                                 -------  -------  --------  -------  -------
    Total cost of revenues......  14,155   15,578    12,050    6,932    5,605
                                 -------  -------  --------  -------  -------
Gross profit....................  57,140   48,145    43,206   26,998   20,677
                                 -------  -------  --------  -------  -------
Operating expenses:
  Marketing and selling.........  35,625   31,531    27,290   21,724   17,461
  Research and development......  12,195    9,835     6,575    4,566    4,437
  General and administrative....   8,115    7,435     6,126    4,383    3,631
  Nouveau marche expenses.......     --       466       --       --       --
  Write-off of acquired
   intangible assets............     253    2,032    31,045      --       --
                                 -------  -------  --------  -------  -------
    Total operating expenses....  56,188   51,299    71,036   30,673   25,529
                                 -------  -------  --------  -------  -------
Income (loss) from operations...     952   (3,154)  (27,830)  (3,675)  (4,852)
Net interest income (expense)
 and other......................     794      114      (121)   1,124     (259)
                                 -------  -------  --------  -------  -------
Income (loss) before income
 taxes..........................   1,746   (3,040)  (27,951)  (2,551)  (5,111)
Income taxes....................    (566)    (130)      --       --       --
                                 -------  -------  --------  -------  -------
Net income (loss)............... $ 1,180  $(3,170) $(27,951) $(2,551)  (5,111)
                                 =======  =======  ========  =======  =======
Net income (loss) per share
  --basic....................... $  0.08  $ (0.23) $  (2.21) $ (0.30) $ (0.74)
  --diluted.....................    0.07    (0.23)    (2.21)   (0.30)   (0.74)
                                 =======  =======  ========  =======  =======
Shares and share equivalents
 used in per share
 calculations(1):
  --basic.......................  14,628   13,999    12,665    8,428    6,907
  --diluted.....................  17,855   13,999    12,665    8,428    6,907
                                 =======  =======  ========  =======  =======
</TABLE>
--------
(1) See Note 1 of Notes to Consolidated Financial Statements for an
    explanation of the determination of the number of Shares and Share
    equivalents used in per share calculations.

                                      27
<PAGE>

<TABLE>
<CAPTION>
                                                       June 30,
                                        ---------------------------------------
                                         2000    1999    1998    1997    1996
                                        ------- ------- ------- ------- -------
                                                    (in thousands)
<S>                                     <C>     <C>     <C>     <C>     <C>
Balance Sheet Data:
Cash and cash equivalents.............. $20,316 $21,532 $20,101 $26,044 $ 4,977
Working capital........................  21,793  17,375  21,929  25,122   4,970
Total assets...........................  52,737  45,006  43,649  41,483  19,226
Convertible bonds......................     --      --      --      --    4,272
Other long term obligations............   1,969   3,879   5,979   1,134   2,364
Shareholders' equity...................  24,082  18,025  19,799  27,057   1,197
</TABLE>

  ILOG has never declared or paid any cash dividends on its Shares. ILOG
currently intends to retain all future earnings to finance future growth and
therefore does not anticipate paying any dividends in the foreseeable future.

Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations

  This section contains trend analysis and other forward-looking statements
that are subject to risks and uncertainties. These statements are based on
current expectations and actual results may differ materially. The Company's
actual results could differ materially from those projected in the forward-
looking statements discussed herein. Factors that could cause or contribute to
such differences include but are not limited to, those set forth under "Risk
Factors" and elsewhere in this Form 20-F.

Overview

  ILOG develops, markets and supports advanced software components for user
interface, resource optimization and business rules functions that are
fundamental to the development of business applications. In 1988, the Company
began shipping software components developed in the LISP programming language.
In 1992, the Company started to transition its products to the C++ programming
language and in 1997 to Java. In 1993, the Company began shipping ILOG Views,
Solver, and Rules, which visualization, optimization and business rules
product families represented 41%, 43% and 13% respectively of the Company's
total license fee revenues in 2000. In August 1997 the Company acquired the
business of CPLEX Optimization, Inc. ("CPLEX"), located in Incline Village,
Nevada, which provides linear based optimization products written in C.

  Up until its initial public offering in February 1997, which raised $24.9
million, the Company has financed itself through a combination of venture
capital investments and interest free loans from French government agencies
and the European Union. The Company partially financed the August 1997 CPLEX
acquisition through the issuance of 1.7 million shares and promissory notes
totaling $5.0 million. In June 1998 a further financing of $10.5 million was
received from SAP A.G. in exchange for approximately 0.7 million shares.

  The Company's software development efforts are based in France except for
the CPLEX products, which are developed primarily in Incline Village, Nevada.
The Company in 2000 and 1999 made significant investments in both new products
and improving existing products resulting in research and development
expenditures growing by 24% and 50% respectively over the previous year.

  The Company derives its revenues from the sale of development licenses to
application developers and from run time or deployment licenses once
applications are developed and deployed and related services. Revenues from
license fees represented 66% and from services 34% of the Company's revenues
in 2000. Services revenue consist of consulting to facilitate the adoption of
the Company's products, maintenance and customer training. Consulting,
maintenance and training accounted for 16%, 16% and 2%, respectively, of the
Company's total revenues in 2000. Gross margins from license fees and revenues
were 98% and 47% respectively in 2000.

  Approximately 30% of the Company's sales and 55% of the Company's expenses
in 2000 were denominated in Euros or Euro equivalent currencies, with the
remainder in U.S. dollars and, to a lesser extent, other currencies.

                                      28
<PAGE>

Results of Operations

  The following table sets forth certain items from the Company's consolidated
statement of operations as a percentage of total revenues for the periods
indicated:

<TABLE>
<CAPTION>
                                                               Year Ended
                                                                June 30,
                                                             -----------------
                                                             2000  1999   1998
                                                             ----  ----   ----
<S>                                                          <C>   <C>    <C>
Revenues:
  License fees..............................................  66%   61%    63%
  Services..................................................  34    39     37
                                                             ---   ---    ---
    Total revenues.......................................... 100   100    100
                                                             ---   ---    ---
Cost of revenues:
  License fees..............................................   2     2      2
  Services..................................................  18    22     20
                                                             ---   ---    ---
    Total cost of revenues..................................  20    24     22
                                                             ---   ---    ---
Gross margin................................................  80    76     78
                                                             ---   ---    ---
Operating expenses:
  Marketing and selling.....................................  50    49     50
  Research and development..................................  17    15     12
  General and administrative................................  11    12     11
  Nouveau marche expenses................................... --      1    --
  Write-off of acquired intangible assets...................   1     4     56
                                                             ---   ---    ---
    Total operating expenses................................  79    81    129
                                                             ---   ---    ---
Income (loss) from operations...............................   1    (5)   (51)
Net interest income (expense), income taxes and other.......   1   --     --
                                                             ---   ---    ---
Net income (loss)...........................................   2%   (5)%  (51)%
                                                             ===   ===    ===
</TABLE>

 Revenues

  Total revenues increased to $71.3 million in 2000 from $63.7 million in
1999, and from $55.3 million in 1998, representing increases of 12% and 15%,
respectively, over the previous year. The rate of growth in 2000 reflects the
transition of the Company's channels of distribution from end users to ISVs,
which have a longer selling cycle, and the impact of spending diversions by
customers from new application development to Year 2000 readiness. The rate of
growth in 1999 reflects the restructuring of the US sales organization and
spending diversions by customers from new application development to Year 2000
readiness.

  During 2000, 1999 and 1998, revenues generated from customers in North
America totaled approximately $32.0 million, $22.5 million and $22.4 million;
in Europe $32.6 million, $34.5 million and $27.9 million; and Asia $6.7
million, $6.7 million and $5.0 million; respectively. The 43% growth in North
American revenues and the 6% decrease in European revenues in 2000 over 1999
reflects the decline of the Euro and the transition of the Company's channel
of distribution from end users to ISVs, which have a greater proportion
located in North America, combined with the general strength of the internet
driven economy in the U.S.

  In 2000, 1999 and 1998 SAP A.G. accounted for 10%, 13% and 7% of total
revenues, respectively. Revenues from a single customer in a particular
quarter can materially affect the Company's revenues and operating results for
such period. See "Risk Factors--Fluctuations in Operating Results."

License Fees. Revenues from license fees increased to $46.8 million in 2000
from $38.7 million in 1999, and from $34.7 million in 1998 representing
increases of 21% and 12%, respectively. These increases in license fees
reflect the growing market acceptance of the Company's products and the
expansion of the Company's product offerings. During this period, the Company
was generally able to maintain the price levels of its products.

                                      29
<PAGE>

  Services. Revenues from services consist of consulting, maintenance and
training. Consulting and training services are billed by the person day or on
a fixed price basis. Maintenance services are typically available at an annual
fee of 15% of the standard software list price. Cash related to maintenance
contracts is generally received in advance while revenues are deferred and
recognized ratably over the term of the maintenance agreement, which is
typically 12 months. Revenues from services decreased to $24.5 million in 2000
from $25.1 million in 1999 and increased from $20.6 million in 1998,
representing a decrease of 2% and an increase of 22%, respectively over the
prior year. The decrease in revenues from services in 2000 over 1999 was due
to lower consulting revenues reflecting spending diversions by customers from
new application development to Year 2000 preparedness. The increase in
revenues from services in 1999 over 1998 were due primarily to increased
maintenance revenue.

 Gross Margin

  The following table sets forth the gross margin for both categories of
revenues for 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                    Year Ended
                                                                     June 30,
                                                                  ----------------
                                                                  2000  1999  1998
                                                                  ----  ----  ----
   <S>                                                            <C>   <C>   <C>
   Gross Margin:
     License fees................................................  98%   97%   97%
     Services....................................................  47    42    47
       Total revenues............................................  80    76    78
</TABLE>

  License Fees. The Company's gross margin for license fees is currently
affected by the pricing of its products as it relates to documentation and
packaging costs. Cost of license fees, consisting primarily of documentation,
packaging and freight expenses, remained level at $1.1 million in 2000 and
1999, and decreased from $1.2 million in 1998 representing 2%, 3% and 3% of
revenues from license fees in 2000, 1999 and 1998, respectively. The payment
of royalties to third parties is currently not a significant component of the
cost of license fees; however, in the event the Company significantly
increases the incorporation of third-party technology in its products, the
payment of such royalties may have the effect of lowering gross margins.

  Services. The Company's gross margin for services is primarily impacted by
the mix of consulting, maintenance and training revenues, where consulting and
training revenues are relatively lower margin activities. The need for
consulting and training services by the Company's customers to facilitate
their adoption of the Company's products and the Company's ability to satisfy
the demand for such services frequently has a direct impact on the Company's
ability to generate license fees. Cost of services, consisting of employee-
related expenses for these services, decreased to $13.1 million in 2000 from
$14.4 million in 1999 and increased from $10.9 million in 1998. The services
gross margin increased to 47% in 2000, from 42% in 1999 and 47% in 1998,
respectively, reflecting primarily the proportion of the Company's consulting
activities in relation to higher margin maintenance revenues.

 Operating Expenses

  Marketing and Selling. Marketing and selling expenses consist primarily of
salaries and other payroll related expenses such as incentive compensation,
promotional marketing activities, customer pre-sales technical support and
overhead costs relating to occupancy. Marketing and selling expenses increased
to $35.6 million in 2000 from $31.5 million in 1999 and from $27.3 million in
1998, representing 50%, 49% and 50% of total revenues, respectively. The level
of marketing and selling expenses as a percentage of total revenues is
attributable to the worldwide expansion of the Company's marketing and selling
organization. The increase in marketing and selling expenses over the last
three years is due primarily to sales and marketing headcount growth which
increased to 204 at June 30, 2000 from 199 at June 30, 1999 and 177 at June
30, 1998. The increase in headcount resulted from growth in the U.S. and the
opening of offices in Japan. The Company intends to continue the expansion of
its sales and marketing organization to promote its products and provide
customer support capability. Accordingly, the Company anticipates that
marketing and selling expenses will continue to increase in absolute terms.

                                      30
<PAGE>

  Research and Development. Research and development expenses consist
principally of personnel costs, overhead costs relating to occupancy,
equipment depreciation and travel, less amounts received from French
government agencies and the European Union to reduce the cost to the Company
of certain specific research and development projects. This financial support
is recorded as a reduction of research and development expenses in the periods
the projects are undertaken and the related expenses are incurred. The
following table sets forth research and development expenses and the amounts
of government funding for 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                              Year Ended June 30,
                             ------------------------
                              2000     1999     1998
                             -------  -------  ------
                                 (in thousands)
   <S>                       <C>      <C>      <C>
   Gross research and
    development expenses...  $13,075  $10,576  $7,204
   Less government
    funding................     (880)    (741)   (629)
                             -------  -------  ------
   Research and development
    expense, net of
    funding................  $12,195  $ 9,835  $6,575
                             =======  =======  ======
</TABLE>

  Research and development expenses increased to $12.2 million in 2000 from
$9.8 million in 1999 and from $6.6 million in 1998, representing 17%, 15% and
12% of total revenues, respectively. The increases in research and development
expenses was due to higher employment costs, the development of ILOG OPL
Studio and ILOG Configurator in 1999 and significant upgrades to the Company's
Visualization and Business Rules product lines in 2000. During 2000 research
and development staffing increased by 6 to 112 at June 30, 2000. The Company
has not capitalized any software development costs and all research and
development costs have been expensed as incurred. See "Risk Factors--Risk of
Loss of Government Research and Development Funding" and Note 1 of Notes to
Consolidated Financial Statements.

  General and Administrative. General and administrative expenses consist
primarily of personnel and related overhead costs for finance and general
management. General and administrative expenses increased to $8.1 million in
2000 from $7.4 million in 1999 and from $6.1 million in 1998, representing
11%, 12% and 11% of total revenues, respectively. The increase in general and
administrative expenses is due to increased staffing to support the Company's
growth and changes in the Company's allowance for doubtful accounts. From
June 30, 1997 to June 30, 2000, the number of the Company's employees engaged
in general and administrative functions increased from 39 to 61.

  Nouveau Marche expenses. In December 1998 the Company listed its shares on
Le Nouveau Marche stock exchange in Paris. The expense related to such listing
totaled $0.5 million and was charged to results of operations at that time.

  Write-off of Acquired Intangible Assets. Write-off of acquired intangible
assets of $0.3 million in 2000 relates to trademarks acquired from CPLEX in
1997. In 1999 $1.8 million was written-off relating to the acquisition of
software in December 1998 that was utilized in the development of OPL Studio
which was introduced in March 1999. Write-off of acquired intangible assets of
$31.0 million in 1998 relates primarily to the expensing of software under
development or earlier versions thereof nearing the end of their life cycle,
which was acquired from CPLEX in 1997.

 Interest Income (Expense) and Other

  Net interest income (expense) and other totaled $0.8, $0.1 and $(0.1)
million, in 2000, 1999 and 1998, respectively. In 2000 net interest income
(expense) and other reflects primarily realized exchange gains with interest
income and expense offsetting each other. In 1999 and 1998 net interest income
(expense) and other reflects primarily interest expense arising from the
promissory notes issued in connection with the CPLEX acquisition after offset
of income from the Company's cash equivalent investments.

 Currency Fluctuations

  The Company operates on a multinational basis and a significant portion of
its business is conducted in currencies other than the U.S. dollar, the
financial reporting currency. A significant portion of the Company's

                                      31
<PAGE>

revenues and expenses are denominated in Euros or Euro equivalent currencies,
and the remainder in U.S. dollars and other currencies. Fluctuations in the
value of the currencies in which the Company conducts its business relative to
the U.S. dollar have caused and will continue to cause dollar-translated
amounts to vary from one period to another. Also currency rate movements on
non-US dollar denominated assets and liabilities, including intercompany
accounts, can result in the reporting of unrealized exchange gains or losses
in the Company's statement of operations. Due to the number of currencies
involved, the constantly changing currency exposures and the volatility of
currency exchange rates, the Company cannot predict the effect of exchange
rate fluctuations upon future operating results.

  Under the Company's accounting policy for foreign currency translation, the
results of the Company and each of its subsidiaries are measured in the
currency in which that entity primarily conducts its business (the functional
currency). The functional currencies of the Company and its subsidiaries are
their respective local currencies in accordance with Statement of Financial
Accounting Standard No. 52, "Foreign Currency Translation." All assets and
liabilities in the balance sheets of entities whose functional currency is not
the U.S. dollar are translated into U.S. dollar equivalents at exchange rates
as follows: (i) asset and liability accounts at year-end rates; and (ii)
income statement accounts at weighted average exchange rates of the year.
Translation gains or losses are recorded in shareholders' equity, and
transaction gains and losses are reflected in net income (loss). The net
exchange gain for 2000, 1999 and 1998 was $0.7, $0.2 and $0.1 million,
respectively. These amounts represent transaction gains and are included in
net interest income (expense) and other. To date, the Company has not
undertaken hedging transactions to cover its currency transaction exposure but
may undertake such transactions in a limited manner in the future. See Note 1
of Notes to Consolidated Financial Statements.

 Income Taxes

  The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes."

  Income tax expense in 2000 and 1999 was $0.6 million and $0.1 million
respectively reflecting tax charges in certain sales subsidiaries that were
profitable on a tax basis in those years.

  At June 30, 2000, the Company had net operating loss carryforwards from
various tax jurisdictions of approximately $24.0 million, of which $8.8
million were in France with no expiration date and $9.9 million were in the
U.S. expiring between 2000 and 2020 if not utilized. Pursuant to the U.S.
Internal Revenue Code, use of the U.S. net operating loss carryforwards may be
limited if a cumulative change in ownership of more than 50% occurs within any
three-year period.

  As of June 30, 2000, a valuation allowance of $14.6 million had been
provided against total deferred tax assets of $14.6 million (which consists
primarily of the tax benefit of net operating loss carryforwards and the
amortization of acquired intangible assets). The Company's expectation for
realizing the deferred tax asset and the determination of the amount of the
valuation allowance is based upon the existence of both taxable temporary
differences and the likelihood of sufficient taxable income in the
carryforward period of certain jurisdictions.

Liquidity and Capital Resources

  Over the last three years, the Company has financed its operations,
investments in capital equipment and intangible assets acquired from CPLEX
through the issuance of equity securities for approximately $20.0 million and
$5.0 million of loans from the CPLEX vendors.

  The Company has lines of credit with a French bank allowing for a maximum
borrowing of approximately $2.9 million available until May 1, 2001. At June
30, 2000, $1.6 million was outstanding under this facility. The lines of
credit bear interest at the rate of EURIBOR (offer rate determined by the
Banking Federation of the European Union) plus 1.5%, which at June 30, 2000,
corresponded to an effective rate of 6.1%.

                                      32
<PAGE>

  As of June 30, 2000 and 1999, the Company had cash and cash equivalents of
$20.3 million and $21.5 million, respectively, and working capital of $21.8
million and $17.4 million, respectively. The net cash decrease of $1.2 million
in 2000 was due to $3.0 million used by operating activities encompassing a
net decrease in working capital items, $1.5 million of property and equipment
expenditure, $2.0 million in loan repayments, and $1.0 million exchange rate
effect less $6.3 million received for shares issued in connection with
employee stock option and purchase plans.

  Accounts receivable increased to $23.4 million at June 30, 2000 from $14.8
million at June 30, 1999. The increase in accounts receivable reflects the
growth in revenues in the period and payment terms being offered to certain
customers.

  In 1999 the Company was provided cash from operations of $5.0 million
reflecting the changes in working capital offsetting the operating loss for
the year. In 1998 the Company was provided cash from operations of $1.6
million reflecting the Company's operating profitability before the write-off
of acquired intangible assets and after adjusting for changes in working
capital.

  The Company's investing activities have consisted primarily of expenditure
on fixed assets, which totaled $1.5 million, $2.4 million and $1.9 million in
2000, 1999 and 1998, respectively. In 1998, as part of the CPLEX acquisition
the Company also acquired $31.8 million of intangible assets consisting
primarily of software products under development or earlier versions thereof
nearing the end of their life cycle. As a result, $31.0 million thereof was
written-off in 1998.

  In 2000, 1999 and 1998, the Company's financing activities provided $4.3
million, $1.0 million and $10.7 million respectively. In 2000, $6.3 million
was from the issuance of shares under employee share option and share plan, in
1999 $2.0 million was from the issuance of shares under employee share option
and share purchase plans, and in 1998 $10.5 million was from the issuance of
shares to SAP A.G. for cash.

  While operating activities may provide cash in certain periods to the extent
the Company may experience growth in the future, the Company anticipates that
its operating and investing activities may use cash and, consequently, such
growth may require the Company to obtain additional sources of financing.

Introduction of the Euro

  The Euro was introduced on January 1, 1999 in eleven European Monetary Union
countries including France where the Company has its headquarters and a
significant part of its worldwide operations is based, and in Germany and
Spain where it has sales subsidiaries. Legacy currencies however will continue
to be used as legal tender through January 1, 2002. The Company believes that
the introduction of the Euro will simplify the conduct of its business in the
above countries over time, however changes and/or improvements will need to be
made to its accounting and related internal systems.

  The Company has commenced planning and the training of its personnel to
handle the currency change and in addition the Company is also assessing the
impact of the Euro on its internal IT and non-IT systems. The Company plans to
implement a new enterprise accounting system in 2001 and modify certain
existing systems to accommodate the introduction of the Euro. The Company
believes that such systems and system modifications will aid in ensuring that
it will be able to accommodate the accounting and reporting requirements of
the new currency.

  The Company does not expect to have to make major investments to handle the
changeover, other than in IT systems. There however can be no assurance that
new systems will be introduced or existing systems modified in a timely and/or
effective manner such that the Company will be able to properly handle the
changeover to the Euro without causing a disruption to its business processes
and operations, which in turn may result in a material adverse effect on the
Company's business, financial condition and results of operations.

                                      33
<PAGE>

                                 RISK FACTORS

  In addition to the other information contained and incorporated by reference
in this Form 20-F, the following factors should be carefully considered in
evaluating the Company and its business:

History of Losses; Accumulated Deficit; Future Operating Results Uncertain

  The Company has incurred net losses in four of the last five fiscal years.
As of June 30, 2000, the Company had an accumulated deficit of approximately
$41.6 million. There can be no assurance that the Company will be profitable
on a quarterly or annual basis in the future. The Company's operating history
and the relative immaturity of its market, together with the factors described
under "Fluctuations in Operating Results" and "Seasonality of Operating
Results," make the prediction of future operating results impossible. The
Company's past financial performance should not be considered indicative of
future results. The Company has experienced revenue growth in recent periods
and a slow-down in the rate of growth in 2000 and 1999. There can be no
assurance that the Company's revenues will continue to increase or will not
decrease. Future operating results will depend on many factors, including the
growth of the market for the Company's object oriented components, demand for
the Company's products and services, the level of competition, the Company's
success in expanding its direct sales force and indirect distribution
channels, and the ability of the Company to develop and market new products
and product enhancements and to control costs, as well as general economic
conditions. See "Fluctuations in Operating Results," "Risk of Loss of
Government Research and Development Funding," "Seasonality of Operating
Results" and "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations."

Fluctuations in Operating Results

  The Company's operating results have varied significantly in the past and
may vary significantly in the future, on a quarterly and an annual basis, as a
result of a number of factors, many of which are outside the Company's
control. These factors include demand for the Company's products and services,
the size, timing and structure of significant licenses and/or royalty payments
by customers, cost overruns on the Company's fixed price consulting contracts,
changes in the mix of products and services licensed or sold by the Company,
product life cycles, the publication of opinions about the Company, its
products and object oriented technology by industry analysts, changes in
pricing policies by the Company or its competitors, changes in the method of
product distribution (including the mix of direct and indirect channels),
customer order deferrals in anticipation of product enhancements or new
product offerings by the Company or its competitors, customer cancellation of
major planned software development programs, the grant of research and
development expense reimbursements by government agencies and the timing of
such research and development reimbursements. Moreover, declines in general
economic conditions, could precipitate significant reductions in corporate
spending for information technology, which could result in delays or
cancellations of orders for the Company's products. The Company's expense
levels are relatively fixed and are based, in significant part, on
expectations of future revenues. Consequently, if revenue levels are below
expectations, expense levels could be disproportionately high as a percentage
of total revenues, and operating results would be immediately and adversely
affected. The Company has historically operated with little backlog because
its products are generally shipped as orders are received. As a result,
revenues from license fees and/or royalties in any quarter are substantially
dependent on orders booked and shipped in that quarter and on sales by the
Company's ISVs, distributors and other resellers. Sales derived through
indirect channels are harder to predict and may have lower margins than direct
sales. The Company also believes that the purchase of its products is
relatively discretionary as was experienced in 2000 and 1999 when its
customers shifted their spending from new applications to Year 2000 readiness
and generally involves a significant commitment of a customer's capital
resources. Therefore, any downturn in any potential customer's business would
have a significant impact on the Company's revenues and quarterly results. In
addition, the Company has historically recognized a substantial portion of its
revenues from sales booked and shipped in the last month of a quarter such
that the magnitude of quarterly fluctuations may not become evident until late
in, or at the end of, a particular quarter. Because a number of the Company's
individual orders and/or royalties are for significant revenue, the Company's
operating expenses are based on anticipated revenue levels and a high
percentage of the Company's expenses are relatively fixed, the

                                      34
<PAGE>

failure to ship a significant order in a particular quarter could
substantially adversely affect revenues and operating results for such
quarter. To the extent that significant sales occur earlier than expected,
operating results for subsequent quarters may be adversely affected. Revenues
are difficult to forecast because the market for the Company's products is
rapidly evolving. The Company may choose to reduce prices or increase spending
in response to competition or to pursue new market opportunities. If new
competitors, technological advances by existing competitors or other
competitive factors require the Company to invest significantly greater
resources in research and development efforts, the Company's future operating
results may be adversely affected. Due to these and other factors, the
Company's quarterly revenues, expenses and operating results could vary
significantly in the future, and period-to-period comparisons should not be
relied upon as indications of future performance. There can be no assurance
that the Company will be able to grow in future periods or that it will be
able to sustain its level of revenues o its rate of revenue growth on a
quarterly or annual basis. See "Risks Associated with Sales Cycle," "Risk of
Loss of Government Research and Development Funding" and "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations."

Market Acceptance of Object Oriented Technology

  The Company's products are designed for use in object oriented software
application development. Object oriented applications are characterized by
technology, development style and programming languages that differ from those
used in traditional software applications. Object oriented technology offers
greater flexibility and re-usability of code than traditional technologies.
Object oriented languages offer significant capabilities not available from
traditional programming languages, but require greater discipline and
attention to detail from developers. In addition, object oriented modeling and
analysis techniques are more sophisticated than traditional techniques. To
transform a software application written in a traditional programming language
into an object oriented application would involve significant re-design and
re-architecture. In many cases, every line of code would have to be re-
written. The Company's growth depends upon continued growth of the market for,
and broader acceptance of, object oriented technology. There can be no
assurance that the market for the Company's products or services will grow or
be sustained or that, if it does, the Company will benefit from such growth.
The acceptance of object oriented technology depends upon the widespread
adoption of object oriented programming, and there can be no assurance as to
the rate or scale of such adoption. For example, the number of software
developers using object oriented technology is relatively small compared to
the number of developers using more traditional software development
technologies. The adoption of object oriented technology by software
programmers who have traditionally used other technology requires
reorientation to significantly different programming methods, and there can be
no assurance that the acceptance of object oriented technology will expand
beyond sophisticated programmers who were early adopters of the technology.
Furthermore, there can be no assurance that potential customers will be
willing to make the investment required to retrain programmers to build
software using object oriented technology rather than structured programming
techniques or other technologies. If the market for object oriented technology
fails to grow or grows more slowly than anticipated, the Company's business,
operating results and financial condition would be materially adversely
affected.

  The market for object oriented technology is characterized by a lack of
standards and numerous competitors in the areas of components, methodology and
services. The Company's future financial performance will depend in part upon
the development of standards that the Company's products address. There can be
no assurance that the Company will be able to respond effectively to the
evolving requirements of the market. For example, to date the Company has
focused its efforts on the C, C++ and Java programming languages. Should these
languages lose acceptance in the marketplace or be replaced by other advanced
languages, the Company's business, operating results and financial condition
would be materially adversely affected. See "Business Software Component
Technology" and "Products."

Market Acceptance of the Company's Products

  The Company's future growth depends upon market acceptance of its products.
There can be no assurance that a significant number of organizations will
choose to use the Company's products, or that they will do so in a

                                      35
<PAGE>

time frame that will benefit the Company. In particular, many of the Company's
customers have licensed only small quantities of the Company's components, and
there can be no assurance that these or new customers will license additional
components from the Company or broadly implement object oriented technology.
Industry data indicate that many complex software development projects are
abandoned before completion or fail to satisfy user requirements, often after
the expenditure of substantial amounts of money and time. While the Company
believes that the components and professional services that it provides can
increase the likelihood that a software development project will be completed
successfully, the Company participates in an industry with an inherently high
failure rate and there can be no assurance that the Company's customers will
achieve success when using the Company's products and services. Any publicized
performance problems relating to object oriented technology or products
offered by the Company or by any competitor of the Company could also slow
customer adoption of the Company's products. Moreover, to the extent that the
Company is associated with unsuccessful customer projects, even if due to
factors beyond the Company's control, the Company's reputation and competitive
position could be materially and adversely affected. See "Business Products."

Risks Associated with Sales Cycle

  The Company's sales cycle is generally three to six months or more and
varies substantially from customer to customer. Due in part to the strategic
nature of the Company's products, potential customers are typically cautious
in making product acquisition decisions. The decision to license the Company's
products generally requires the Company to provide a significant level of
education to prospective customers regarding the uses and benefits of the
Company's products, and the Company must frequently commit substantial
presales support and consulting resources. The Company has been constrained in
its ability to provide consulting resources as a result of a lack of trained
personnel, which may cause sales cycles to be lengthened or result in the loss
of sales.

  Sales of licenses and/or royalty receipts are subject to a number of risks
over which the Company has little or no control, including customers'
budgetary constraints, customers' internal acceptance reviews, the success and
continued internal support of customers' own development efforts, the efforts
of ISVs and distributors and the possibility of cancellation of projects by
customers. The uncertain outcome of the Company's and/or ISV's sales efforts
and the length of its sales cycles could result in substantial fluctuations in
operating results. If sales and/or royalties forecasted from a specific
customer for a particular quarter are not realized in that quarter, the
Company is unlikely to be able to generate revenues from alternate sources in
time to compensate for the shortfall. As a result, and due to the relatively
large size of some orders or royalties, a lost or delayed sale could have a
material adverse effect on the Company's quarterly operating results.
Moreover, to the extent that significant sales occur earlier than expected,
current operating results and/or those of subsequent quarters may be adversely
affected. See "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations."

Risk of Loss of Government Research and Development Funding

  The Company has received significant amounts of research and development
funding from the European Union and, to a lesser extent, agencies of the
French government, which approximated $880,000, $741,000 and $629,000 for
2000, 1999 and 1998, respectively. Such funding has been netted against, and
has therefore reduced, the Company's reported research and development
expenses on a dollar for dollar basis. Relevant authorities award research and
development funding on a discretionary basis based on applications made by the
Company for specific product related projects. The Company has contracts that
provide for additional research and development funds through June 2002 based
upon recent funding applications. However, there can be no assurance that any
future grants will be made. Failure to receive future funding, a reduction in
existing levels of funding, or delays in receipt of additional funding may
cause the Company's research and development expenses to increase and may
adversely affect the Company's operating results on a dollar for dollar basis.
See "Fluctuations in Operating Results" and "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations."

                                      36
<PAGE>

Seasonality of Operating Results

  A significant proportion of the Company's sales come from Europe. Similar to
many companies in the software industry with significant sales outside of the
U.S., the Company generally realizes lower revenues (i) in the September
quarter than in the immediately preceding quarter due primarily to reduced
economic activity in Europe in the summer months; and (ii) to a lesser extent,
in the March quarter compared to the immediately preceding quarter due to the
concentration by some customers of purchases in the fourth quarter of the
calendar year, and their consequently lower purchasing activity during the
following quarter. See "Fluctuations in Operating Results" and "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations."

Rapid Technological Change and Introduction of New Products and Product
Enhancements

  The market for the Company's products and services is characterized by rapid
technological change, dynamic customer demands and frequent introductions of
new products and product enhancements. Customer requirements for products can
change rapidly as a result of innovations or changes within the computer
hardware and software industries, the introduction of new products and
technologies (including new hardware platforms and programming languages) and
the emergence, evolution or widespread adoption of industry standards. For
example, increasing commercial use of the internet may give rise to new
customer requirements and new industry standards. There can be no assurance
that the Company will be successful in modifying its products and services to
address these requirements and standards. The actual or anticipated
introduction of new products, technologies and industry standards can render
existing products obsolete or unmarketable or result in delays in the purchase
of such products. As a result, the life cycles of the Company's products are
difficult to estimate. The Company must respond to developments rapidly and
make substantial product development investments. Any failure by the Company
to anticipate or respond adequately to technology developments and customer
requirements, or any significant delays in product development or
introduction, could result in loss of competitiveness and/or revenues.

  The Company's future success will depend in large part on its ability to
improve its current technologies and to develop and market new products and
product enhancements that address these changing market requirements on a
timely basis. There can be no assurance that the Company will be successful in
developing and marketing new products or product enhancements, that the
Company will not experience difficulties that delay or prevent the successful
development, introduction or marketing of such products or enhancements or
that any new products or product enhancements will adequately address market
requirements and achieve market acceptance. As is customary in the software
industry, the Company has in the past experienced delays in the introduction
of new products and features, and may experience such delays in the future. If
the Company is unable, for technological or other reasons, to develop new
products or enhancements of existing products in a timely manner in response
to changing market conditions or customer requirements, the Company's
business, operating results and financial condition would be materially
adversely affected. See "Business Research and Development."

Product Concentration Risk

  The Company currently generates approximately 87% of its total license fees
from the ILOG visualization and ILOG optimization product families. The
Company expects that revenues from these two product families will continue to
represent a substantial portion of its total license fees for the foreseeable
future. As a result, any factor adversely affecting licenses of either ILOG
Views, ILOG Solver or ILOG CPLEX would have a material adverse effect on the
Company's business, operating results and financial condition. The Company's
future financial performance will depend in significant part on the Company's
successful development and introduction, and customer acceptance, of new and
enhanced versions of is visualization and optimization products. In addition,
to the extent that competitive pressures or other factors result in
significant price erosion on these products, the Company's results of
operations would be materially adversely affected. See "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations," "Business Products" and "Competition."

                                      37
<PAGE>

Competition

  The Company believes that the primary competitive factors in its markets are
product performance and features, sales and distribution capabilities and
total cost. The Company's present direct competitors include a number of
private and public companies such as Brokat A.G., Cosytech, Dash Associates
Limited, Dash Optimization, Inc., Dynatech Corporation, IBM, Selectica, Inc.,
SL Corporation, Trilogy Software, Inc., and 2order.com. The Company also
competes with companies that provide packaged software with respect to
specific applications. In addition, virtually all of the Company's customers
have significant investments in their existing solutions and have the
resources necessary to enhance existing products and to develop future
products. These customers have or may develop and incorporate competing
technologies into their systems, thereby replacing the Company's current or
proposed components. This would eliminate their need for the Company's
services and components and limit future opportunities for the Company. The
Company therefore is required to persuade development personnel within these
customer organizations to outsource the development of their software and to
provide products and solutions to these customers that cost-effectively
compete with their internally developed products. The Company expects to face
additional competition from other established and emerging companies if the
market for its components continues to develop and expand. In addition,
current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase
the ability of their products to address the needs of the Company's current
and prospective customers. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly gain significant market
share. New or enhanced products introduced by existing or future competitors
could increase the competition faced by the Company's products. Increased
competition could result in fewer customer orders, price reductions, reduced
transaction size, reduced gross margins and loss of market share, any of which
could have a material adverse effect on the Company's business, operating
results and financial condition. There can be no assurance that the Company
will be able to maintain prices for its products at levels that will enable
the Company to market its products profitably. Any decrease in prices, as a
result of competition or otherwise, could have a material adverse effect on
the Company's business, operating results and financial condition.

  Some of the Company's current, and many of the Company's potential,
competitors have longer operating histories, significantly greater financial,
technical, marketing, service and other resources, significantly greater name
recognition, broader product offerings and a larger installed base of
customers than the Company. In addition, the Company's current and potential
competitors may have well-established relationships with current and potential
customers of the Company. As a result, such competitors may be able to devote
greater resources to the development, promotion and sale of their products,
may have more direct access to corporate decision-makers based on previous
relationships and may be able to respond more quickly to new or emerging
technologies and changes in customer requirements. There can be no assurance
that the Company will be able to compete successfully against current or
future competitors or that competitive pressures will not have a material
adverse effect on the Company's business, operating results and financial
condition.

Dependence upon Development of Sales and Marketing Force

  The Company has made a significant investment in recent years in the
expansion of its sales and marketing force, primarily in the U.S. and Asia,
and plans to continue to expand its sales and marketing force. The Company's
future success will depend in part upon the productivity of its sales and
marketing force and the ability of the Company to continue to attract,
integrate, train, motivate and retain new sales and marketing personnel. There
can be no assurance that the Company's recent and planned investment in sales
and marketing will ultimately prove to be successful or that the incremental
revenues generated will exceed the significant incremental costs associated
with these efforts.

  In addition, there can be no assurance that the Company's sales and
marketing organization will be able to compete successfully against the
significantly more extensive and better funded sales and marketing operations
of many of the Company's current and potential competitors. The Company's
inability to develop and manage its sales and marketing force expansion
effectively could have a material adverse effect on the Company's business,
operating results and financial condition. See "Description of Business--Sales
and Marketing."

                                      38
<PAGE>

Dependence on Key Personnel

  The Company's future success will depend in significant part upon the
continued service of its key technical, sales and senior management personnel,
including the Company's President and Chief Executive Officer, Pierre Haren.
The Company is particularly dependent upon its technical personnel with
expertise in object oriented technology. The loss of the services of one or
more of the Company's key employees could have a material adverse effect on
the Company's business, operating results and financial condition. The
Company's future success will depend on its ability to attract, integrate,
train, motivate and retain highly qualified technical, sales and managerial
personnel, and there can be no assurance that the Company will be able to do
so. Competition for such personnel is intense, especially the competition for
technical personnel with expertise in object oriented technology. The Company
expects that such competition will continue for the foreseeable future, and
may intensify. If the Company is unable to hire qualified personnel on a
timely basis in the future, the Company's business, operating results and
financial condition would be materially adversely affected. Additions of new
personnel and departures of existing personnel, particularly in key positions,
can be disruptive, might lead to additional departures of existing personnel
and could have a material adverse effect upon the Company's business,
operating results and financial condition. See "Description of Business--Sales
and Marketing, Employees" and "Directors and Officers of Registrant."

  The addition and assimilation of new personnel may be made more difficult by
the fact that the Company's research and development personnel are located
primarily in France, and its sales and marketing activities are located on
three continents, thus requiring the coordination of organizations separated
by geography and time zones, and the interaction of personnel with disparate
business backgrounds, languages and cultures. See "Risks Associated with
Worldwide Operations."

Risks Associated with Worldwide Operations

  The Company's engineering and research and development operations are
located in France except for the CPLEX products which are primarily developed
in Incline Village, Nevada, and its sales and marketing operations are located
on three continents. The geographic distance between these locations has in
the past led, and could in the future lead, to logistical and communications
difficulties. There can be no assurance that the geographic, time zone,
language and cultural differences between the Company's French, North American
and Asia personnel and operations will not result in problems that materially
adversely affect the Company's business, operating results and financial
condition. Further, the Company's operations may be directly affected by
economic and political conditions in the countries where the Company does
business.

  The Company expects to commit additional time and resources to expanding its
worldwide sales and marketing activities, localizing its products for selected
markets and developing local sales and support channels. There can be no
assurance that such efforts will be successful. Failure to sustain or increase
worldwide revenue, especially in North America and Asia, could have a material
adverse effect on the Company's business, operating results and financial
condition. Worldwide operations are subject to a number of risks, including
the costs of localizing products for different countries, longer accounts
receivable collection periods in certain geographic regions, especially
Europe, and greater difficulty in accounts receivable collections, unexpected
changes in regulatory requirements, dependence on independent resellers and
technology standards, import and export restrictions and tariffs, difficulties
and costs of staffing and managing international operations, potentially
adverse tax consequences, political instability, the burdens of complying with
multiple, potentially conflicting laws and the impact of business cycles and
regional economic instability. Approximately 30% of the Company's sales and
55% of the Company's expenses in 2000 were denominated in Euros or Euro
equivalent currencies, with the remainder in U.S. dollars and, to a lesser
extent, other currencies. An increase in the value of the Euro relative to the
U.S. dollar will result in lower profitability in U.S. dollar terms. See
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations" and "Description of Business--Sales and Marketing."

                                      39
<PAGE>

Management of Potential Growth

  The Company has recently experienced a period of growth in revenues and
employees that has placed a significant strain on its management systems and
resources. Further increases in the number of employees are anticipated in
2001. Much of this growth has occurred and will occur in North America and
Asia, thus increasing the Company's need for information and communication
systems. The Company's ability to manage any future growth effectively will
require it to continue to improve its operational, financial and management
controls, accounting and reporting systems and procedures and other internal
processes, and there can be no assurance that the Company will be able to make
such improvements in an efficient and timely manner or that such improvement
will be adequate. If the Company's management is unable to manage growth and
change effectively, the Company's business, operating results and financial
condition could be materially adversely affected.

Acquisitions

  The Company may in the future pursue other acquisitions of complementary
product lines, technologies or businesses. Future acquisitions by the Company
could result in potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities and amortization expenses
related to goodwill and other intangible assets, which could materially
adversely affect any Company profitability. In addition, acquisitions, such as
CPLEX, involve numerous risks, including difficulties in the assimilation of
the operations, technologies and products of the acquired companies, the
diversion of management's attention from other business concerns, risks of
entering markets in which the Company may have limited direct prior
experience, operating companies in different geographical locations with
different cultures, and the potential loss of key employees of the acquired
company. There are currently no agreements with respect to any acquisitions.
In the event that such an acquisition does occur, however, there can be no
assurance as to the effect thereof on the Company's business, financial
condition or operating results.

Risk of Software Defects; Product Liability

  As a result of their complexity, software products frequently contain
undetected errors or failures, especially when first introduced or when new
versions or enhancements are released. There can be no assurance that, despite
testing by the Company and testing and use by current and potential customers,
errors will not be found in new products and product enhancements released by
the Company in the future. The occurrence of such errors could result in
significant losses to the Company or a customer, especially if such errors
occur in strategic applications. Such occurrence could also result in reduced
market acceptance of the Company's products, which would have a material
adverse effect on the Company's business, operating results and financial
condition. The Company's license agreements with its customers typically
contain provisions designed to limit the Company's exposure to potential
product liability and other claims. It is possible, however, that the
limitation of liability provisions contained in the Company's license
agreements, especially unsigned "shrink-wrap" licenses, may not be effective
under the laws of certain jurisdictions. Consequently, the sale and support of
the Company's software by the Company entail the risk of such claims in the
future. The Company currently has limited insurance against product liability
risks or errors or omissions coverage, and there can be no assurance that
additional insurance will be available to the Company on commercially
reasonable terms or at all. A product liability claim or claim for economic
loss brought against the Company could have a material adverse effect upon the
Company's business, operating results and financial condition.

Currency Fluctuations

  The Company publishes its financial statements in U.S. dollars. The Company
operates on a multinational basis and a significant portion of its business is
conducted in currencies other than the U.S. dollar, the financial reporting
currency. Approximately 30% of the Company's sales and 55% of the Company's
expenses in 2000 were denominated in Euros or Euro equivalent currencies, with
the remainder in U.S. dollars and, to a lesser extent, other currencies. An
increase in the value of the Euro relative to the U.S. dollar will result in
lower

                                      40
<PAGE>

profitability in U.S. dollar terms. See "Management's Discussion and Analysis
of Consolidated Financial Condition and Results of Operations" and
"Description of Business--Sales and Marketing." Fluctuations in the value of
the currencies in which the Company conducts its business relative to the U.S.
dollar have caused and will continue to cause dollar-translated amounts to
vary from one period to another. Also currency rate movements on the non-U.S.
dollar denominated assets and liabilities, including intercompany accounts,
can result in the reporting of unrealized exchange gains or losses in the
Company's statement of operations. Due to the number of currencies involved,
the constantly changing currency exposures and the volatility of currency
exchange rates, the Company cannot predict the effect of exchange rate
fluctuations upon future operating results. To date, the Company has not
undertaken hedging transactions to cover its currency transaction exposure but
may undertake such transactions in a limited manner in the future. See
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations" and "Quantitative and Qualitative Disclosures about
Market Risk."

Protection of Intellectual Property

  The Company's success is heavily dependent upon its proprietary technology.
The Company relies primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology. For example, the Company licenses its
software pursuant to signed license agreements and, to a lesser extent,
"shrink-wrap" licenses displayed on product packaging, which impose certain
restrictions on the licensee's ability to use the software. In addition, the
Company seeks to avoid disclosure of its trade secrets, including requiring
those persons with access to the Company's proprietary information to execute
confidentiality agreements with the Company and restricting access to the
Company's source codes. The Company seeks to protect its software,
documentation and other written materials under the laws relating to trade
secret and copyright, which afford only limited protection. The Company has no
patents or pending patent applications.

  Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products,
obtain or use information that the Company regards as proprietary or use or
make copies of the Company's products. Policing unauthorized use of the
Company's products is difficult. In addition, the laws of many jurisdictions
do not protect the Company's proprietary rights to as great an extent as do
the laws of France and the U.S. In particular, "shrink-wrap" licenses may be
wholly or partially unenforceable under the laws of certain jurisdictions, and
copyright and trade secret protection for software may be unavailable in
certain countries. Under French intellectual property laws, rights over
software are not patentable but are protected under copyright law and
infringements by third parties can be enjoined. There can be no assurance that
the Company's means of protecting its proprietary rights will be adequate or
that the Company's competitors will not independently develop similar
technology.

  There can be no assurance that the Company will not receive communications
in the future from third parties asserting that the Company's products
infringe, or may infringe, on their proprietary rights. There can be no
assurance that licenses to disputed third-party technology would be available
on reasonable commercial terms, if at all. In addition, the Company may
initiate claims or litigation against third parties for infringement of the
Company's proprietary rights or to establish the validity of the Company's
proprietary rights. Litigation to determine the validity of any claims could
result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from productive tasks, whether or
not such litigation were determined in favor of the Company. In the event of
an adverse ruling in any such litigation, the Company might be required to pay
substantial damages, discontinue the use and sale of infringing products,
expend significant resources to develop non-infringing technology or obtain
licenses to infringing technology. In the event of a successful claim against
the Company and the failure of the Company to develop or license a substitute
technology, the Company's business, operating results and financial condition
would be materially adversely affected. As the number of software products in
the industry increases and the functionality of these products further
overlaps, the Company believes that software developers may become
increasingly subject to infringement claims. Any such claims against the
Company, with or without merit, as well as claims initiated by the Company
against third parties, could be time consuming and expensive to defend or
prosecute and to resolve.

                                      41
<PAGE>

Volatility of Share Price

  The market price of the Company's ADSs and the Shares has experienced
significant fluctuation and may continue to fluctuate significantly. In
particular, the trading price of the ADSs and the Shares could be subject to
wide fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the Company or
its competitors, changes in financial estimates by securities analysts,
downturns in the economy of regions in which the Company does business, and
other events or factors, many of which are beyond the Company's control. In
some future quarters the Company's operating results may be below expectations
of public market analysts and investors. In such event, or in the event that
adverse conditions prevail or are perceived to prevail generally or with
respect to the Company's business, the price of the Company's ADSs and the
Shares would likely be immediately materially adversely affected. In addition,
the stock market has experienced volatility that has particularly affected the
market prices of equity securities of many technology companies and that often
has been unrelated or disproportionate to the operating performance of such
companies. These broad market fluctuations, as well as general economic,
political and market conditions such as recessions or international currency
fluctuations, have and may continue to adversely affect the market price of
the ADSs and the Shares.

Control by Officers and Directors; Factors Inhibiting Takeover

  As of September 30, 2000, the Company's executive officers and directors and
their affiliates beneficially owned approximately 11% of the Company's Shares.
As a result, such persons and entities, acting together, may have the ability
to control the Company and direct its affairs and business. The concentration
of ownership of the Company's Shares may have the effect of delaying,
deferring or preventing a change in control of the Company.

  Pursuant to the Company's charter or statuts, the members of the Company's
Board of Directors each serve for a three-year term. One-third of the
directors are elected every year, which may make it more difficult for the
Company's shareholders to replace the Board of Directors. The Board of
Directors may also be authorized in the part by the shareholders of the
Company to effect increases in the Company's share capital in the context of a
tender offer or exchange offer for the securities of the Company, which could
have an anti-takeover effect. A new authorization will be submitted to the
next shareholders' meeting. See "Directors and Executive Officers" and
"Control of Registrant."

Enforceability of U.S. Judgments against French Corporations, Directors and
Officers

  Judgments of U.S. courts, including judgments against the Company or its
directors or officers, predicated on the civil liability provisions of the
federal securities laws of the U.S. may not be enforceable in the Republic of
France.

No Dividends

  The Company has not paid any cash dividends on its share capital to date.
The Company currently anticipates that it will retain any future earnings for
use in its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. Any dividend would be declared and paid
in French francs or Euros and under the French Company Law (the "French Law")
and the Company's statuts, may only be paid from pre-consolidated net income,
as increased or reduced, as the case may be, by any net income or loss of ILOG
carried forward from prior years.

Certain Matters Related to French Companies; Acquisitions, Mergers and
Corporate Reorganizations.

  As a French societe anonyme, the Company will be subject to certain
requirements not generally applicable to corporations organized in U.S.
jurisdictions. Among other things, holders of ADSs will be subject to voting
procedures that are more complicated than for U.S. jurisdictions. The
Company's ability to increase its share capital is subject to shareholder
approval at an extraordinary shareholders' meeting. Shareholder approval must

                                      42
<PAGE>

in any event be obtained for any issuances of share capital in connection with
a merger even if the Company is the surviving entity, or an acquisition of
assets in exchange for shares of the Company. In the case of an extraordinary
general meeting, the presence, in person or by proxy, of shareholders holding
one-third of the Shares upon first notice and one-quarter of the Shares upon
second notice is required for a quorum. The complicated voting procedures
under French Law, coupled with the increasing practice of ADS holders not to
exercise their voting rights, may prevent the Company from obtaining a quorum
for future shareholders' meetings and thereby impair the ability of the
Company to take any action such as the approval of acquisitions, mergers
and/or corporate reorganizations that requires shareholder approval.

Item 9A. Quantitative and Qualitative Disclosures About Market Risk

  Approximately 30% of the Company's revenues and 55% of the Company's
expenses in 2000 were denominated in Euros or Euro equivalent currencies, with
the remainder in U.S. dollars and, to a lesser extent, other currencies. An
increase in the value of the Euro relative to the U.S. dollar will result in
lower profitability in U.S. dollar terms. For the year ended June 30, 2000,
the effect of a 10% hypothetical uniform strengthening in the value of the
Euro relative to the U.S. dollar would result in an increase in revenues of
$3.2 million and expenses of $4.1 million with a decrease in operating income
and a decrease of other income of approximately $0.9 million and decrease of
earnings per share of $0.05. See "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations" and "Description
of Business--Sales and Marketing."

  Fluctuations in the value of the currencies in which the Company conducts
its business relative to the U.S. dollar have caused and will continue to
cause dollar-translated amounts to vary from one period to another. Also
currency rate movements on non-US dollar denominated assets and liabilities,
including intercompany accounts, can result in the reporting of unrealized
exchange gains or losses in the Company's statement of operations. Due to the
number of currencies involved, the constantly changing currency exposures and
the volatility of currency exchange rates, the Company cannot predict the
effect of exchange rate fluctuations upon future operating results. The
Company does not hedge its exchange rate risk.

  The Company believes it does not have any significant risk with regard to
interest rate fluctuation and accordingly does not hedge for interest rate
exposure.

Item 10. Directors and Officers of Registrant

  In accordance with French law governing a societe anonyme, the Company's
affairs are managed by its Board of Directors and by its Chairman, President
and Chief Executive Officer, who has full executive authority to manage the
affairs of the Company, subject to the prior authorization of the Board of
Directors or of the Company's shareholders for certain decisions specified by
law.

Directors and Executive Officers

  Under French law, the Board of Directors prepares and presents the year-end
accounts of the Company to the shareholders and convenes shareholders'
meetings. In addition, the Board of Directors reviews and monitors ILOG's
economic, financial and technical strategies. French law provides that the
Board of Directors be composed of no fewer than three and no more than 24
members. The actual number of directors must be within such limits and may be
provided for in the statuts or determined by the shareholders at the annual
general meeting of shareholders. The number of members of the Board may be
increased only by decision of the shareholders. The Company's Board of
Directors currently consists of eight members. Each director must be a
shareholder of the Company. Under French law a director may be an individual
or a corporation, but the Chairman must be an individual. Each director is
elected for a three year term. There is no limitation, other than applicable
age limits, on the number of terms that a director may serve. Directors are
elected by the shareholders and serve until the expiration of their respective
terms, or until their resignation, death or removal, with or without cause, by
the shareholders. Vacancies which exist in the Board of Directors may be
filled by the Board of Directors, pending the next shareholders' meeting.
However, if the number of Directors falls below the legal

                                      43
<PAGE>

minimum of three, the remaining Directors must immediately call a shareholders
meeting to elect a sufficient number of Directors to reach the legal minimum.

  Meetings of the Board of Directors of ILOG are normally convened and
presided over by the Chairman, who is elected by the Board of Directors. A
quorum consists of one-half of the members of the Board of Directors and
decisions are generally taken by a vote of the majority of the members present
or represented by other members of the Board of Directors. The Chairman has
the ability to cast a deciding vote in the event of a tie vote. A director may
give a proxy to another director but a director cannot represent more than one
other director at any particular meeting. Members of the Board of Directors
represented by another member at meetings do not count for purposes of
determining the existence of a quorum. As required under French law, two
representatives of the employees are entitled to be present at meetings of the
Board of Directors of the Company, but do not have any voting rights.

  Directors are required to comply with applicable law and ILOG's statuts.
Under French law, directors are liable for violations of French legal or
regulatory requirements applicable to societes anonymes, violation of the
Company's statuts or mismanagement. Directors may be held liable for such
actions both individually and jointly with the other directors.

  The Board currently has two committees: the Audit Committee, currently
composed of Pascal Brandys (since October 25, 2000) and Marc Fourrier, and a
Compensation Committee, currently composed of Fredric Harman and Marc
Fourrier. From September 22, 1999 until July 25, 2000 Jean-Francois Abramatic
served on the Audit Committee. The Audit Committee primarily reviews with
management and the Company's independent auditors the internal accounting
procedures and quarterly and annual financial statements of the Company and
consults with and reviews the services provided by the Company's independent
auditors. The Compensation Committee determines the compensation of Pierre
Haren, the Chairman and Chief Executive Officer of the Company, and the other
executive officers of the Company and makes recommendations as to the
implementation of the Company's stock option and other employee benefits
plans. Each of the Committees makes recommendations to the Board of Directors
for final decision by the Board.

  Under French law, the Chairman and Chief Executive Officer has the broadest
powers to act on behalf of ILOG and to represent ILOG in dealings with third
parties, subject only to those powers expressly reserved by law to the Board
of Directors or the shareholders. The Chairman and Chief Executive Officer
determines, and is responsible for the implementation of, the goals,
strategies and budgets of ILOG, which are reviewed and monitored by the Board
of Directors. The Board of Directors has the power to appoint and remove, at
any time, the Chairman and Chief Executive Officer.

                                      44
<PAGE>

  The following table sets forth the names, ages and positions of the
directors and executive officers of ILOG as of September 30, 2000:

<TABLE>
<CAPTION>
   Name                      Age Position with the Company
   ----                      --- -------------------------
   <C>                       <C> <S>
   Pierre Haren.............  47 Chairman and Chief Executive Officer

   Jean-Francois Abramatic..  51 Senior Vice President, Research and
                                 Development

   Patrick Albert...........  44 Chief Technology Officer

   Eric Brisson.............  35 Vice President and General Manager
                                 Telecommunications Business Division

   Christian Deutsch........  55 Vice President, Customer Support and
                                 Administration

   Roger Friedberger........  49 Chief Financial Officer

   Bounthara Ing............  37 Vice President and General Manager Industry
                                 Solutions Division

   Janet Lowe...............  42 Vice President and General Manager ILOG Direct

   Todd Lowe................  44 Director, Executive Vice President and General
                                 Manager Value Chain Management Business
                                 Division

   William Scull............  47 Vice President of Worldwide Marketing

   Michel Alard.............  46 Director

   Pascal Brandys...........  41 Director

   Philippe Claude..........  52 Director

   Edouard Efira............  52 Director

   Marc Fourrier............  46 Director

   Fredric Harman...........  40 Director
</TABLE>

  Pierre Haren is a founder of the Company and was its Managing Director from
1987 to December 1995, when he was appointed Chairman and Chief Executive
Officer of the Company. Prior to founding ILOG, Mr. Haren spent four years in
charge of the SMECI Expert System Shell Project with the Institut National de
Recherche en Informatique et en Automatique ("INRIA") following a three-year
term directing the investment department of the French Ministry of the Sea. He
is also a Director of IPSOS S.A. Mr. Haren received engineering degrees from
Ecole Polytechnique in 1976 and Ecole Nationale des Ponts et Chaussees in
1978. He received his M.S. from Massachusetts Institute of Technology ("MIT")
in 1978 and Ph.D. from MIT in Civil Engineering in 1980. Mr. Haren's term on
the Board of Directors expires in 2002.

  Jean-Francois Abramatic has served as Senior Vice President, Research and
Development of the Company since July 2000 and as a Director of the Company
from December 1994 to July 2000. Since September 1996, Mr. Abramatic has been
the Chairman of the International World Wide Web Consortium and from September
1996 to July 2000 he was an Associate Director of the MIT Laboratory of
Computer Science. From September 1997 to July 2000 Mr. Abramatic was INRIA's
Director of Development and Industrial Relations and from 1992 to September
1997 its Director of Development. Abramatic received an Engineering degree
from Ecole des Mines, Nancy in 1971 and a Ph.D. from the University of Paris
VI in 1980.

  Patrick Albert is a founder of the Company and has been its Chief Technology
Officer since July 1996, having previously held the position of Vice President
of Research and Development since 1990. Mr. Albert was head of the Expert
System Shell Department of Groupe Bull prior to joining the Company in 1987.
Mr. Albert received a Master of Science degree in Information Technology from
the University of Paris VII in 1982.

  Eric Brisson has served as Vice President and General Manager
Telecommunications Business Division of the Company since August 2000
previously having held the position of Worldwide Director, Professional
Services of the Division since July 1999. From July 1998 to July 1999 he
served as a Consulting Manager and

                                      45
<PAGE>

since September 1995 as a Senior Consultant and Software Developer of the
Company. From 1991 to September 1995 he was a Research Engineer at CSTB,
French government research center. Mr. Brisson received a Bachelor's degree in
Computer Science at the University of Nice in 1988 and a Master's degree in
Computer Science at the University of Paris in 1990.

  Christian Deutsch has served as Vice President, Customer Support and
Administration of the Company since August 2000 previously holding the
position of Manager, Corporate Business Development since January 1998. From
1974 to 1997 he was Chief Executive and Technical Officer of OPEFORM, an
information technology consulting company for the transportation industry,
which he co-founded. Mr. Deutsch received in 1968 a Master's degree and in
1977 a Ph.D. in Advanced Mathematics from the University of Paris.

  Roger Friedberger has served as Chief Financial Officer of the Company since
May 1996. From 1988 through March 1996, he served as Senior Vice President,
Chief Financial Officer and Secretary of Insignia Solutions plc, a software
company. Mr. Friedberger graduated from the University of Leeds, England in
1972 with a Bachelor of Commerce degree in Accounting and Law. He is a
certified public accountant in California and a member of the Institute of
Chartered Accountants in England and Wales.

  Bounthara Ing has served as Vice President and General Manager Industry
Solutions Division of the Company since July 1999, as President of ILOG KK
Japan since September 1997, and as Managing Director of ILOG Pte. Ltd.
Singapore since January 1994. He joined the Company in 1988 as Manager of the
Graphic Department. Mr. Ing received an Engineering degree from Ecole Centrale
de Paris in 1986.

  Janet Lowe has served as Vice President and General Manager ILOG Direct
since July 1999, having previously held the position from August 1997 of
Director of Marketing, Optimization Products. Ms. Lowe co-founded in 1988
CPLEX Optimization, Inc., and served as its Vice President of Marketing and
Chief Financial Officer until the company was acquired by ILOG in 1997. She
received a B.S. in chemical engineering at the University of Texas in 1980 and
an M.B.A. at Rice University in 1988.

  Todd Lowe has served as a Director of the Company since August 1997, and as
the Company's Executive Vice President and General Manager Value Chain
Management Business Division since July 1999, having previously held the
position of Executive Vice President CPLEX and ILOG Direct since July 1998.
From August 1997 until June 1998 he was the Company's Executive Vice
President, CPLEX business. From 1988 until 1997 he was President of CPLEX
Optimization, Inc. He received a Chemical Engineering degree from the
University of California. Mr. Lowe's term on the Board of Directors expires in
2000, but will be extended to 2003 upon ILOG shareholder approval at its
Ordinary General Meeting to be held on December 18, 2000.

  William Scull has served as Vice President of Worldwide Marketing of the
Company since September 1997. From October 1993 until September 1997, Mr.
Scull was president of Catalyst Consultants, a strategic marketing consulting
firm based in Los Altos, California. From November 1988 until September 1993,
Mr. Scull was at Tandem Computers where his most recent position was as
Director of Corporate Development, New Ventures. Mr. Scull received an M.B.A.
from Stanford University in 1981 and a Master of Science degree in Engineering
from MIT in 1979.

  Michel Alard has served as a Director of the Company since July 2000. Mr.
Alard is Chairman of the Board of Directors of Wavecom S.A. which he co-
founded in 1993. Previously from 1988 he was a project manager at Matra
Communications. Mr. Alard received degrees from Ecole Polytechnique in 1976
and from the Paris Telecommunications Engineering School in 1978. Mr. Alard's
term on the Board of Directors expires in 2000, but will be extended to 2003
upon ILOG shareholder approval at its Ordinary General Meeting to be held on
December 18, 2000.

  Pascal Brandys has served as a Director of the Company since September 1998.
Mr. Brandys has been Chairman of the Board of Directors of Genset S.A. since
he co-founded it in 1989 and its Chief Executive Officer until July 2000.
Since 1997, Mr. Brandys has served as President of France Biotech, the
association of French

                                      46
<PAGE>

biotechnology companies. Mr. Brandys graduated from the Ecole Polytechnique in
1980, received an M.S. in Economic Systems from Stanford University in 1982
and an M.S. in Civil Engineering from the Ecole Nationale des Ponts et
Chaussees in 1983. Mr. Brandys's term on the Board of Directors expires in
2000, but will be extended to 2003 upon ILOG shareholder approval at its
Ordinary General Meeting to be held on December 18, 2000.

  Philippe Claude has served as the permanent representative of Atlas Venture
Europe Fund B.V., a Director of the Company, since January 1995, and was
appointed a Director of the Company in his individual capacity in September
1996. Mr. Claude has been a General Partner of Atlas Venture, a venture
capital firm, since January 1993. Prior to joining Atlas Venture Group, he had
been a general partner of Partech International since 1987. Mr. Claude
graduated from the University of Brussels, Solvay School in 1971 and received
an M.B.A. from Oregon State University in 1973. Mr. Claude's term on the Board
of Directors expires in 2002.

  Edouard Efira has served as a Director of the Company since May 2000 and
from August 1997 to September 1998. Since July 2000 he has served as Chief
Executive Officer of Quadratec, a French software company. From July 1999 to
May 2000 he served as the Company's Executive Vice President, Corporate
Business Development, having previously served as Executive Vice President
International Strategic Alliances and Business Development since January 1997.
From May 1996 to January 1997, he was Chief Operating Officer of the Company
and, from January 1989 to May 1996, he was Director of International Sales.
Mr. Efira's term on the Board of Directors expires in 2000, but will be
extended to 2003 upon ILOG shareholder approval at its Ordinary General
Meeting to be held on December 18, 2000.

  Marc Fourrier has served as a director of the Company since April 1987. Mr.
Fourrier is President of Delphis, a holding company that specializes in the
creation and development of high technology companies. From 1988 to June 1997,
Mr. Fourrier was a principal of Cleversys S.A., a consulting firm which
specializes in information technology. He is also a Director of Wavecom S.A.
Mr. Fourrier received engineering degrees from Ecole Polytechnique in 1976 and
Ecole Nationale des Ponts et Chaussees in 1978, and an M.S. from MIT in 1978.
Mr. Fourrier's term on the Board of Directors expires in 2001.

  Fredric Harman has served as the permanent representative of Oak Management
Corporation, a director of the Company, since December 1994, and was appointed
a director of the Company in his individual capacity in September 1996. Mr.
Harman is a General Partner of Oak Investment Partners, a venture capital
firm. Mr. Harman was formerly with Morgan Stanley where he was a General
Partner of Morgan Stanley Venture Partners, L.P., a venture capital firm. He
is also a Director of Avenue A, Inc., ClickSoftware, Inc., Inktomi
Corporation, InterNAP Network Services, Primus Knowledge Solutions and Quintus
Corporation. Mr. Harman received his B.S. and an M.S. in Electrical
Engineering from Stanford University in 1983, and an M.B.A. from the Harvard
Graduate School of Business in 1987. Mr. Harman's term on the Board of
Directors expires in 2001.

Liability Insurance

  French law generally prohibits the Company from entering into
indemnification agreements with its directors and officers providing for
limitations on personal liability for damages and other costs and expenses
that may be incurred by directors and officers arising out of or related to
acts or omissions in such capacity. French law also prohibits the statuts of
the Company from providing for the limitation of liability of a member of the
Board of Directors. These prohibitions may adversely affect the ability of the
Company to attract and retain directors. Generally, under French law,
directors and officers will not be held personally liable for decisions taken
diligently and in the corporate interest of the Company.

  The Company has entered into an agreement with each of its directors, its
Chairman and Chief Executive Officer, its Chief Operating Officer, its Chief
Financial Officer and other members of senior management designated by the
Board of Directors pursuant to which the Company agreed to contract for and
maintain liability insurance against liabilities which may be incurred by such
persons in their respective capacities, including liabilities which may be
incurred under the U.S. federal and state securities laws, subject to certain
limitations.

                                      47
<PAGE>

The Company believes that entering into such agreements and maintaining
appropriate liability insurance for its directors and officers will assist the
Company in attracting and retaining qualified individuals to serve as
directors and officers.

Item 11. Compensation of Directors and Officers

  The aggregate amount of compensation of all executive officers of ILOG as a
group (11 persons) paid or accrued for services in all capacities for the year
ended June 30, 2000 was approximately $2.2 million. In accordance with French
law only shareholders may determine directors fees paid to the Board of
Directors. The Board of Directors then has full and discretionary authority to
decide the allocation of the directors' fees authorized by the shareholders
among its members. The shareholders of the Company have not authorized the
payment of any directors fees for 2000.

Item 12. Options to Purchase Securities from Registrant or Subsidiaries

  The Company has various employee stock option, employee purchase plans and
Stock warrant plans currently in effect. The following is a summary
description of each of the Company's plans.

  The 1992 Stock Option Plan. In general meetings held in 1992 and in 1993,
the shareholders of the Company authorized the Board of Directors to grant
options with respect to an aggregate of 614,275 Shares at a price to be
determined by the Board of Directors on the date of grant based on the net
assets of the Company and increased by a reasonable estimate of the future
profitability of the Company (the "1992 Plan"). The Board of Directors were
able to grant options under the 1992 Plan until June 1998. Under the 1992
Plan, options become exercisable for a period of five years following the date
of grant subject to vesting on the basis of one-fourth of the Shares upon the
date of grant, and one-fourth in each of the three following years. As of
September 30, 2000, options with respect to an aggregate of 19,651 Shares were
outstanding under the 1992 Plan at exercise prices ranging from FF12.80 per
share to FF32.00 per share.

  The 1996 Stock Option Plan. In 1994, the shareholders of the Company
authorized the Board of Directors to grant until November 23, 1999 up to
500,000 options at a price to be determined by the Board of Directors on the
date of grant based on the net assets of the Company, a reasonable estimate of
its future profitability and its future development prospects (the "1994
Plan"). In order to comply with the U.S. Internal Revenue Code of 1986, as
amended (the "Code") for the granting of incentive stock options, the Company
decided to adopt a new plan (the "1996 Plan"), incorporating Shares authorized
under the 1994 Plan. The 1996 Plan was approved by the shareholders on May 30,
1996, and on that date 600,000 Shares, on October 17, 1996, 200,000 Shares, on
August 20, 1997, 1,600,000 Shares, on December 17, 1997, 500,000 Shares and on
August 31, 1998, 1,000,000 Shares, were added to the 1996 Plan with respect to
which options may also be granted by the Board of Directors until November 23,
1999. Following the approval by shareholders of the 1998 Plan (see below)
1,000,000 shares authorized for the 1996 Plan were transferred to the 1998
Plan. Under the 1996 Plan, optionees are entitled to exercise options for ten
years (or seven years less one day for U.K. employees). Under the 1996 Plan,
generally and unless otherwise specified, one-fourth of the Shares subject to
option vest 12 months after the date of grant of options and 1/48 of the
Shares vest each month thereafter provided the optionee continues to render
services to the Company. As of September 30, 2000, options with respect to an
aggregate of 2,245,507 Shares were outstanding at exercise prices ranging from
FF12.80 to FF88.79.

  The 1998 Stock Option Plan. On November 4, 1998 the shareholders approved
the 1998 Stock Option Plan, to succeed the 1996 Stock Option Plan and at that
time 1,000,000 options previously authorized for the 1996 Plan were
transferred to the 1998 Plan. In addition on September 21, 1999, 900,000
Shares and on October 18, 2000, 1,250,000 Shares were authorized with respect
to which options may be granted by the Board of Directors. The 1998 Stock
Option Plan is identical to the 1996 Stock Option Plan except that it expires
in 2003. As of September 30, 2000, options with respect to an aggregate of
1,669,972 Shares were outstanding at exercise prices ranging from FF43.95 to
FF314.86, and options to purchase 175,176 Shares remained available for grant
under the 1998 Plan.

                                      48
<PAGE>

  As of September 30, 2000, options to purchase an aggregate of 918,278 Shares
were held by executive officers of the Company as a group (10 persons). Under
French Law, the Company cannot grant options to members of the Board of
Directors (other than the Chairman, Chief Executive Officer or Managing
Director) who are not employees.

  All Options granted under the 1996 and 1998 Plans have a term of ten years,
other than options granted to employees in the United Kingdom which have a
term of seven years less one day. Generally, and unless otherwise specified,
if an optionee terminates his or her employment with the Company, the optionee
may exercise only those options vested as of the date of termination and must
effect such exercise within three months. In general, if an optionee dies
during his or her employment, or within three months after termination of
employment, such person's options may be exercised up to six months after his
or her death to the extent vested at the time of his or her death or
termination. No option may be transferred by the optionee other than by will
or the laws of intestacy.

  In December 1996, the French parliament adopted a law that requires French
companies to pay French social contributions and certain salary-based taxes,
which may represent, for the Company, up to 45% of the taxable salary, on the
difference between the exercise price of a stock option and the fair market
value of the underlying shares on the exercise date, if the beneficiary
disposes of the shares before a five-year period following the grant of the
option. The new law is consistent with French personal income tax law pursuant
to which the difference between the option exercise price and the fair value
of the shares at the grant date is treated as salary income if the shares are
sold or otherwise disposed of within five years of the option grant. The law
applies to all options, whatever the grant date, exercised after January 1,
1997. Pursuant to a law of July 2, 1998, both the beneficiary and the Company
are exempted from such social security related taxation if the options were
granted before January 1, 1997 and are exercised after April 1, 1998.

  The Company has not recorded a liability for social charges which may be
assessed for options granted as of June 30, 2000 as the liability, being
dependent on future values of the Company's shares and the timing of
employees' decisions to exercise options and sell the related shares, cannot
be estimated. The Company also does not consider that the liability is
probable due to the income tax disincentives to employees of exercising
options and selling the shares in less than a five year period.

  For options granted after the adoption of the new law, the Company has
decided to subject such options to a minimum holding period of the underlying
shares, whereby French optionees will not be allowed to sell or dispose of the
shares before the expiration of a 5-year period from the grant date.

  1996 International Employee Stock Purchase Plan. In October 1996, the
shareholders of the Company approved the Company's International Employee
Stock Purchase Plan (the "Purchase Plan") and renewed such approval in October
2000 which reserves a total of 300,000 Shares for issuance thereunder for a
period of two years from the date of renewed approval by the Company's
shareholders. The Purchase Plan permits eligible employees to acquire Shares
in the form of ADSs through payroll deductions. The Purchase Plan is intended
to qualify as an "employee stock purchase plan" under Section 423 of the Code.
The Purchase Plan is implemented by consecutive offering periods. Except for
the initial offering, each offering under the Purchase Plan will be for a
period of six months (the "Offering Period") commencing on February 1 and
August 1 of each year. The first Offering Period began on February 14, 1997
being the date on which price quotations for the ADSs corresponding to the
Shares were first available on the Nasdaq National Market and ended on July
31, 1997. The Board of Directors has the power to set the beginning of any
Offering Period and to change the duration of Offering Periods without
shareholder approval, provided that the change is announced at least 15 days
prior to the scheduled beginning of the first Offering Period to be affected.
Eligible employees may select a rate of payroll deduction up to 10% of their
compensation, up to an aggregate total payroll deduction not to exceed $21,250
in any calendar year. The purchase price for ADSs purchased under the Purchase
Plan is 85% of the lesser of the fair market value of the Company's ADSs on
the first day of each applicable Offering Period and on the last day of such
Offering Period.


                                      49
<PAGE>

  1996 French Employee Savings Plan. The Company's 1996 French Employee
Savings Plan (the "Savings Plan"), which was approved by the Company's
shareholders in October 1996, and renewed such approval in October 2000
reserves a total of 300,000 Shares for issuance thereunder for a period of two
years from the date of such renewed approval. The Savings Plan permits
eligible employees primarily to make contributions for purposes of purchasing
shares in investment funds managed for the Company on behalf of employees, or
to acquire Shares issued by the Company itself. The Savings Plan is intended
to qualify as an Employee Savings Plan under Article 443-1 et. seq. of the
French Labor Code. The Savings Plan is funded by an annual contribution made
on behalf of employees from a special employee profit-sharing reserve, by
voluntary contributions made by employees, by discretionary supplemental
contributions made by the Company, and by the reinvestment of revenues and
capital gains from investments in the Savings Plan prior to distribution. In
accordance with the French Labor Code, voluntary contributions in any one
calendar year for an eligible employee may not exceed 25% of such employee's
gross annual salary. The price for Shares of the Company purchased under the
Savings Plan is 80% of the mean of the fair market value of the Company's ADSs
as quoted on the Nasdaq National Market or the Nouveau Marche in the twenty
trading days preceding the Board of Directors' decision to issue Shares to
eligible employees under the Savings Plan. Investments made on behalf of
eligible employees may be distributed on the first day of the fourth month of
the fifth fiscal year following the year in which investment fund shares or
Shares of the Company were purchased. The Savings Plan is automatically
renewed each year unless otherwise terminated by the Company.

  As of September 30, 2000 the Company had issued 65,286 and 199,771 Shares
under the Purchase Plan and Savings Plan, respectively since December 1999.

 Warrants for non-executive Directors

  Pursuant to resolutions adopted on September 21, 1999 and October 18, 2000,
the shareholders have authorized the Board to issue warrants for the purchase
of Shares in the Company, of up to a total of 40,000 Shares which are to be
reserved for issuance to the non-executive Directors. On September 22, 1999,
warrants to purchase 20,000 Shares were granted to 5 non-executive Directors
of which 16,000 were outstanding as of September 30, 2000. Such warrants may
be exercised at any time until September 21, 2004 at a price of 7.55 Euros or
FF 49.52 per share.

Item 13. Interest of Management in Certain Transactions

  Since July 1, 1998, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which the Company was or is
to be a party in which the amount involved exceeds $60,000 and in which any
director, executive officer or holder of more than 5% of the share capital of
the Company had or will have a direct or indirect material interest other than
in the transactions described below.

  In August 1998 the Company entered into an Agreement and Plan of
Reorganization whereby it acquired Compass Modeling Solutions, Inc., in
exchange for 51,852 Company shares of which Mr. Todd Lowe, a director of the
Company, and Ms. Lowe, an executive officer of the Company, as trustees of the
Lowe Family Trust, received 20,514 Company shares and Mr. Robert Bixby, a
director of the Company, received 4,559 Company shares.

  In December 1998, the Company's U.S. subsidiary extended a loan at the rate
of 4.47% per annum in the amount of $65,997 to Mr. Edouard Efira, a director
and a former executive of the Company. The loan was repaid in 2000.

  The Company believes that the terms of each of the foregoing transactions
were as favorable to the Company as the terms that would have been available
from unaffiliated third parties.

                                      50
<PAGE>

                                    PART II

Item 14. Description of Securities to be Registered

  Not applicable.

                                   PART III

Item 15. Defaults Upon Senior Securities

  Not Applicable

Item 16. Changes in Securities and Changes in Security for Registered
Securities

  Not Applicable

                                    PART IV

Item 17. Financial Statements

  Not Applicable

Item 18. Financial Statements

  See pages F-1 through F-20.

Item 19. Financial Statements and Exhibits

  (A) Financial Statements

  The following financial statements and schedules, together with the report
of Ernst & Young Audit thereon, are filed as part of this annual report:

    Independent Auditors' Report

    Consolidated Balance Sheets

    Consolidated Statements of Operations

    Consolidated Statements of Shareholders' Equity

    Consolidated Statements of Cash Flows

    Notes to Consolidated Financial Statements

  Schedule II to Financial Statements (Financial statement schedules I, III,
IV and V are omitted as the information is not required, is not applicable or
the information is presented in the financial statements or related notes
thereto)

  (B) Exhibits

  None

                                      51
<PAGE>

                                   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 annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                                          ILOG S.A.
                                          Chief Financial Officer

Dated: October 31, 2000

                                       52
<PAGE>

                                   ILOG S.A.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report of Independent Auditors............................................. F-2

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

Consolidated Statements of Operations...................................... F-4

Consolidated Statements of Shareholders' Equity............................ F-5

Consolidated Statements of Cash Flows...................................... F-6

Notes to Consolidated Financial Statements................................. F-7
</TABLE>

                                      F-1
<PAGE>

                        REPORT OF INDEPENDENT AUDITORS

The Directors and Shareholders
ILOG S.A.

  We have audited the accompanying consolidated balance sheets of ILOG S.A.
and subsidiaries as of June 30, 2000 and 1999 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended June 30, 2000. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

  We 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 the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of ILOG S.A. and subsidiaries at June 30, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended June 30, 2000, in conformity with generally accepted
accounting principles in the United States.

                                          ERNST & YOUNG Audit

                                          [Signature of John Mackey]
                                          Represented by
                                          John Mackey

Paris, France
July 31, 2000

                                      F-2
<PAGE>

                                   ILOG S.A.

                          CONSOLIDATED BALANCE SHEETS
                     (In thousands, except for share data)

<TABLE>
<CAPTION>
                                                                June 30,
                                                            ------------------
                                                              2000      1999
                                                            --------  --------
<S>                                                         <C>       <C>
                          ASSETS
                          ------

Current assets:
  Cash and cash equivalents................................ $ 20,316  $ 21,532
  Accounts receivable (less allowance for doubtful accounts
   of $691 and $941 at June 30, 2000 and 1999
   respectively)...........................................   23,393    14,839
  Value-added tax collectible on accounts receivable.......    1,539     1,248
  Other receivables........................................    2,363     1,896
  Prepaid expenses.........................................      868       962
                                                            --------  --------
    Total current assets...................................   48,479    40,477
Property and equipment.....................................    9,490     9,902
Less accumulated depreciation and amortization.............   (5,252)   (5,646)
                                                            --------  --------
Property and equipment, net................................    4,238     4,256
                                                            --------  --------
Other assets...............................................       20       273
                                                            --------  --------
    Total assets........................................... $ 52,737  $ 45,006
                                                            ========  ========

           LIABILITIES AND SHAREHOLDERS' EQUITY
           ------------------------------------

Current liabilities:
  Lines of credit.......................................... $  1,602  $  1,100
  Accounts payable and accrued expenses....................    7,588     5,944
  Accrued compensation.....................................    7,172     5,690
  Value-added tax payable..................................    1,177     1,162
  Current portion of long-term debt........................    1,714     2,007
  Current portion of capitalized lease obligations.........      399       424
  Deferred revenue.........................................    7,034     6,775
                                                            --------  --------
    Total current liabilities..............................   26,686    23,102
Long-term portion of capitalized lease obligations.........      303       323
Other long-term liabilities................................    1,666     3,556
                                                            --------  --------
    Total liabilities......................................   28,655    26,981

Commitments and contingencies

Shareholders' equity:
  Shares, FF 4.00 nominal value 15,362,719 and 14,096,500
   shares issued and outstanding at June 30, 2000 and 1999,
   respectively............................................   10,672     9,918
  Additional paid-in capital...............................   57,893    52,506
  Accumulated deficit......................................  (41,552)  (42,732)
  Cumulative translation adjustment........................   (2,931)   (1,667)
                                                            --------  --------
    Total shareholders' equity.............................   24,082    18,025
                                                            --------  --------
    Total liabilities and shareholders' equity............. $ 52,737  $ 45,006
                                                            ========  ========
</TABLE>

                 See notes to consolidated financial statements

                                      F-3
<PAGE>

                                   ILOG S.A.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
              (In thousands, except for share and per share data)

<TABLE>
<CAPTION>
                                                 Year Ended June 30
                                         -------------------------------------
                                            2000         1999         1998
                                         -----------  -----------  -----------
<S>                                      <C>          <C>          <C>
Revenues:
  License fees.........................  $    46,776  $    38,657  $    34,652
  Services.............................       24,519       25,066       20,604
                                         -----------  -----------  -----------
    Total revenues.....................       71,295       63,723       55,256
Cost of revenues:
  License fees.........................        1,065        1,149        1,183
  Services.............................       13,090       14,429       10,867
                                         -----------  -----------  -----------
    Total cost of revenues.............       14,155       15,578       12,050
                                         -----------  -----------  -----------
Gross profit...........................       57,140       48,145       43,206
Operating expenses:
  Marketing and selling................       35,625       31,531       27,290
  Research and development.............       12,195        9,835        6,575
  General and administrative...........        8,115        7,435        6,126
  Nouveau marche expenses..............          --           466          --
  Write-off of acquired intangibles....          253        2,032       31,045
                                         -----------  -----------  -----------
    Total operating expenses...........       56,188       51,299       71,036
                                         -----------  -----------  -----------
Income (loss) from operations..........          952       (3,154)     (27,830)
Interest expense.......................         (424)        (475)        (466)
Interest income........................          483          503          283
Foreign exchange gain..................          735          168           76
Other..................................          --           (82)         (14)
                                         -----------  -----------  -----------
Net income (loss) before income taxes..        1,746       (3,040)     (27,951)
Income taxes...........................         (566)        (130)         --
                                         -----------  -----------  -----------
Net income (loss)......................  $     1,180  $    (3,170) $   (27,951)
                                         ===========  ===========  ===========
Net income (loss) per share
  --basic..............................  $      0.08  $     (0.23) $     (2.21)
  --diluted............................  $      0.07  $     (0.23) $     (2.21)
                                         ===========  ===========  ===========
Number of shares used in computing net
 income (loss) per share
  --basic..............................   14,628,098   13,998,859   12,664,720
  --diluted............................   17,854,659   13,998,859   12,664,720
                                         ===========  ===========  ===========
</TABLE>

                 See notes to consolidated financial statements

                                      F-4
<PAGE>

                                   ILOG S.A.

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                     (In thousands, except for share data)

<TABLE>
<CAPTION>
                                                                     Accumulated
                                Shares       Additional                 Other     Shareholders'
                          ------------------  Paid-in   Accumulated Comprehensive    Equity
                            Shares   Amount   Capital     Deficit   Income (Loss)   (Deficit)
                          ---------- ------- ---------- ----------- ------------- -------------
<S>                       <C>        <C>     <C>        <C>         <C>           <C>
Balance June 30, 1997...  11,011,474 $ 7,873  $30,751    $(11,611)     $   (22)     $ 26,991
  Options exercised.....     336,471     224      448         --           --            672
  Issuance of shares....   2,444,584   1,616   19,267         --           --         20,883
Amortization of deferred
 stock compensation.....         --      --       117         --           --            117
Components of
 comprehensive loss
  Translation
   adjustment...........         --      --       --          --          (913)         (913)
  Net loss..............         --      --       --      (27,951)         --        (27,951)
                                                                                    --------
    Total comprehensive
     loss...............         --      --       --          --           --        (28,864)
                          ---------- -------  -------    --------      -------      --------
Balance June 30, 1998...  13,792,529   9,713   50,583     (39,562)        (935)       19,799
  Options exercised.....     150,106     101      684         --           --            785
  Issuance of shares....     153,865     104    1,137         --           --          1,241
Amortization of deferred
 stock compensation.....         --      --       102         --           --            102
Components of
 comprehensive loss
  Translation
   adjustment...........         --      --       --          --          (732)         (732)
  Net loss..............         --      --       --       (3,170)         --         (3,170)
                                                                                    --------
    Total comprehensive
     loss...............         --      --       --          --           --         (3,902)
                          ---------- -------  -------    --------      -------      --------
Balance June 30, 1999...  14,096,500   9,918   52,506     (42,732)      (1,667)       18,025
  Options exercised.....     874,301     514    3,321         --           --          3,835
  Issuance of shares....     391,918     240    2,042         --           --          2,282
  Amortization of
   deferred stock
   compensation.........         --      --        24         --           --             24
Components of
 comprehensive loss
  Translation
   adjustment...........         --      --       --          --        (1,264)       (1,264)
  Net income............         --      --       --        1,180          --          1,180
                                                                                    --------
    Total comprehensive
     loss...............         --      --       --          --           --            (84)
                          ---------- -------  -------    --------      -------      --------
Balance June 30, 2000...  15,362,719 $10,672  $57,893    $(41,552)     $(2,931)     $ 24,082
                          ========== =======  =======    ========      =======      ========
</TABLE>


                 See notes to consolidated financial statements

                                      F-5
<PAGE>

                                   ILOG S.A.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                      Year Ended June 30,
                                                    --------------------------
                                                     2000     1999      1998
                                                    -------  -------  --------
<S>                                                 <C>      <C>      <C>
Cash flows from operating activities:
  Net income (loss) income......................... $ 1,180  $(3,170) $(27,951)
  Adjustments to reconcile net income (loss) to net
   cash used for operating activities:
   Depreciation and amortization of property and
    equipment......................................   1,910    1,860     1,445
   Amortization of deferred stock compensation.....      24      102       117
   Write-off of acquired intangible assets.........     253    2,032    31,045
   Loss on sales of fixed assets...................       5        6         5
   Increase (decrease) in cash from:
    Accounts receivable............................  (9,154)     161    (5,761)
    Value-added tax collectible on accounts
     receivable....................................     453      (64)      382
    Other receivables..............................  (1,379)     140    (1,680)
    Prepaid expenses...............................      17      570      (447)
    Accounts payable and accrued expenses..........   1,288     (244)    1,108
    Accrued compensation...........................   1,816    1,380     1,541
    Deferred revenue...............................     727    2,332     2,222
    Value-added tax payable........................      95     (149)      656
    Other..........................................    (258)      38    (1,058)
                                                    -------  -------  --------
      Net cash provided by (used for) operating
       activities..................................  (3,023)   4,994     1,624
                                                    -------  -------  --------
Cash flows from investing activities:
  Acquisition of intangible assets.................     --    (1,000)  (15,600)
  Purchases of property and equipment..............  (1,534)  (2,424)   (1,870)
  Proceeds from sale of property and equipment.....      25       82       136
                                                    -------  -------  --------
      Net cash used for investing activities.......  (1,509)  (3,342)  (17,334)
                                                    -------  -------  --------
Cash flows from financing activities:
  Cash proceeds from issuance of shares............   6,318    2,026    11,655
  Repayment of loans...............................  (1,558)    (639)     (372)
  Principal payments on capital lease obligations..    (479)    (481)     (482)
  Dividends paid...................................     --       --        (71)
                                                    -------  -------  --------
      Net cash provided by financing activities....   4,281      906    10,730
                                                    -------  -------  --------
Effect of exchange rate changes on cash and cash
 equivalents.......................................    (965)  (1,127)     (963)
                                                    -------  -------  --------
Net increase (decrease) in cash and cash
 equivalents.......................................  (1,216)   1,431    (5,943)
Cash and cash equivalents, beginning of period.....  21,532   20,101    26,044
                                                    -------  -------  --------
Cash and cash equivalents, end of period........... $20,316  $21,532  $ 20,101
                                                    =======  =======  ========
</TABLE>

                 See notes to consolidated financial statements

                                      F-6
<PAGE>

                                   ILOG S.A.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Summary of Significant Accounting Policies

 Nature of business

  ILOG S.A. (the "Company") is organized as a societe anonyme, or limited
liability company, under the laws of the Republic of France. The Company was
founded in 1987.

  The Company develops, markets and supports advanced software components for
user interface, resource optimization and business rules functions that are
fundamental to the development of business applications. The Company's object
oriented libraries are used in all development stages, from conceptual
modeling to final delivery, of C, C++ and Java compiled applications. The
Company's products are distributed through its direct sales force, ISVs, and
VARs.

 Basis of presentation and principles of consolidation

  The accompanying consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the United States,
which were applied on a consistent basis. The preparation of financial
statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying footnotes. Actual
results could differ from those estimates.

  The accompanying consolidated financial statements include the Company and
its subsidiaries in the United States, Germany, Japan, Singapore, Spain and
the United Kingdom after eliminating intercompany accounts and transactions.

  In August 1998, the Company acquired Compass Modeling Solutions, Inc.
(Compass) in a business combination accounted for as a pooling of interests.
All prior period consolidated financial statements presented have been
restated to include the combined results of operations, financial position and
cash flows of Compass to give effect to the combination.

 Foreign currency translation

  Generally, the functional currency of the Company and its subsidiaries is
the applicable local currency in accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation", while the
Company's reporting currency is the U.S. dollar.

  All assets and liabilities of the Company and its subsidiaries with
functional currencies other than the U.S. dollar are translated into U.S.
dollar equivalents at exchange rates as follows: (1) asset and liability
accounts at the rate of exchange in effect on the balance sheet date, (2)
revenues and expenses at the weighted averages exchange rates for the year,
and (3) shareholders' equity accounts at historical exchange rates.
Transaction gains or losses are recorded as a separate component of
shareholders' equity, and transaction gains and losses are reflected in net
income.

  Due to the number of currencies involved, the constant change in currency
exposures, and the substantial volatility of currency exchange rates, the
effect of exchange rate fluctuations upon future operating results could be
significant. To date, the Company has not undertaken hedging transactions to
cover any currency exposure.

 Revenue recognition

  The Company recognizes revenue from product licensing fees, whether sold
directly or through distributors, when the product is delivered, evidence of
an arrangement has been received, all significant contractual obligations have
been satisfied and the resulting receivable is deemed collectible by
management, in accordance

                                      F-7
<PAGE>

                                   ILOG S.A.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

with Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2",)
as amended by Statement of Position 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2" and Statement of Position 98-9, "Modification of SOP
97-2, Software Revenue Recognition, with Respect to Certain Transactions".

  If an arrangement to deliver software, either alone or together with other
products or services, requires significant production, modification,
customization or complex integration of software, the entire arrangement is
accounted for in conformity with Accounting Research Bulletin (ARB) No. 45,
"Long-Term Contruction-Type Contracts", using the relevant guidance in SOP 81-
1, "Accounting for Performance of Contruction-Type and Certain Production-Type
Contracts".

  Service revenue from software maintenance agreements is recognized ratably
over the maintenance period, which in most instances is one year. Other
service revenue, primarily consulting and training, are generally recognized
at the time the service is performed. In software arrangements that include
rights to multiple software products, post-contract customer support, and/or
other services, the Company allocates the total arrangement fee among each
deliverable based on the relative fair value of each of the deliverables
determined based on vendor-specific objective evidence.

 Sales returns and warranties

  The Company's customers generally do not have the right to return product
for credit or refund. Any potential sales returns are covered by the Company's
allowance for sales returns and doubtful accounts. The Company provides for
the costs of warranty when specific problems are identified. The Company has
not experienced any significant sales returns and warranty claims to date.

 Net income or loss per share

  Basic net income (loss) per share is computed using the weighted average
number of shares outstanding during the period. Diluted net income (loss) per
share is computed using the weighted average number of shares and dilutive
equivalent shares outstanding during the period. Dilutive equivalent shares
consist of stock options and warrants.

 Cash and cash equivalents

  The Company considers all highly liquid investments with insignificant
interest risk and purchased with an original maturity of three months or less
to be cash equivalents. Cash equivalents include marketable securities which
are principally money market funds certificates of deposits, and commercial
paper. The cost associated which such securities approximates fair market
value.

  All of the Company's cash and cash equivalents are classified as available-
for-sale and are recorded at amounts that approximate fair market value based
on quoted market prices at June 30, 2000 and 1999. Unrecognized gain or losses
on available-for-sale securities are included, net of tax, in equity until
their disposition. Realized gains and losses and decline in value judged to be
other-than-temporary on available-for-sale securities are included in interest
income. The cost of securities sold is based on the specific identification
method.

 Fair value of financial instruments

  At June 30, 2000 and 1999, the carrying values of current financial
instruments such as cash, accounts receivable, accounts payable, other
receivables, accrued liabilities and the current portion of long-term debt
approximated their market values, based on the short-term maturities of these
instruments. At June 30, 2000 and 1999, the fair value of long-term debt was
$1,666,000 and $3,557,000 respectively, compared to book values of $1,666,000
and $3,556,000 respectively. Fair value is determined based on expected future
cash flows, discounted at market interest rates, and other appropriate
valuation methodologies.

                                      F-8
<PAGE>

                                   ILOG S.A.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Property and equipment

  Property and equipment is stated at cost. Depreciation and amortization are
computed using the straight-line method over the following estimated useful
lives:

<TABLE>
   <S>                                           <C>
   Computer equipment and purchased software...  1-3 years
   Furniture and other equipment...............  4-8 years
   Leasehold improvements......................  10 years, or lease term if less
</TABLE>

  Amortization of capitalized leased equipment is included in depreciation
expense.

  Long-lived assets are written-down when, as a result of events and changes
in circumstances within the year, their recoverable value based on
undiscounted future cash flow appear to be permanently less than their
carrying value.

 Concentration of risk

  Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents and trade
receivables.

  The Company has cash investment policies that limit investments to short-
term low risk instruments. The Company's cash is held principally in French
francs and concentrated primarily in one major French bank.

  The Company sells its products to customers in a variety of industries in
Europe, North America and Asia. The Company performs ongoing credit
evaluations of its customers and maintains allowances for potential credit
losses.

  Sales to one customer accounted for approximately 10% and 13% of revenues
for the years ended June 30, 2000 and 1999 respectively. No single customer
accounted for more than 10% of revenues in 1998.

 Software development costs

  The Company capitalizes eligible computer software costs upon achievement of
technological feasibility subject to net realizable value considerations. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs require management's judgment with respect to
certain external factors, including, but not limited to, anticipated future
gross license revenues, estimated economic life and changes in software and
hardware technology. Research and development costs prior to the establishment
of technological feasibility are expensed as incurred. Because the period
between achievement of technological feasibility and the general release of
the Company's products has been of relatively short duration, costs qualifying
for capitalization were insignificant during the years ended June 30, 2000,
1999 and 1998, and accordingly, have been charged to research and development
expenses in the accompanying statements of operations.

 Research and development grants

  The Company receives financial support for various research projects from
public institutions. Such support is recorded as a reduction of research and
development expenses in the periods when the projects are undertaken, the
related expenses have been incurred and the funding has been definitively
acquired. Financial support of $880,000, $741,000 and $629,000 received in the
years ended June 30, 2000, 1999 and 1998, has been recorded as reductions to
the related research and development expenses in each such year.

                                      F-9
<PAGE>

                                   ILOG S.A.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Income taxes

  The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities 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. A valuation allowance
is established if, based on the weight of available evidence, it is more
likely than not that some portion or all of the deferred tax asset will not be
realized.

 Employee stock option plans

  The Company complies with the disclosure provisions of Financial Accounting
Standard No.123 (SFAS 123), "Accounting for Stock Based Compensation". As
permitted by SFAS 123, the Company continues to account for its employee stock
option plans in accordance with the provisions of the Accounting Principles
Board opinion No.25 (APB 25), "Accounting for Stock Issued to Employees",
which requires that compensation expense be recorded when the option exercise
price is less than the market value of the underlying share on the grant date.
Differences between the exercise price of the options and the estimated fair
value of the underlying shares are recorded as compensation expense and
amortized over the vesting period.

 Advertising costs

  The Company expenses advertising expenses as incurred. Advertising expenses
totaled $2,578,000, $2,763,000, and $2,145,000 for the years ended June 30,
2000, 1999, and 1998, respectively.

 Recent pronouncements

  In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activity" (FAS 133).
In June 1999, the Board issued FAS 137, "Accounting for Derivative Instruments
and Hedging Activity--Deferral of the Effective Date of FAS Statement No.
133", which deferred the effective date of FAS 133 until fiscal years
beginning after June 15, 2000. FAS 133 requires the recognition of all
derivatives on the balance sheet at fair value. Derivatives that are not
hedges of underlying transactions must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings. The Company
does not believe that FAS 133 will have a significant impact on its
consolidated financial position, results of operations, or cash flows.

 Introduction of the Euro

  On January 1, 1999, 11 of the 15 member countries of the European Union
established a fixed conversion rate between their sovereign currencies and
adopted the Euro as their common legal currency. As a result, the Euro now
trades on currency exchanges and is available for non-cash transactions. The
Company is modifying its business operations and systems to accommodate the
Euro conversion, and as of June 30, 2000, the cost of these modifications has
not significantly affected its operating results.

2. Business Acquisitions

  In August 1997, the Company acquired the business of CPLEX Optimization,
Inc. (CPLEX), a software company based in Incline Village, Nevada in exchange
for $15.0 million cash, promissory notes of $5.0 million and 1,700,000 shares
of the Company. The acquisition was accounted for as a purchase with
substantially all of the purchase price being allocated to in-process
technology and other intangible assets with $31.0 million thereof being
charged to operations during the year. The operating results of the acquired
business have been included in the accompanying consolidated financial
statements from its date of acquisition.

                                     F-10
<PAGE>

                                   ILOG S.A.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  In August 1998, the Company completed the acquisition of Compass by issuing
51,852 ILOG shares for all of the outstanding shares of Compass. The merger
has been accounted for as a pooling of interests. Accordingly, all prior
period consolidated financial statements have been restated to show the
results of operations, financial position and cash flows combined with
Compass. Prior to the merger, Compass utilized a December 31 fiscal year end.
For purposes of the combined results of operations for the year ended June 30,
1998, the amounts include Compass' historical results of operations for the
four quarters ended June 30, 1998. All reclassifications and adjustments
performed to conform Compass' accounting policies to ILOG's accounting
policies were immaterial. Revenue and net loss for Compass from July 1, 1998
to the date of acquisition were approximately $98,000 and $(90,000),
respectively. Selected financial information for the combining entities
included in the consolidated statement of income for the year ended June 30,
1998 is as follows (in thousands):

<TABLE>
<CAPTION>
                                                     Company   Compass Combined
                                                     --------  ------- --------
   <S>                                               <C>       <C>     <C>
   1998:
     Revenues....................................... $ 54,596   $660   $ 55,256
     Net income (loss)..............................  (28,035)    84    (27,951)
</TABLE>

  A reconciliation of the Company's historical loss per share to the loss per
share as restated due to the Compass merger is as follows:

<TABLE>
<CAPTION>
                                                                         1998
                                                                        ------
   <S>                                                                  <C>
   Loss per share, as previously reported.............................. $(2.22)
   Effect of Compass...................................................   0.01
                                                                        ------
   Restated basic and diluted loss per share........................... $(2.21)
                                                                        ======
</TABLE>

3. Cash and Cash Equivalents

  Cash and cash equivalents, all of which are classified as available-for-sale
securities, include:

<TABLE>
<CAPTION>
                                                                   June 30,
                                                                ---------------
                                                                 2000    1999
                                                                ------- -------
                                                                (in thousands)
   <S>                                                          <C>     <C>
   Cash held at bank........................................... $ 4,471 $ 7,054
   Cash equivalents............................................  15,845  14,478
                                                                ------- -------
     Total cash and cash equivalents........................... $20,316 $21,532
                                                                ======= =======
</TABLE>

  Gross realized gains and losses on sales of available-for-sale securities
during 2000, 1999 and 1998 were immaterial. There was no unrealized holding
gains or losses on available-for-sale securities at June 30, 2000 or 1999.

  As of June 30, 2000 and 1999, all cash equivalents have contractual
maturities of less than three months.

                                     F-11
<PAGE>

                                   ILOG S.A.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


4. Property and Equipment

  Property and equipment includes:
<TABLE>
<CAPTION>
                                                                  June 30,
                                                               ----------------
                                                                2000     1999
                                                               -------  -------
                                                               (In thousands)
   <S>                                                         <C>      <C>
   Computer equipment and purchased software.................. $ 5,987  $ 6,660
   Furniture and other equipment..............................   2,586    2,504
   Leasehold improvements.....................................     917      738
                                                               -------  -------
     Total property and equipment.............................   9,490    9,902
   Accumulated depreciation and amortization..................  (5,252)  (5,646)
                                                               -------  -------
     Property and equipment, net.............................. $ 4,238  $ 4,256
                                                               =======  =======
</TABLE>

  Equipment purchased under capital leases in the years ended June 30, 2000,
and 1999 totaled $507,000 and $551,000, respectively. The cost of such
equipment included in property and equipment at June 30, 2000 and 1999 totaled
$1,795,000, and $2,633,000, respectively. Accumulated amortization of this
equipment totaled $1,021,000 and $1,862,000 at June 30, 2000 and 1999,
respectively.

5. Comprehensive Income (Loss)

  As of July 1, 1998, the Company adopted Financial Accounting Standards Board
Statement No. 130, "Reporting Comprehensive Income" (FAS 130), which
establishes new rules for the reporting and display of comprehensive income
and its components; however the adoption of this Statement had no impact on
the Company's results of operations or shareholders' equity.

  The components of comprehensive loss are as follows:

<TABLE>
<CAPTION>
                                                            June 30,
                                                    --------------------------
                                                     2000     1999      1998
                                                    -------  -------  --------
                                                         (In thousands)
   <S>                                              <C>      <C>      <C>
   Net income (loss)............................... $ 1,180  $(3,170) $(27,951)
   Change in cumulative translation adjustment.....  (1,264)    (732)     (913)
                                                    -------  -------  --------
     Total comprehensive loss...................... $   (84) $(3,902) $(28,864)
                                                    =======  =======  ========
</TABLE>

                                     F-12
<PAGE>

                                   ILOG S.A.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


6. Debt

  The following table presents a summary of the Company's debt:
<TABLE>
<CAPTION>
                                                                    June 30,
                                                                  -------------
                                                                   2000   1999
                                                                  ------ ------
                                                                       (In
                                                                   thousands)
   <S>                                                            <C>    <C>
   Short-term debt:
   Lines of credit..............................................  $1,602 $1,100
   Current portion of interest-free loans from French government
    agencies, denominated in French francs......................      47    340
   Current portion of capitalized lease obligations.............     399    424
   Current portion of notes payable to stockholders.............   1,667  1,667
                                                                  ------ ------
     Total short-term-debt......................................  $3,715 $3,531
                                                                  ====== ======

   Long-term debt:

   Long-term portion of interest-free loans from French
    government agencies denominated in French francs............  $  --  $  223
   Long-term portion of capitalized lease obligations...........     303    323
   Notes payable to stockholders................................   1,666  3,333
                                                                  ------ ------
     Total long-term debt.......................................  $1,969 $3,879
                                                                  ====== ======
</TABLE>

  The Company has lines of credit with a French bank allowing for a maximum
borrowing of FF 20,000,000 (approximately $2,915,000) at June 30, 2000 and
which expire on May 1, 2001. The lines of credit bear interest at the rate of
EURIBOR (offer rate determined by the Banking Federation of the European
Union) plus 1.5% which corresponded to effective rates of 6.1% and 4.1% at
June 30, 2000 and 1999, respectively. The amounts outstanding under these
lines at June 30, 2000 were denominated in Euros, French francs, U.S. dollars,
pounds sterling, Singapore dollars and Spanish pesetas.

  Promissory notes for a total of $5,000,000 were issued in August 1997, in
connection with the CPLEX acquisition. The note holders became stockholders
and directors of the Company following the acquisition. The notes bear
interest at a fixed rate of 6.39%. Repayment is in three annual equal
installments commencing in August 1999.

  Future payments of long-term debt, excluding capitalized lease obligations,
for the years ending June 30 are as follows (in thousands):

<TABLE>
     <S>                                                                 <C>
     2001............................................................... $ 1,714
     2002...............................................................   1,666
                                                                         -------
                                                                         $ 3,380
                                                                         =======
</TABLE>

                                     F-13
<PAGE>

                                   ILOG S.A.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Future minimum lease payments under capitalized lease obligations due for
the years ending June 30 are as follows (in thousands):

<TABLE>
   <S>                                                                    <C>
   2001.................................................................. $ 422
   2002..................................................................   225
   2003..................................................................    83
   2004..................................................................     2
   2005..................................................................   --
                                                                          -----
   Total minimum lease payments..........................................   732
   Less amount representing interest.....................................   (30)
                                                                          -----
   Present value of net minimum lease payments...........................   702
   Less current portion..................................................  (399)
                                                                          -----
   Long-term portion..................................................... $ 303
                                                                          =====
</TABLE>

  Interest paid in the years ended June 30, 2000, 1999 and 1998 totaled
$38,000, $47,000 and $51,000 respectively.

7. Shareholders' Equity

 General

  At June 30, 2000, the issued and outstanding share capital of the Company
consisted of 15,362,719 shares with a nominal value of FF 4.00.

  In August 1998, 51,852 shares were issued as part of the Compass
acquisition. In June 1998, 685,064 shares were issued for cash to a customer
at $15.31 per share, resulting in total proceeds of approximately $10,500,000.
In August 1997, 1,700,000 shares were issued as part of the purchase
consideration in the CPLEX acquisition.

 Preemptive subscription rights

  Shareholders have preemptive rights to subscribe on a pro rata basis for
additional shares issued by the Company for cash. Shareholders may waive such
preemptive subscription rights at an extraordinary general meeting of
shareholders under certain circumstances. Preemptive subscription rights, if
not previously waived, are transferable during the subscription period
relating to a particular offer of shares.

 Dividend rights

  Dividends may be distributed from the statutory retained earnings, subject
to the requirements of French law and the Company's statutes. The Company has
not distributed any dividends since its inception. The accumulated deficit for
statutory purposes totaled approximately $22,475,000 at June 30, 2000.
Dividend distributions, if any, will be made in French francs.

Stock options

  Stock options have been granted to employees under the Company's 1992, 1994,
1996, and 1998 Stock Option Plans. Generally, options vest over four years
from, and expire between five to ten years after, the date of hire or grant.
During the years ended June 30, 2000, 1999 and 1998, the Company recorded
compensation expense related to options of $24,000, $102,000 and $117,000,
respectively. The Company will record an aggregate compensation expense of
approximately $46,000 over the related vesting period of the options in future
years.

                                     F-14
<PAGE>

                                   ILOG S.A.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  A summary of activity under the option plans is as follows:

<TABLE>
<CAPTION>
                            Shares       Options   Weighted Average  Weighted Average
                         Reserved for  Granted and Exercise Price in Exercise Price in
                         Future Grants Outstanding   French Francs     U.S. Dollars
                         ------------- ----------- ----------------- -----------------
<S>                      <C>           <C>         <C>               <C>
Balances at June 30,
 1997...................     491,470    1,284,004        18.88             3.46
  Options authorized....   2,100,000          --           --               --
  Options granted.......  (2,195,789)   2,195,789        45.58             7.60
  Options exercised.....         --      (336,471)       12.01             2.00
  Options canceled......     161,185     (161,185)       25.02             4.17
                          ----------    ---------        -----             ----
Balances at June 30,
 1998...................     556,866    2,982,137        54.18             9.03
  Options authorized....   1,000,000          --           --               --
  Options granted.......  (1,205,977)   1,205,977        47.57             8.08
  Options exercised.....         --      (150,106)       30.86             5.24
  Options canceled......     103,552     (103,552)       47.95             8.15
                          ----------    ---------        -----             ----
Balances at June 30,
 1999...................     454,441    3,934,456        45.54             7.74
  Options authorized....     900,000          --           --               --
  Options granted.......  (1,124,850)   1,124,850        64.96             9.93
  Options exercised.....         --      (871,801)       29.71             4.54
  Options canceled......     300,305     (300,305)       46.49             7.10
  Plan termination......    (138,131)         --           --               --
                          ----------    ---------        -----             ----
Balances at June 30,
 2000...................     391,765    3,887,200        50.69             7.75
                          ==========    =========        =====             ====
</TABLE>

  At June 30, 2000, 1999 and 1998, 1,675,236, 1,059,045, and 361,322
respectively, of the outstanding options were exercisable at weighted average
exercise prices of FF43.38 ($6.63), FF31.85 ($5.41), and FF18.37 ($3.06)
respectively. Exercise prices for options outstanding as of June 30, 2000
ranged from FF12.80 to FF314.86 ($1.96 to $48.14). The weighted average
remaining contractual life of those options is 7.7 years.

  As allowed under SFAS 123, the Company has elected to continue using APB 25
in accounting for its employee stock options. Under APB 25, when the exercise
price of the Company's employee stock options is less than the market price of
the underlying shares at the date of grant, compensation expense is
recognized.

  Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if Company had accounted for
its employee stock options under the fair value method of SFAS 123. The fair
value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following average assumptions for 2000,
1999 and 1998, respectively: Risk-free interest rates of 4%, dividend yield of
0%; volatility factors of the expected market price of the Company's ordinary
shares of 1.23, 0.93, and 0.98, for 2000, 1999, and 1998; and a weighted-
average expected life of the option of 5 years.

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

                                     F-15
<PAGE>

                                   ILOG S.A.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  For purposes of pro forma disclosures, the estimated fair value of the
options is expensed over the vesting period of the options. The Company's pro
forma information follows (in thousands except for loss per share
information):

<TABLE>
<CAPTION>
                                                     2000     1999      1998
                                                   --------  -------  --------
   <S>                                             <C>       <C>      <C>
   Pro forma net loss............................. $(12,448) $(8,273) $(30,956)
   Pro forma loss per share--basic................ $  (0.85) $ (0.59) $  (2.44)
   Pro forma loss per share--diluted.............. $  (0.70) $ (0.59) $  (2.44)

  The weighted-average value of options granted during 2000, 1999 and 1998 was
as follows:

<CAPTION>
                                                     2000     1999      1998
                                                   --------  -------  --------
   <S>                                             <C>       <C>      <C>
   Options whose exercise price equaled market
    price of the underlying shares on the grant
    date.......................................... $   9.93  $  6.16  $   5.48
   Options whose exercise price was more than the
    market price of the underlying shares on the
    grant date....................................      --       --      $5.71
   Options whose exercise price was less than the
    market price of the underlying shares on the
    grant date....................................      --   $  6.08      7.21
</TABLE>

 Employee Stock Purchase Plan

  In March 1997, the Company implemented the 1996 International Employee Stock
Purchase Plan and the 1996 French Employee Savings Plan, as authorized by the
shareholders in October 1996. Under provisions of the Company's employee stock
purchase plans, employees can purchase the Company's common stock at a
specified price through payroll deductions during an offering period. In
October 2000 the Company's shareholders authorized the issuance of up to
600,000 shares to employees pursuant to the terms of these Plans. 391,918
shares were issued under the Plans during the year ended June 30, 2000.

 Warrants

  In September 1999, warrants to purchase 20,000 shares were granted to the
Company's non-executive Directors at a price of FF49.52 per share. 2,500 were
exercised in the year ended June 30, 2000 and as of June 30, 2000 17,500 were
outstanding. These warrants may be exercised at any time prior to September
2004.

8. Earnings Per Share

  The following table sets forth the computation of basic and diluted net
income (loss) per share:

<TABLE>
<CAPTION>
                                                  Year Ended June 30,
                                          ------------------------------------
                                             2000        1999         1998
                                          ----------- -----------  -----------
                                            (in thousands, except per share
                                                       amounts)
<S>                                       <C>         <C>          <C>
Numerator:
  Net income (loss)...................... $     1,180 $    (3,170) $   (27,951)

Denominator:
  Weighted average shares outstanding....  14,628,098  13,998,859   12,664,720
  Incremental shares attributable to
   shares exercisable under employee
   stock plans and warrants..............   3,226,561         --           --
                                          ----------- -----------  -----------
Denominator for diluted earnings per
 share...................................  17,854,659  13,998,859   12,664,720
                                          =========== ===========  ===========
Net income (loss) per share--basic....... $      0.08 $     (0.23) $     (2.21)
                                          =========== ===========  ===========
Net income (loss) per share--diluted..... $      0.07 $     (0.23) $     (2.21)
                                          =========== ===========  ===========
</TABLE>

                                     F-16
<PAGE>

                                   ILOG S.A.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


9. Income Taxes

  For financial reporting purposes, income (loss) before income taxes includes
the following components:

<TABLE>
<CAPTION>
                                                     Year Ended June 30,
                                                  ---------------------------
                                                   2000      1999      1998
                                                  -------  --------  --------
                                                       (in thousands)
<S>                                               <C>      <C>       <C>
France........................................... $ 2,390  $    748  $(27,556)
United States....................................    (189)   (3,784)     (514)
Rest of the world................................    (455)       (4)      119
                                                  -------  --------  --------
  Total.......................................... $ 1,746  $ (3,040) $(27,951)
                                                  =======  ========  ========

  A reconciliation of income taxes computed at the French statutory rate
(37.8% in 2000, and 41.7% in 1999 and 1998) to the income tax benefit is as
follows:

<CAPTION>
                                                     Year Ended June 30,
                                                  ---------------------------
                                                   2000      1999      1998
                                                  -------  --------  --------
                                                       (in thousands)
<S>                                               <C>      <C>       <C>
Income tax expense (benefit) computed at the
 French statutory rate........................... $   660  $ (1,266) $(11,644)
Operating losses not utilized....................     --      1,396    11,504
Use of operating losses whose benefits were not
 previously recognized...........................     --        --        140
Other............................................     (94)      --        --
                                                  -------  --------  --------
  Total income taxes............................. $   566  $    130  $    --
                                                  =======  ========  ========

  Significant components of the Company's deferred tax assets and liabilities
consist of the following:

<CAPTION>
                                                     Year Ended June 30,
                                                  ---------------------------
                                                   2000      1999      1998
                                                  -------  --------  --------
                                                       (in thousands)
<S>                                               <C>      <C>       <C>
Deferred tax assets:
  Net operating loss carryforwards...............  $8,816  $  7,404  $  7,231
  Acquired intangibles capitalized and amortized
   for tax purposes..............................   4,697     8,139    10,330
  Provisions and accruals not currently
   deductible....................................     158       419       208
  Other..........................................     926       665       544
                                                  -------  --------  --------
                                                   14,597    16,627    18,313
Valuation allowance.............................. (14,597)  (16,627)  (18,313)
                                                  -------  --------  --------
  Net deferred taxes............................. $   --   $    --   $    --
                                                  =======  ========  ========
</TABLE>

  Due to its history of losses, the Company does not believe that sufficient
objective, positive evidence exists to conclude that recoverability of its net
deferred tax assets is more likely than not. Consequently, the Company has
provided valuation allowances covering 100% of its net deferred tax assets.

  As of June 30, 2000 the Company had net operating loss carryforwards for
French tax purposes of approximately $8,800,000 which have no expiration date.
The Company also has U.S. net operating loss carryforwards for federal and
state tax purposes of approximately $9,900,000 and $4,000,000, respectively,
that expire in the years 2000 through 2020. The Company has U.K. net operating
losses of approximately $4,300,000 which have no expiration date. The Company
also has net operating loss carryforwards totaling approximately $1,000,000 in
various other jurisdictions.

                                     F-17
<PAGE>

                                   ILOG S.A.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The utilization of these net operating loss carryforwards is limited to the
future operations of the Company in the tax jurisdictions in which such
carryforwards arose.

10. Employee Retirement Plans

  The Company contributes to pensions for personnel in France in accordance
with French law by contributing based on salaries to the relevant government
agencies. There exists no actuarial liability in connection with these plans.
French law also requires payment of a lump sum retirement indemnity to
employees based upon years of service and compensation at retirement. Benefits
do not vest prior to retirement. The Company's obligation at June 30, 2000 and
1999 was immaterial.

11. Operating Lease Commitments

  The Company leases its facilities and certain equipment under operating
leases that expire through 2007. Future minimum lease payments under operating
leases due for the fiscal years ending June 30 are as follows (in thousands):

<TABLE>
     <S>                                                                  <C>
     2001................................................................ $3,086
     2002................................................................  2,901
     2003................................................................  2,481
     2004................................................................  1,660
     2005 and thereafter.................................................  4,439
</TABLE>

  Rental expense for the years ended June 30, 2000, 1999 and 1998 was
approximately $3,225,000, $2,496,000 and $1,964,000, respectively.

12. Segment and Geographic Information

  Segments: From July 1, 1999, ILOG has been organized into three divisions,
each operating in different markets. They each handle industry marketing,
sales, consulting and some product development. The Telecommunications
Business Division ("TELCO") is dedicated to the web-enabled network management
customer care and customer relationship management sectors. The Value Chain
Management Business Division ("VCM") is focused on enterprise resource
planning (ERP), and supply chain management (SCM) applications for the
allocation of equipment, planning and scheduling production, assigning
personnel, and managing supply chains with the greatest possible efficiency.
The Industry Solutions Division ("ISD") focuses on the e-commerce, finance,
transportation and defense industries. "Corporate & other" includes a segment
which does not meet the quantitative threshold for determining reportable
segments, and corporate overhead and other expenses which are not allocated to
reportable segments. In prior years, the Company operated in one reportable
segment and accordingly comparative information is unavailable.

  The Company evaluates performance and allocates resources based on segment
revenues and operating results. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. There are no intersegment sales. Assets of the segment
groups are not relevant for management of the business and are thus not
disclosed.

<TABLE>
<CAPTION>
                                                         Corporate
                                  TELCO    VCM     ISD    & other  Consolidated
                                 ------- ------- ------- --------- ------------
<S>                              <C>     <C>     <C>     <C>       <C>
2000
Revenues........................ $20,422 $19,925 $23,911   $7,037       $71,295
Income (loss) from operations...   6,192   8,296   7,951  (21,487)          952
</TABLE>

                                     F-18
<PAGE>

                                   ILOG S.A.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Geography: Operations outside of France consist principally of sales,
marketing, finance, customer support, and to a lesser extent, research and
development activities. Intercompany sales between geographic areas are
accounted for at third party selling price less a discount and are consistent
with the rules and regulations of governing tax authorities. Such transactions
are eliminated in the consolidated financial statements. Identifiable assets
are those assets that can be directly associated with a particular geographic
area. The following is a summary of operations within geographic area:

<TABLE>
<CAPTION>
                                                   Europe,
                                   United         excluding
                         France(1) States   Asia   France   Elimination Consolidated
                         --------- ------- ------ --------- ----------- ------------
<S>                      <C>       <C>     <C>    <C>       <C>         <C>
1998
Net revenues:
  Customers.............  $17,191  $22,312 $4,985  $10,768        --      $55,256
  Intercompany..........    7,437      --     --       --    $ (7,437)        --
                          -------  ------- ------  -------   --------     -------
                           24,628   22,312  4,985   10,768     (7,437)     55,256
                          =======  ======= ======  =======   ========     =======
  Long-lived assets.....    1,368    1,469    422      591        --        3,850

1999
Net revenues:
  Customers.............   20,956   22,440  6,680   13,647        --       63,723
  Intercompany..........    8,831      --     --       --      (8,831)        --
                          -------  ------- ------  -------   --------     -------
                           29,787   22,440  6,680   13,647     (8,831)     63,723
                          =======  ======= ======  =======   ========     =======
  Long-lived assets.....    1,618    1,991    366      554        --        4,529

2000
Net revenues:
  Customers.............   22,747   31,989  6,686    9,873        --       71,295
  Intercompany..........   12,055      --     --       --     (12,055)        --
                          -------  ------- ------  -------   --------     -------
                           34,802   31,989  6,686    9,873    (12,055)     71,295
                          =======  ======= ======  =======   ========     =======
  Long-lived assets.....    1,598    1,682    562      416        --        4,258
</TABLE>
--------
(1) Net revenues related to sales from France made to customers outside of
    France are included within the net revenue related to customers in the
    geographic area of France and totaled $11,737,000, $8,358,000 and
    $3,993,000 at for the years ended June 30, 2000, 1999 and 1998,
    respectively.

13. Event subsequent to the date of auditor's report--unaudited

  In October 2000, the Company's shareholders authorized the issuance of an
additional 1,250,000 shares under the terms of the 1998 Stock Option Plan.

                                     F-19
<PAGE>

                                   ILOG S.A.

                 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
         Col. A              Col. B           Col. C            Col. D     Col. E
 -----------------------  ------------ --------------------- ------------ --------
                                            Additional
                                       ---------------------
                                                  Charged to              Balance
                           Balance at  Charged to   Other                    at
                          Beginning of Costs and  Accounts-- Deductions--  End of
      Description            Period     Expenses   Describe    Describe    Period
      -----------         ------------ ---------- ---------- ------------ --------
<S>                       <C>          <C>        <C>        <C>          <C>
Year ended June 30, 1998
Reserves and allowances
 deducted
 from asset accounts:
  Allowance for doubtful
   accounts.............    $273,000    $302,000     --        $ 49,000   $526,000

Year ended June 30, 1999
Reserves and allowances
 deducted
 from asset accounts:
  Allowance for doubtful
   accounts.............    $526,000    $596,000     --        $181,000   $941,000

Year ended June 30, 2000
Reserves and allowances
 deducted
 from asset accounts:
  Allowance for doubtful
   accounts.............    $941,000    $206,000     --        $456,000   $691,000
</TABLE>

                                      F-20