##### Table of Contents

As filed with the Securities and Exchange Commission on October 31, 2002





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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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Form 20-F





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




|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------

For the fiscal year ended June 30, 2002





| ̈ |  | 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





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ILOG S.A.


(Exact name of Registrant as specified in its charter)





Not Applicable (Translation of
Registrants Name into English)

The Republic of France (Jurisdiction of incorporation or organization)





9, rue de Verdun, 94253 Gentilly, France


(Address of principal executive offices)





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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:





Title of each class:

Name of each exchange on which registered:American Depositary Shares, each representing one Ordinary Share, nominal value 0.61 per share

Nasdaq National MarketOrdinary Shares, nominal value 0.61 per share

Nasdaq National Market*


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|* |  | Not for trading, but only in connection with the American Depositary Shares.
|- |  | ----------------------------------------------------------------------------




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Securities for which there is a reporting obligation pursuant to Section 15 of the Act:





None





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The number of outstanding shares of each of the issuers classes of capital or
common stock as of June 30, 2002 was 16,670,665 Ordinary Shares of 0.61 nominal value, including 5,765,322 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. þ  Yes  ̈ No





Indicate by check mark which financial statement item the registrant has elected to follow.


 ̈ Item 17    þ  Item 18





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##### Table of Contents

TABLE OF CONTENTS





PageINTRODUCTIONCautionary Statement Regarding Forward-Looking Statements

2Presentation of Information

3American Depositary Shares

3Exchange Rates

3PART IItem 1.

Identity of Directors, Senior Management and Advisers

4Item 2.

Offer Statistics and Expected Timetable

4Item 3.

Key InformationA.

Selected Financial Data

4B.

Capitalization and Indebtedness

5C.

Reasons for the Offer and Use of Proceeds

5D.

Risk Factors

5Item 4.

Information on the CompanyA.

History and Development of ILOG

13B.

Business Overview

14C.

Organizational Structure

26D.

Property, Plant and Equipment

26Item 5.

Operating and Financial Review and ProspectsA.

Operating Results

28B.

Liquidity and Capital Resources

33C.

Research and Development, Patents and Licenses

34D.

Trend Information

35Item 6.

Directors, Senior Management and EmployeesA.

Directors and Senior Management

35B.

Compensation

40C.

Board Practices

41D.

Employees

43E.

Share Ownership

44Item 7.

Major Shareholders and Related Party TransactionsA.

Major Shareholders

47B.

Related Party Transactions

47C.

Interests of Experts and Counsel

48Item 8.

Financial InformationA.

Consolidated Statements and Other Financial Information

48B.

Significant Changes

48Item 9.

The Offer and ListingA.

Offer and Listing Details

49B.

Plan of Distribution

50C.

Markets

50D.

Selling Shareholders

52




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##### Table of Contents

PageE.

Dilution

52F.

Expenses of the Issue

52Item 10.

Additional InformationA.

Share Capital

52B.

Memorandum and Articles of Association

52C.

Material Contracts

61D.

Exchange Controls

61E.

Taxation

62F.

Dividends and Paying Agents

67G.

Statements by Experts

67H.

Documents on Display

67I.

Subsidiary Information

67Item 11.

Quantitative and Qualitative Disclosures About Market Risk

67Item 12.

Description of Securities Other Than Equity Securities

68PART IIItem 13.

Defaults, Dividend Arrearages and Delinquencies

68Item 14.

Material Modification to the Rights of Security Holders and Use of Proceeds

68Item 15.

[Reserved]

68Item 16.

[Reserved]

68PART IIIItem 17.

Financial Statements

69Item 18.

Financial Statements

69Item 19.

Exhibits

69





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INTRODUCTION





CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS





In addition to historical
information, this Annual Report on Form 20-F 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. These forward-looking
statements 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 Item 3. Key InformationRisk Factors, Item 4. Information on the Company and Item 5. Operating and Financial Review and Prospects. 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 of this Annual Report on Form 20-F. Readers should carefully review the risk factors described in other documents the Company files or submits from time to time with the Securities and Exchange Commission, including reports on Form 6-K
submitted by the Company.




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##### Table of Contents

PRESENTATION OF INFORMATION





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.





AMERICAN DEPOSITARY SHARES





Pursuant to a program sponsored by the Company, Ordinary
Shares of the Company, or the Shares, are traded in the United States in the form of American Depositary Shares, or ADSs, each ADS representing one Share placed on deposit with JPMorgan Chase Bank, as 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. Shares may be deposited with the Paris office of BNP Paribas, as Custodian, or any successor or successors to such Custodian under
the terms of the Deposit Agreement, dated as of February 13, 1997 and amended on August 13, 1999, among the Company, the Depositary and the holders from time to time of ADSs. 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, 1999.





EXCHANGE RATES





ILOG publishes its financial statements in U.S. dollars. In this Annual
Report on Form 20-F, references to dollars or $ are to U.S. dollars and  are to euros. 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 low, high,
average and end of period noon buying rates in New York City for cable transfers in euros as certified for customs purposes by the Federal Reserve Bank of New York, or Noon Buying Rate, for the euro against the dollar. These 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.





Year Ended June 30,

Low

High

Average Rate(1)

End of Period(Dollars per euro)1998

1.06

1.14

1.09

1.081999

1.03

1.22

1.11

1.032000

0.89

1.09

1.00

0.952001

0.84

1.09

0.96

0.852002

0.86

0.99

0.90

0.99


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|(1) |  | The average of the Noon Buying Rates on the last business day of each month during the year. Through December 31, 1998, the above rates reflect those of the
French Franc converted into euros at the official fixed conversion rate of one euro = 6.55957 French francs.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




For information regarding the effects of currency fluctuations on the Companys results, see Item 5. Operating and Financial Review and Prospects, and Item 11. Quantitative and Qualitative Disclosures about
Market Risk.




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##### Table of Contents

PART I





Item 1.Identity of Directors, Senior Management and Advisers





Not Applicable.





Item 2.Offer Statistics and Expected Timetable





Not Applicable.





Item 3.Key Information





A.    Selected Financial Data





The following selected financial
data should be read in conjunction with Item 5. Operating and Financial Review and Prospects, 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, 2002, 2001 and 2000 and the balance sheet data at June 30, 2002 and 2001 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 are included herein. The selected statement of operations data for the years ended June 30, 1999 and 1998 and balance
sheet data at June 30, 2000, 1999 and 1998 are derived from audited financial statements not included herein.





Year Ended June 30,2002


2001


2000


1999


1998(in thousands, except per share data)Statement of Operations Data:Revenues:License fees

$
53,173


$
52,325


$
46,776


$
38,657


$
34,652Services


29,480



27,301



25,059



25,066



20,604Total revenues


82,653



79,626



71,835



63,723



55,256Cost of revenues:License fees


1,163



1,258



1,065



1,149



1,183Services


12,785



13,179



13,630



14,429



10,867Total cost of revenues


13,948



14,437



14,695



15,578



12,050Gross profit


68,705



65,189



57,140



48,145



43,206Operating expenses:Marketing and selling


44,622



40,958



35,625



31,531



27,290Research and development


15,289



14,804



12,195



9,835



6,575General and administrative


7,898



8,709



8,115



7,435



6,126Nouveau marché expenses














466



Write-off of acquired intangibles










253



2,032



31,045Total operating expenses


67,809



64,471



56,188



51,299



71,036Income (loss) from operations


896



718



952



(3,154
)


(27,830
)Net interest income (expense) and other


713



998



794



114



(121
)Income taxes


(800
)


(789
)


(566
)


(130
)


Net income (loss)

$
809


$
927


$
1,180


$
(3,170
)

$
(27,951
)Net income (loss) per share:basic

$
0.05


$
0.06


$
0.08


$
(0.23
)

$
(2.21
)diluted

$
0.05


$
0.05


$
0.07


$
(0.23
)

$
(2.21
)Shares and share equivalents used in per share calculations(1):basic


16,379



15,765



14,628



13,999



12,665diluted


17,717



17,547



17,855



13,999



12,665


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|(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.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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June 30,2002

2001

2000

1999

1998(In thousands)Balance Sheet Data:Cash and cash equivalents

$
31,368

$
20,870

$
20,316

$
21,532

$
20,101Working capital


29,075


20,894


21,793


17,375


21,929Total assets


63,655


55,377


52,737


45,006


43,649Long-term obligations


340


262


1,969


3,879


5,979Shareholders equity


35,950


27,528


24,082


18,025


19,799





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.





B.    
Capitalization and Indebtedness





Not Applicable.





C.    
Reasons for the Offer and Use of Proceeds





Not Applicable.





D.    
Risk Factors


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





The Company
has incurred losses in the past and, as of June 30, 2002, had a substantial accumulated deficit. The Companys future operating results are uncertain and there can be no assurance that the Company will be profitable in the future.





The Company has incurred losses in two of the last five fiscal years. As of June 30, 2002, the Company
had an accumulated deficit of approximately $39.8 million, of which $33.4 million relates to the write-off of intangibles acquired in 1998. 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 certain portions of its markets, together with the factors described in these risk factors under The Companys operating results have fluctuated significantly in the past
and may continue to do so in the future, and The Companys operating results are subject to seasonal fluctuations, make the prediction of future operating results difficult. The Companys past financial performance should
not be considered indicative of future results. The Company has experienced a slow-down in the rate of its revenue growth in recent years. 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, 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.





The
Companys operating results have fluctuated significantly in the past and may continue to do so in the future.





The Companys operating results have varied significantly in the past, on a quarterly 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




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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. These factors and others could cause the Companys operating results to
vary significantly in the future. Moreover, acts of terrorism and/or war and 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 2002 as a result of the global economic downturn, and in 2000 and 1999 when its customers shifted their spending from new
applications to Year 2000 readiness. 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 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 or its rate of revenue growth on a quarterly or annual basis.





The Company is dependant upon its major independent software vendors (ISVs) for a significant part of its revenues. There can be no
assurance that this source of revenues will continue.





In 2002 ILOGs largest customer, SAP A.G., an
ISV, provided 11% of the Companys revenues, and its next nine largest customers, of which six were ISVs, accounted for a further 14% of its revenues. In 2002 43% of the Companys license revenues were from ISVs which embed the
Companys software components in their applications, which they sell to their customers. Should the ISVs individually or collectively decide to replace the Companys components with their own or a competitors technology for any
reason, discontinue offering the application embedding the Companys components and/or experience a business downturn, the Companys business, operating results and financial condition will be adversely affected.





The uncertain outcome of sales efforts and the extended length of the Companys sales cycle could result in substantial fluctuations in operating
results.





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




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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.





There can be no assurances that the Companys sales and marketing force will generate adequate revenues or be able to compete successfully.





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 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. For example, in 2002 sales and marketing expenses increased by 9% and headcount by 8% with revenues increasing by 4%.





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.





The industry in which the Company
operates is characterized by intense competition. If the Company is unable to compete successfully against new or future competitors, its operating results would be negatively affected.





The Companys present direct competitors include a number of private and public companies such as Computer Associates, Cosytech, Dash Associates, Fair Isaac,
Haley, IBM, Loox Software, Pegasystems, SL Corporation and Tom Sawyer. 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.





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, these 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-




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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. See Item 4. Information
on the CompanyCompetition.





If the Company is unable to meet evolving market conditions or customer requirements, its
business, operating results and financial condition would be materially adversely affected.





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.





Errors in the Companys software products could result in significant losses to the Company or its customers and
could result in product liability claims against the Company.





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 these errors could result in significant losses to the Company or a customer, especially if these 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 these claims in the future. The Company currently has limited




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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.





The Companys commercial reputation and success is dependant upon its consulting activities meeting customer expectations.





In 2002 13% of the Companys revenues were directly provided by its consulting services which are designed to facilitate
customer adoption of the Companys products, and accelerate their deployment, so that further license and maintenance revenues can be generated for the Company. If the Company, in performing its consulting services, fails to meet or satisfy
customer expectations, then future revenue streams could be reduced and the Company may be required to reimburse customers for monies paid on such unfulfilled projects. In addition the weakening of reputation would have an adverse affect on the
Companys business generally.





Intellectual property infringement disputes could result in significant expense to the Company
and divert technical and management personnel.





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.
For example, in 2002 the Company successfully defended an intellectual property infringement claim by a third party relating to JRules, which defense consumed significant expense and diverted technical and management personnel.





The Company may engage in acquisitions which could adversely affect profitability. The Company may not be able to compete effectively or become
profitable in any markets it enters.





The Company may in the future pursue 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 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.




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As a result of its global operations, the Company is exposed to numerous risks, including
logistical difficulties, cultural differences, product localization costs, import and tariff restrictions, adverse foreign tax consequences and fluctuations in currencies.





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. The Companys 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 adverse economic and political conditions in the countries where the Company does business.





The Company expects to commit additional time and resources localizing its products for selected markets and developing local
sales and support channels. There can be no assurance that these 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.





Currency fluctuations could result in lower profitability for the Company in U.S. dollar terms and the reporting of
exchange gains or losses.





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 26% of the Companys sales and 48% of the Companys expenses
in 2002 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. 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. The Company has a policy of hedging its
short-term currency exposures in order to mitigate the effect of changing exchange rates on the Companys earnings per share. There can be no assurance that this policy will be successful and/or properly executed. See Note 3 to Consolidated
Financial Statements.





The loss of services of any key personnel, or the inability of the Company to successfully recruit, could
have a material adverse impact on the Companys business, operating results or financial condition.





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 Chairman 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.




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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. 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.





The Company is heavily dependent upon its proprietary technology. There can be no assurance that the Companys means of
protecting its proprietary rights will be adequate or that its competitors will not develop similar technology.





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 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.





The Companys ADSs and Shares have
experienced significant fluctuations in the past. The fluctuations have adversely affected the market price of the ADSs and Shares and may continue to do so in the future.





The market price of the Companys ADSs and the Shares has experienced significant fluctuations 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




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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.





Limitations imposed by French law may prevent or delay the ability of the Company to take corporate actions
that require shareholder approval.





As a French société 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 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 voting
Shares upon first notice and one-quarter of the voting 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.





The Company generates its revenues from a concentrated group of product families. Any factor adversely
affecting any of these product families could have a material adverse effect on the Company.





The Company
generates its license fees from the ILOG optimization (42% for 2002), business rules (29%) and visualization (29%) product families. The Company expects that revenues from these 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 Solver, ILOG CPLEX, ILOG JViews and/or ILOG JRules 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 its
optimization, visualization and business rules 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.





The Companys operating results are subject to seasonal fluctuations.





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 in the quarter ending September 30th than in the immediately preceding quarter due primarily to reduced economic activity in Europe in the summer months.





Enforceability of U.S. judgments against French corporations, directors and officers is limited.





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.




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The Company has not paid dividends on its share capital to date and does not intend to pay
dividends in the foreseeable future.





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 euros and
under the French Company 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.





Ownership of Shares by the Companys management and Board of Directors and certain provisions of the Companys by-laws may reduce the
likelihood of a change in control of the Company.





As of September 30, 2002, the Companys executive
officers and directors and their affiliates beneficially owned an aggregate of approximately 19.4% of the Shares. As a result, these 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 by-laws, 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 are also authorized 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. This authorization expires at the next shareholders meeting and will be submitted for renewal at that
time.





Item 4.Information on the Company





A.    History and Development of ILOG





ILOG S.A. is a
société anonyme, a form of limited liability company, incorporated under the laws of France. The Company was registered at the Greffe of the Registry of Commerce, Paris on April 6, 1987 for a duration of 99 years. The
Company was founded by Mr. Pierre Haren, Mr. Marc Fourrier and Mr. Jérôme Chailloux, with the support of the Institut National de Recherche en Informatique et en Automatique (INRIA). It is subject to Book II of the French Code
du Commerceand to Act No. 67-236 of March 23, 1967 on les sociétés commerciales(French Company Law).





The Company is registered with the Register of Commerce and Companies of Créteil under number B 340 852 458. The corporate purposes of the Company, within France, its overseas territories, and outside of France, are
as follows:





a.  the consultation and completion of research and studies and generally
all services related to intelligent software;





b.  the development, running,
distribution and maintenance of hardware and software; and





c.  training in these areas
of activity, including audiovisual techniques and generally, all useful support tools,





all directly or indirectly, on its own
behalf or on behalf of third parties, for sale or in conjunction with third parties, by means of the setting-up of new companies, capital contributions, the purchase of securities, mergers, alliances or investment companies or by lease or management
lease of any assets or rights or otherwise. These corporate purposes may be found in Article 3 of the Companys statuts.





The registered office of the Company is located at 9 rue de Verdun, 94253 Gentilly, France, and its telephone number is 011 33 1 49 08 35 00. The Companys agent for service of process in the United States is CT
Corporation System located at 111 Eighth Avenue, New York, New York 10011.




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In 1987, 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. In 1993, the Company began shipping ILOG Views and ILOG Solver. In 1997 the Company acquired the business of CPLEX Optimization, Inc.
(CPLEX), located in Incline Village, Nevada, which provides linear based optimizer products written in C. In 1998 the Company started to introduce Java versions of its products.





The Companys software development efforts are based in France, except for the CPLEX products, which are developed in Incline Village. Until 1995 the Companys
sales were concentrated in Europe, particularly in France. In 1995, the Company started to expand its sales efforts globally by establishing a major sales presence in the U.S. and Asia and acquiring CPLEX, which has resulted in revenue and expense
growth.





Up until its initial public offering in 1997 on the Nasdaq National Market, which raised $24.9 million,
the Company financed itself through a combination of retained earnings, venture capital investments and interest free loans from French government agencies and the European Union. The Company partially financed the 1997 CPLEX acquisition through the
issuance of 1.7 million shares and promissory notes totaling $5.0 million. In 1998 a further financing of $10.5 million was received from SAP A.G. in exchange for 685,064 shares. In 1998 the Company listed its shares on the Nouveau
Marché of Euronext Paris.





B.    Business Overview





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.





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.





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 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




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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.





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 communication 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 optimization, visualization and business 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 375 ISVs and intends to
sell its components to additional ISVs for inclusion in packaged software products. Approximately 43% of the Companys revenues in 2002 were from ISVs.





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




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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.





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 additional programming languages and expanding the number of components to address common software development needs.





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




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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.





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.





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, value added resellers (VARs), ISVs, 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 or servers on which the application will be deployed and the number and type of ILOG components used in the application.




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





Product Category and Name

Calendar Year of First Commercial Shipment

Calendar Year of Most Recent Version

Product DescriptionOptimizationILOG Solver

1993

2001

Constraint-based reasoning for resource allocationILOG Scheduler

1994

2001

Add-on product for Solver for short-term schedulingILOG Dispatcher

1997

2001

Add-on product for Solver for the transportation industryILOG CPLEX

1997

2002

High performance components for linear programming in CILOG OPL Studio

1998

2001

Optimization modelingILOG Configurator

1999

2001

Embeddable engine for configuration applicationsILOG JConfigurator

2001

2002

Embeddable engine for configuration applications in JavaILOG JSolver

2001

2002

Embeddable constraint-based reasoning for resource allocation in JavaILOG ODF

2000

2002

Add-on to mySAP APO that extends APOs standard optimization capabilitiesILOG OEK

2002

2002

Add-on to Oracle APS that extends APSs standard optimization capabilitiesVisualizationILOG Views Component Suite

1993

2002

Data visualization and graphical user interface in C++ILOG DB-Link

1994

2002

Access to relational and object relational data from C++ILOG Server

1996

2002

Application integration and real-time event notificationILOG JViews Component Suite

1997

2001

Data visualization in JavaILOG JTGO

1998

2002

Graphic components for the communications industryRulesILOG Rules

1993

2002

Business rule engine and business rule management system for C++ILOG JRules

1997

2002

Business rule engine and business rule management system for Java





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:





Optimization Products





The Company currently markets seven optimization components, one optimization modeling product and two environments which in
2002 comprised 42% of the Companys revenue from license fees. The Company generates its revenues from a concentrated group of product families. Any factor adversely affecting any of these product families could have a material adverse affect
on the Company. See Item 3. Key InformationRisk Factors.




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The ILOG Solver and JSolver constraint-programming components provide 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 communications,
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 and JConfigurator are embeddable engines for customer relationship
management (CRM) and/or web-based configuration applications. They are 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 is family of optimizers for solving linear, quadratic, mixed-integer linear and mixed-integer quadratic programming problems. The CPLEX component libraries are
designed to allow developers to embed the CPLEX engine in their applications. These libraries include both the CPLEX Callable Library and ILOG Concert Technology. The CPLEX Callable Library uses a matrix-oriented problem representation and is
available for C and Visual Basic programmers. Concert Technology is a set of modeling objects shared in common with ILOG Solver that allows C++ and Java programmers to represent their problems in a transparent algebraic form. The CPLEX Simplex
Optimizers are implementations of the primal, dual and network simplex methods for linear and quadratic programming. The CPLEX Barrier Optimizer is based on a primal-dual predictor-corrector method and provides an alternative to the simplex methods
for solving linear and quadratic programs. The CPLEX Mixed Integer Optimizer employs a branch-and-cut technique that provides solutions to mixed integer programs, both linear and quadratic. It includes the CPLEX presolve algorithm and cutting-plane
strategies using Gomory mixed-integer, clique and cover, flow cover, GUB cover and implied bound cuts.





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.




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ILOG ODF (Optimization Development Framework), is an add-on to mySAP APO
(Advanced Planner and Optimizer) supply chain solution, which allows end users to extend APOs standard optimization capabilities and customize their applications to suit their individual requirements. With ILOG ODF, users build industry- and
solution-specific cartridges that generate optimization extensions which connect to APO through APOs standard integration mechanism, the SAP APO Optimization Extension Workbench (APX).





ILOGs OEK (Optimization Extension Kit) provides an environment for Oracle APS users to create and use specific optimization modules within standard Oracle APS. These
modulescalled cartridges, provide plug and play integration with Oracle APS, and, combined with other ILOG products provide an extension environment for custom solutions.





Visualization Products





The
Company currently markets user interface components, which in 2002 comprised approximately 29% of the Companys revenues from license fees. The Company generates its license fees from a concentrated group of product families. As a result, any
factor adversely affecting the license of any of these product families could have a material adverse effect on the Company. See Item 3. Key InformationRisk Factors.





ILOG JViews and Views are each a comprehensive data visualization and graphical environment providing components for structured two-dimensional graphics. They are used to
solve a wide range of graphics problems in industrial and commercial environments and supplement the user interface toolkits that are provided by the various platforms to build the dialogs and menus (Windows, Motif, Swing), with graphical components
and tools aimed to display and interact with application data in visually rich and meaningful contexts. They are suitable for building modeling, monitoring, and performance analysis displays in application domains such as business process
management, business activity monitoring, fleet management, network supervision, C3I in defense, production planning and scheduling. These tools and components are designed to improve the efficiency of developing intuitive and interactive graphical
user interfaces while maintaining customizability and integration capabilities. With these components, application data is displayed and manipulated visually, and in representations that end-users can easily comprehend.





The ILOG JViews Component Suite is a set of Java components (class library, JavaBeans, and graphical editors) for building visually rich,
interactive web-based user interfaces. Developers use JViews to create web displays with data-aware graphics atop maps, data relationships in diagrams, real-time charts, schedule data in Gantt charts, and workflow displays. JViews includes a
pre-built business process modeler that is embeddable into business process management applications, or other applications using flow modelers. JViews screen elements are customizable for specific application domains, work alongside existing Swing
and HTML components, and can be used as either power (Java) clients or thin web clients. JViews integrates the current web standards including XML, SVG, and CSS.





ILOG Views is an enterprise class visualization toolkit used to develop advanced user interfaces for supervision applications. It provides a set of editors and C++
components consisting of interactive 2D graphics, maps, charts, Gantt charts, automatic graph arrangement and connections to data sources such as databases or XML. Views takes advantage of the rendering capabilities given by the underlying platform,
such as Microsofts GDI+ (transparency, gradient, anti-aliasing). Views code is portable across Unix, Windows, and Linux platforms. To achieve full portability of the application user interface, Views provides a full set of portable
widgets buttons, menus, notebookthat comply with the look-and-feel of Windows and Motif. ILOG Views Maps and ILOG Data Access are add-on modules that facilitate the access to the main geographic data formats, and data sources and RDBMS.
ILOG Views Charts adds real-time charting capabilities to Views.





ILOG Server is a C++ library that facilitates
the implementation of distributed applications by sharing objects in real-time. Server provides 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 solve system integration and business process operational problems.




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ILOG DB-Link is a set of C++ libraries, which provide access to relational and
object-relational data. DB-Link includes native support for DB2, 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 DB-Link is platform and database
independent, allowing application code to be fully portable onto UNIX and Windows. It 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 JTGO is a suite of Java components
that enables rapid development of visualization layers for Operations Support Systems (OSSs) in the telecommunication industry. Built as an extension to JViews, JTGO components provide data-driven user interfaces that produce graphics directly from
business objects, and instant connectivity for business objects and back-end data via JavaBeans or XML. JTGO has a customizable look-and-feel for the display of network and service data. Based on business logic, data can be represented in different
views: network, equipment, table or tree, which come with navigation services for sorting, filtering and layout. JTGO provides turnkey support for inventory data, QoS indicators, faults, CDR and IPDR. Its information environment is fully compliant
with various telecommunication industry standards including ITU, OSI, Bellcore, SONET, SNMP and OSS/J. JTGO applications are deployed in various formats, including Java stand-alone applications, Java applets or Web-enabled user interfaces.





Rules Products





The ILOG JRules and Rules components, which comprised approximately 29% of the Companys license revenues in 2002, is a business rule engine and business rule management system. JRules and Rules
provide an environment for building and managing enterprise-wide business rule applications in Java and C++. They share a common set of tools known as the Rule Kit which includes: (i) Rule Builder, an integrated development environment for
developing and debugging business rule applications; (ii) Business Rule Language, a customizable and extensible business rule language, placing business rule definition in the hands of the user; and (iii) Rule Editor, adaptable web-enabled and
JavaBean components that can be embedded in applications.





JRules contains a Business Rule Repository, which is a
centralized location for storing business rules and all related information can be customized and is designed to work with an organizations unique business rule requirements. JRules also provides event management features that allow users to
create rules for detecting complex time-oriented patterns within flows of events. JRules is embeddable within Web Services on the major application server platforms.





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. Rules is used in applications such as network management, process
monitoring and fraud detection.





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.




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Customers and Applications





As of September 30, 2002, ILOG components are under license by over 2,000 customers, including 375 ISVs and/or OEMs, for development and/or deployment in a wide range
of applications described below.





Manufacturing

Communications

Aerospace and DefenseSupervision and Data Visualization    Equipment performance analysis   Geographic information
systems   Process monitoring and control   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

Network and Systems Management    Network visualization   Configuration
management   Fault management   Performance management   Security management  Service Management    Dynamic tariff policy management   On-demand service provisioning   Flexible invoicing  Network Planning    Economic analysis   Ground and space equipment scheduling   Satellite mission planning   Network modeling

Command, Control,Communications andIntelligence (C3I) systems    Data fusion   Geographic information systems   Image processing   Logistics mapping  Process Monitoring    Data flow monitoring
  Radar visualization   Test bench monitoring simulation   Capability analysis   Flight simulators   Scenario analysis  Resource Allocation
andOptimization    Frequency and bandwidth allocation   Mission planning   On-board resource scheduling   Payload optimization   Supply chain logistics


Transportation

Finance

E-BusinessResource Optimization    Airport counter, gate and belt allocation   Command and control
  Crew allocation   Distribution planning   Equipment scheduling   Fleet management   Maintenance planning and scheduling   Timetabling   Traffic planning   Warehouse management  Supervision & Data Visualization    Geographic information systems   Traffic monitoring   Vehicle tracking
systems   Security

  Online investment management   Online lending   Online trading   Online financial planning & advisory services   Web personalization   Portfolio management & optimization
  Risk management   Automated trading   Order generation & management   Loan configuration   Underwriting   Claims processing   Straight-through-processing   Customer care & billing

  CRM   e-Commerce   e-Fulfillment   E-Procurement   E-Travel   Self-service websites   Web personalization   Business Process Management   Business Activity Management




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Sales and Marketing





The Company derives its revenues from the sale of development licenses to application developers and from royalties or deployment licenses once applications are developed
and deployed and related services. Revenues from license fees and services represented 64% and 36%, respectively, of the Companys total revenues in 2002. Services revenue consist of consulting to facilitate the adoption of the Companys
products, maintenance and customer training. Maintenance, consulting and training accounted for 21%, 13% and 2%, respectively, of the Companys total revenues in 2002.





Total revenues increased to $82.7 million in 2002 from $79.6 million in 2001, and from $71.8 million in 2000, representing increases of 4% and 11% over the respective
previous years. The growth in 2002 reflects the market success of the Rules product line for business process applications and the impact of the growing installed base of licenses on maintenance revenue, offset by the lower spending of the
communications industry. The rate of growth in 2001 reflected the transition of the Companys channels of distribution from end users to ISVs, which have a longer selling cycle, and the impact of slower spending by communications industry
customers in the latter part of 2001.





During 2002, 2001 and 2000, revenues generated from customers in North
America totaled approximately $37.4 million, $36.7 million and $32.4 million; in Europe $37.3 million, $34.2 million and $32.7 million; and in Asia $8.0 million, $8.7 million and $6.7 million; respectively. The 9% increase in European revenues and
the 2% growth in North American revenues in 2002 over 2001 reflects difficulties in the telecommunications and supply chain management sectors affecting the United States more than Europe. The 12% growth in North American revenues and the 4%
increase in European revenues in 2001 over 2000 reflected a lower euro exchange rate 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 the first part of 2001. The 8% decrease in Asia in 2002 over 2001 reflects the difficult economic conditions in Asia, after the 31% increase in 2001 over 2000 following the establishment
of the Companys Japanese operations.





ILOG markets and sells its products worldwide principally through its
direct sales force, system integrators, VARs, 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., China, Germany, Japan, Singapore, Spain and U.K. Similar to many
companies in the software industry with significant sales outside of the U.S., the Company generally realizes lower revenues in the quarter ending September 30th, compared to the immediately preceding quarter due primarily to reduced economic
activity in Europe in the summer months.





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 these 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.




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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 ILOG
customers, 375 are ISVs and/or OEMs that develop and resell software based on ILOG technologies. In 2002, 43% 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.





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-focused divisions. Their structure is designed to
bring the Company close 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 Industry Solutions (ISD), Value Chain Management (VCM) and Communications (COM).





The Industry Solutions Division (ISD) focuses on the e-commerce, finance, transportation and defense industries. 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
Communications Business Division (COM) is dedicated to the web-enabled network management, and customer management, service and billing.





The ILOG Direct Division is a direct sales organization with the mission of delivering products 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 Item 5.
Operating and Financial Review and Prospects.





Marketing and selling expenses increased to $44.6 million in
2002 from $41.0 million in 2001 and from $35.6 million in 2000, representing 54%, 51% and 50% of total revenues, respectively. The increase of marketing and selling expenses as a percentage of total revenues over the last three years is
attributable to the worldwide expansion of the Companys marketing and selling organization with a growth of the headcount from 199 at June 30, 1999 to 270 at June 30, 2002. The increase in headcount resulted primarily from organizational
growth in the U.S. focused on sales to end users in the financial services sector.





Research and Development





The Company has committed, and expects to continue to commit in the future, substantial resources to research and development.
During 2002, 2001 and 2000, net research and development expenses were $15.3 million, $14.8 million, and $12.2 million, respectively. Gross research and development expenses before the offsets of funding provided by the European Union and
agencies of the French government were $16.0 million, $15.6 million, and $13.1 million in 2002, 2001 and 2000, respectively.




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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 fifteen 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. See Item 3. Key InformationRisk FactorsIf the Company is unable to meet evolving market conditions or customer requirements, its business, operating results and financial condition could be materially adversely
affected.





Competition





The Companys present direct competitors include a number of private and public companies such as Computer Associates, Cosytech, Dash Associates, Fair Isaac, Haley, IBM, Loox Software,
Pegasystems, SL Corporation and Tom Sawyer. 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.





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




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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 one pending patent application. See Item 3. Key InformationRisk FactorsPatent infringement disputes could result in significant expense to the Company and divert technical and management personnel and The
Company is heavily dependent on its proprietary technology. There can be no assurance that the Companys means of protecting its proprietary rights will be adequate or that its competitors will not develop similar technology.





C.    Organizational Structure





The Company has the following
wholly owned subsidiaries: ILOG, Inc., ILOG Limited, ILOG GmbH, ILOG SA, the ILOG(S) (Pte) Ltd and ILOG KK, which operate in the United States, United Kingdom, Germany, Spain, Singapore and Japan, respectively.





D.    Property, Plant and Equipment





The Companys corporate
headquarters are located in Gentilly, France, a suburb of Paris, in premises consisting of approximately 62,000 square feet under leases expiring from 2003 to 2009. The Company maintains a research and development facility in Sophia-Antipolis, in
the south of France, in premises consisting of approximately 12,000 square feet under leases expiring from 2005 to 2010. The Company has its U.S. headquarters in Mountain View, California in premises consisting of approximately 36,000 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 5,000 square feet under a lease expiring in 2007, and leased sales offices
in Arlington, Virginia; Bingham Farms, Michigan; and Southborough, Massachusetts with approximately 13,000 square feet in aggregate. In addition, the Company maintains leased sales and customer support offices in Bracknell, near London, England; in
Bad Homburg, near Frankfurt, Germany; in Madrid, Spain; in Singapore; in Beijing, China; and in Tokyo, Japan, with approximately 33,000 square feet in aggregate.





Item 5.Operating and Financial Review and Prospects





The following discussion and analysis should be read together with the Companys consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 20-F. This discussion
contains forward-looking statements based on the Companys current expectations, assumptions, estimates, and projections about ILOG. These forward-looking statements involve risks and uncertainties. ILOGs actual results could differ
materially from those indicated in these forward-looking statements as a result of certain factors, as more fully described in Item 3. Key InformationRisk Factors and elsewhere in this Annual Report on Form 20-F.





Overview





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.





Revenue Recognition





ILOG enters into arrangements for the sale of (1) licenses of software products; (2) related annual maintenance contracts; and (3)
consulting and training services.




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For each software license arrangement, ILOG determines whether evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable. If any of these criteria are not met, revenue recognition is deferred until such time as all of the criteria are met.





ILOG recognizes maintenance revenue ratably over the term of the maintenance contract, which is usually one year.





In all cases of consulting and training services, ILOG assesses whether this element of the arrangement is essential to the functionality
of the other elements of the arrangement. When consulting services are considered essential or the arrangement involves customization or modification of the software, both the license and consulting service revenue under the arrangement are
recognized under the percentage of completion method of contract accounting. For those arrangements for which ILOG has concluded that the consulting service element is not essential to the other elements of the arrangement, ILOG determines whether
the consulting services are available from other vendors, do not involve a significant degree of risk or unique acceptance criteria, and whether ILOG has sufficient experience in providing the service to be able to separately account for the
services. When the consulting service qualifies for separate accounting, ILOG uses the separate prices stated within the consulting contract for the consulting which correspond to vendor specific objective evidence of fair value for the services.
Revenue allocable to consulting and training services is recognized as the services are performed.





ILOG generates
a significant portion of its revenues and incurs a significant portion of its expenses in certain currencies other than the U.S. dollar, primarily the euro, British pounds sterling, Singapore dollars, and the Japanese yen. Accordingly, ILOGs
results of operations are affected by exchange rate fluctuations of the U.S. dollar relative to these currencies. However, the net impact of exchange rate fluctuations on operating income has been low as the variance in translated revenue is
primarily offset by a variance in operating expenses. See notes 1 and 3 to the Consolidated Financial Statements.





As with many software companies, ILOG experiences seasonality in its business, with revenues generally lower in the first quarter of each fiscal year due to the reduced economic activity in Europe during the summer months.





Use of Estimates





The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to application of
the Companys revenue recognition policy, allowance for uncollectible accounts receivable, useful lives for property and equipment and intangibles, employee benefits, and taxes. Actual results could differ from those estimates.





Critical Accounting Policies





Revenue Recognition





ILOGs revenue recognition
policy, as described above, is significant because revenue is a key component of the Companys results from operations. In addition, revenue recognition determines the timing of certain expenses, such as incentive compensation. ILOG follows
very specific and detailed guidelines in measuring revenue; however, certain judgments and estimates affect the application of the revenue policy. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue
could cause operating results to vary significantly from quarter to quarter and could result in future operating losses.





Allowance for Doubtful Accounts





ILOG records provisions for allowance for doubtful
accounts as part of general and administrative expenses. These provisions, which are netted against accounts receivable on the consolidated balance sheets, totaled




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$0.7 million and $1.1 million at June 30, 2002 and 2001, respectively. These estimates are based on bad debt write-off experience, analysis of credit information, specific identification of
probable bad debts based on collection efforts, aging of accounts receivable and other known factors. Actual results could differ from those estimates.





A.    Operating Results





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





Year Ended June 30,2002


2001


2000Revenues:License fees

64
%

66
%

65
%Services

36


34


35Total revenues

100


100


100Cost of revenues:License fees

1


2


1Services

15


17


19Total cost of revenues

17


18


20Gross margin

83


82


80Operating expenses:Marketing and selling

54


51


50Research and development

18


19


17General and administrative

10


11


11Write-off of acquired intangibles







1Total operating expenses

82


81


79Income from operations

1


1


1Net interest income (expense), income taxes and other







1Net income

1
%

1
%

2
%





Revenues





Total revenues increased to $82.7 million in 2002 from $79.6 million in 2001, and from $71.8 million in 2000, representing increases of 4% and 11% over the respective
previous years. The growth in 2002 reflects the market success of the Rules product line for business process applications and the impact of the growing installed base of licenses on maintenance revenue, offset by the lower spending of the
communications industry. The rate of growth in 2001 reflected the transition of the Companys channels of distribution from end users to ISVs, which have a longer selling cycle, and the impact of slower spending by communications industry
customers in the latter part of 2001.





During 2002, 2001 and 2000, revenues generated from customers in North
America totaled approximately $37.4 million, $36.7 million and $32.4 million; in Europe $37.3 million, $34.2 million and $32.7 million; and in Asia $8.0 million, $8.7 million and $6.7 million; in each case, respectively. The 9% increase in European
revenues and the 2% growth in North American revenues in 2002 over 2001 reflects difficulties in the telecommunications and supply chain management sectors affecting the United States more than Europe. The 12% growth in North American revenues and
the 4% increase in European revenues in 2001 over 2000 reflected a lower euro exchange rate 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




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driven economy in the U.S. in the first part of 2001. The 8% decrease in Asia in 2002 over 2001 reflects the difficult economic conditions in Asia, after the 31% increase in 2001 over 2000
following the establishment of the Companys Japanese operations.





In 2002, 2001 and 2000 SAP A.G. accounted
for 11%, 9% and 10% of total revenues, respectively. In 2002 the next four largest customers accounted for approximately 8% of total revenues, and the next five largest accounted for approximately 6% of revenues. Revenues from a single customer in a
particular quarter can materially affect the Companys revenues and operating results for such period. For a discussion of revenues received from certain related parties, see Item 7. Major Shareholders and Related Party
Transactions.





License Fees.    Revenues from license fees increased to $53.2
million in 2002 from $52.3 million in 2001, and from $46.8 million in 2000, representing increases of 2% and 12%, respectively. The 2% increase mainly reflects the success of the Rules product in the market place while Optimization and Visualization
revenues eased due to tough business conditions facing ILOGs ISV partners in both the supply chain management and communications markets. During this period, the Company was generally able to maintain the price levels of its products. In 2001,
the license revenue increase reflected the growing market acceptance of the Companys products but was however starting to show the weakening economic conditions of the communications industry.





Services.    Revenues from services consist of maintenance, consulting and training. Consulting and training
services are billed on a time basis or occasionally on a fixed price basis. Maintenance services are typically available at an annual fee of 15% of the standard software list price. Payments related to maintenance contracts are generally received in
advance with revenues deferred and recognized ratably over the term of the maintenance agreement, which is typically 12 months. Revenues from services increased to $29.5 million in 2002 from $27.3 million in 2001, compared to $25.0 million in 2000.
This represented increases of 8% and 9%, over the respective prior years. Maintenance revenues for the years ended June 30, 2002, 2001 and 2000 constituted 59%, 50% and 45% of services revenues, respectively. The services revenue growth in 2002 is
derived from a 29% increase in maintenance revenues from the growing installed base of ILOG licenses, while consulting and training revenues decreased by 13% reflecting weaker economic conditions and reduced customer needs corresponding to the
product mix shift into Rules applications which are less demanding of consulting and training services. The services revenue growth in 2001 was derived from a 21% increase in maintenance revenues from the growing installed base of ILOG licenses,
while consulting and training revenues increased by 4% in that year.





Services revenues and costs, as reported,
reflect the implementation of a new Financial Accounting Standards Board rule, Staff Announcement Topic D-103 Income Statement Characterization of Reimbursement Received for Out-of-Pocket Expenses Incurred, which requires the
inclusion of reimbursable expenses in both service revenues and costs. Previously, reimbursable expenses were not reported as revenues and costs. This change increased both services revenues and costs by $0.5 million for each of the years ended June
30, 2002, 2001 and 2000. The Companys adoption of this rule does not and will not affect earnings in any past or future periods.





Gross Margin





The following table sets forth the gross margin for both categories of
revenues for 2002, 2001 and 2000:





Year Ended June 30,2002


2001


2000Gross Margin:License fees

98
%

98
%

98
%Services

57


52


46Total revenues

83
%

82
%

80
%




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License Fees.    The Companys gross margin for
license fees is currently affected by the pricing of its products as it relates to royalties, documentation and packaging costs. Cost of license fees, consisting primarily of royalties to third parties, documentation, packaging and freight expenses,
decreased to $1.2 million in 2002 from $1.3 million in 2001 and $1.1 million in 2000, representing 2% of revenues from license fees for each of the past three years. In the event the Company significantly increases the incorporation of third-party
technology in its products, the payment of royalties may have the effect of lowering gross margins.





Services.    The Companys gross margin for services is primarily impacted by the mix of maintenance, consulting and training revenues. Maintenance revenues for years ended June 30, 2002, 2001 and 2000
constituted 59%, 50% and 45% of service revenues, respectively. The services gross margin increased to 57% in 2002, from 52% in 2001 and 46% in 2000, reflecting the increase of higher margin maintenance revenues and an improvement of the margin in
consulting and training. The margins for years ended June 30, 2002, 2001 and 2000 were 82%, 87% and 80% for maintenance revenues, and 20%, 17% and 18%, respectively for consulting and training services. Cost of services, consisting primarily of
employee-related expenses, decreased to $12.8 million in 2002 from $13.2 million in 2001 and $13.6 million in 2000. 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.





Operating Expenses





Marketing and
Selling.    Marketing and selling expenses consist primarily of salaries and other payroll related expenses, incentive compensation, promotional marketing activities, customer pre-sales technical support and overhead costs
relating to occupancy. Marketing and selling expenses increased to $44.6 million in 2002 from $41.0 million in 2001 and from $35.6 million in 2000, representing 54%, 51% and 50% of total revenues, respectively. The increase of marketing and selling
expenses as a percentage of total revenues over the last three years is attributable to the worldwide expansion of the Companys marketing and selling organization with a growth of the headcount from 199 at June 30, 1999 to 270 at June 30,
2002. The increase in headcount resulted primarily from organizational growth in the U.S. focused on sales to end users in the financial services sector.





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 in the form of grants, 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 2002, 2001 and 2000:





Year Ended June 30,2002


2001


2000(In thousands)Gross research and development expenses

$
16,046


$
15,628


$
13,075Less government funding


(757
)


(824
)


(880
)Research and development expense, net of funding

$
15,289


$
14,804


$
12,195





Research and development expenses increased to $15.3 million in
2002 from $14.8 million in 2001 and from $12.2 million in 2000, representing 18%, 19% and 17% of total revenues, respectively. The increases in research and development expenses were due to staffing growth and the further enhancement of JRules for
the business process marketplace. From June 30, 1999 to June 30, 2002 research and development staffing increased from 106 to 142. The Company has not capitalized any software development costs and all research and development costs have been
expensed as incurred.




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General and Administrative.    General and
administrative expenses consist primarily of personnel and related overhead costs for finance and general management. General and administrative expenses decreased to $7.9 million in 2002 from $8.7 million in 2001 as compared to $8.1 million in
2000, representing 10%, 11% and 11% of total revenues, respectively. The decrease in general and administrative expenses reflects expense restraint and lower bad debt allowance expense as a result of an improvement in accounts receivable quality.
From June 30, 1999 to June 30, 2002, the number of the Companys employees engaged in general and administrative functions increased from 57 to 73.





Write-off of Acquired Intangible Assets.





Write-off of
acquired intangible assets of $0.3 million in 2000 relates to trademarks acquired in 1997.





Interest Income and
Other





Net interest income and other totaled $0.7, $1.0 and $0.8 million, in 2002, 2001 and 2000,
respectively. Net interest income and other includes exchange gains and net interest income.





Segments





ILOG in 2000, 2001 and 2002 was organized into three divisions, each operating in different markets. They each handle industry marketing,
sales, consulting and some product development. The Industry Solutions Division (ISD) focuses on the e-commerce, finance, transportation and defense industries. 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
Communications Business Division (COM) is dedicated to the web-enabled network management, and customer management, service and billing. Corporate & other includes segments which do not meet the quantitative threshold for
determining reportable segments, corporate overhead and other expenses which are not allocated to reportable segments. The Company evaluates performance and allocates resources based on segment revenues and operating results. There are no
intersegment sales.





The following table sets forth segment revenue and income from operations for 2002, 2001 and
2000:





Revenues

Income (loss) from Operations2002

2001

2000

2002


2001


2000(In thousands)Industry Solutions Division (ISD)

$
33,431

$
25,545

$
23,911

$
5,572


$
2,897


$
2,101Value Chain Management (VCM)


24,766


25,196


19,925


6,459



6,580



3,617Communications (COM)


15,185


18,250


20,422


(1,162
)


(888
)


1,337Corporate & Other


9,271


10,635


7,577


(9,973
)


(7,871
)


(6,103
)$
82,653

$
79,626

$
71,835

$
896


$
718


$
952





The growth of the ISD divisions e-commerce, finance,
transportation and defense industry revenues to $33.4 million in 2002 from $25.5 million in 2001 and $23.9 million in 2000 reflects the Companys penetration in 2002 of the finance sector market place, where previously it had minimal presence.
This is predominantly a result of the competitive success of the Companys business rules product line, which also generated cross-selling opportunities for other ILOG products. This revenue growth resulted in the profitability of this segment
increasing to $5.6 million in 2002 from $2.9 million in 2001 and $2.1 million in 2000.





The value chain market
revenues decreased to $24.8 million in 2002 from $25.2 million in 2001, compared to $19.9 million in 2000. The revenue level in 2002 compared to 2001 reflects a lower royalty flow from ISVs offset by increased end user business. The 27% revenue
increase in 2001 over 2000 reflects demand for the




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Companys optimization products by ISVs during a period of strong economic activity. As a result, in this segment, profits of $6.5 million in 2002 compared to $6.6 million in 2001 and $3.6
million in 2000 were generated.





The decline in the communications market revenues in 2002 to $15.2 million from
$18.3 million in 2001 and $20.4 million in 2000, reflects the significant slow-down in spending by the telecommunications industry since mid-2001. As a result, in this segment a loss of $1.2 million in 2002 was incurred compared to a loss of $0.9
million in 2001 and a profit of $1.3 million in 2000.





Other revenues, which predominantly are from Asia,
decreased to $9.3 million in 2002 from $10.6 million in 2001, due to the economic difficulties in this region in 2002. This decrease follows an increase from $7.6 million in 2000 due to revenue growth in Japan. The operating loss for the
corporate and other segment increased from $6.1 million in 2000 to $7.9 million in 2001 and to $10.0 million in 2002 as a result of lower revenues in 2002 and increased spending in marketing and research and development in 2001 over 2000.





In October 2002, as a result of changes in the market place for its products, the Company reorganized its revenue
generating activities from being along market segment lines to the geographic regions of Americas, Europe and Asia, with the goal of improving sales execution efficiency and productivity. No significant change in operating costs is anticipated from
this change.





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 revenues and expenses are denominated in euros, 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-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.





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 gains for 2002, 2001 and 2000 were $0.2, $0.6 and $0.7 million, respectively. These amounts represent both
realized and unrealized gains or losses from transactions or balance sheet items.





In 2002 the Company started
hedging its currency exposures in order to mitigate the effect of changing exchange rates on the Companys earnings per share and derived a gain of approximately $0.5 million from such hedging activities. See Note 3 of Notes to Consolidated
Financial Statements. These transactions can be considered as hedges in economic terms but the required conditions for hedge accounting (FAS 133) were not met. In the Companys case the hedging instruments and the hedged item were reported
independently as if there were no hedging arrangements, thus the derivatives are initially recorded at cost including transaction costs, and reported at fair value, with changes in fair value included in foreign exchange gain (loss). The Company




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generally limits the use of hedge accounting for certain significant transactions. Consequently, as at June 30, 2002, the Company had no fair value hedges, cash flow hedges or hedges of net
investment in a foreign entity that meet the strict requirements to qualify for hedge accounting under FAS 133.





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 2002, 2001 and 2000 was $0.8 million,
$0.8 million and $0.6 million, respectively, reflecting tax charges in certain European and Asian sales subsidiaries that were profitable on a tax basis in those years.





At June 30, 2002, the Company had net operating loss carryforwards from various tax jurisdictions of approximately $69.4 million, of which $25.0 million and $2.7 million
were in France and the U.K., respectively, with no expiration date and $41.7 million were in the U.S. expiring between 2003 and 2022 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,
2002, a valuation allowance of $26.9 million had been provided against total deferred tax assets of $26.9 million (which consists primarily of the tax benefit of net operating loss carryforwards.





B.    Liquidity and Capital Resources





Over the last three years, the Company has financed its operations and investments in property and capital equipment through cash from operations and the issuance of equity securities to employees under the Companys stock
purchase plans.





The Companys operating activities provided $9.7 million and $4.9 million in 2002 and 2001,
respectively, and used $2.5 million in 2000 of which: $0.8 million, $0.9 million and $1.2 million was provided by net income; $3.2 million, $2.1 million and $2.2 million by depreciation and amortization in 2002, 2001 and 2000, respectively; and
working capital changes provided $5.7 million and $1.9 million in 2002 and 2001, respectively, and used $5.9 million in 2000.





The Companys investing activities have consisted primarily of expenditure on fixed assets, which totaled $2.2 million, $4.8 million and $1.5 million in 2002, 2001 and 2000, respectively. Capital expenditure in 2003 is expected
to approximate $3 million. As of June 30, 2002 fixed assets were located in the United States, France, rest of Europe and Asia with net book values of $3.4 million, $2.6 million, $0.4 million and $0.5 million, respectively. The Companys fixed
assets are generally unencumbered.





The Companys financing activities used $0.3 million in 2002 and provided
$2.9 million and $4.8 million in 2001 and 2000, respectively, of which $3.3 million, $5.3 million and $6.3 million was provided from the issuance of shares under employee stock option and stock purchase plans, and $3.6 million, $2.4 million and
$1.5 million in 2002, 2001 and 2000, respectively, was used to repay loans and capitalized lease obligations.





As of June 30, 2002 and 2001, the Company had cash and cash equivalents of $31.4 million and $20.9 million, respectively, and working capital of $29.1 million and $20.9 million, respectively. The net cash increase of $10.5
million in 2002 was primarily due to income from operations of $0.8 million, depreciation and amortization of $3.2 million, a reduction in accounts receivable of $3.1 million, an increase in deferred revenue of $2.5 million, a stronger euro
providing $3.3 million and proceeds from issuance of shares under employee benefit plans of $3.3 million, less capital expenditure of $2.2 million and repayment of debt of $3.6 million.




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Accounts receivable, net of the allowance for doubtful accounts, decreased to
$19.2 million at June 30, 2002 from $22.2 million at June 30, 2001 due to improved collections of accounts receivables. The allowance for doubtful accounts decreased to $0.7 million at June 30, 2002 from $1.1 million at June 30, 2001 due to the
improved quality of accounts receivables.





The following table sets forth contracted payment obligations for the
fiscal years indicated:





Total

2003

2004-2006

2007-2008

2009-2010Operating leases

13,348

3,698

7,598

1,893

159Capitalized lease obligations

804

454

350









See Notes 5 and 10 to Consolidated Financial Statements for more
information on the above obligations.





The Company has a line of credit with a U.S. bank secured on its U.S.
accounts receivable that allows for a maximum borrowing of $3 million, subject to certain covenants. The line of credit matures on November 9, 2002 and bears interest at the banks prime rate plus 1.5% which at June 30, 2002 corresponded to
6.25%. As of June 30, 2002 the Company had no borrowings against this facility.





While operating activities
may provide cash in certain periods, the Company anticipates that possible losses and investing activities will use cash and, consequently, such losses and investing activities may require the Company to obtain additional sources of financing.
However, the Company believes it currently has sufficient working capital to meet its present requirements.





C.    Research and Development, Patents and Licenses





The Company
has committed, and expects to continue to commit in the future, resources to research and development. During 2002, 2001 and 2000, net research and development expenses were $15.3 million, $14.8 million and $12.2 million, respectively. Gross
research and development expenses before the offsets of funding provided by the European Union and agencies of the French government were $16.0 million, $15.6 million and $13.1 million in 2002, 2001 and 2000, respectively.





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 fifteen 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.





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.




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D.    Trend Information





The Company sells its products and
services to software developers in a number of different market places. During 2002, revenues were derived from finance, transportation and defense sectors; the value chain software market; the communications industry; and other sectors encompassing
Asia, which accounted for 40%, 30%, 18% and 12% of revenues, respectively, compared to 32%, 32%, 23% and 13%, respectively, in 2001.





The growth of the finance, transportation and defense sectors revenue to $33.4 million in 2002, from $25.5 million in 2001, reflects the success of ILOGs enterprise-class business rules management software to
provide a platform for business process re-engineering initiatives, particularly straight-through processing (STP) projects for the banks, securities firms and insurance companies. This trend is expected to continue.





Revenue from ILOGs Value Chain Management division remained level at $25.2 million in 2001 compared to $24.8 million in 2002
reflecting a lower royalty flow from ISVs due to general economic weakness in the supply chain sector, offset by increased end user business. Some of the increased end user business is being fueled by the emergence of aftermarket opportunities for
ILOG products with end users who have recently installed optimization systems from one of ILOGs major supply chain planning ISV partners. This trend is expected to continue.





The decline in the communications market revenues in 2002 to $15.2 million from $18.3 million in 2001 reflects the over capacity and general business conditions prevalent
in this sector for the last year and a half. This sector is not expected to return to its historic levels in 2003.





Other revenues, which predominantly are from Asia, decreased in 2002 to $9.3 million from $10.6 million in 2001 due to general economic weakness in that region, but especially in Japan. This trend is expected to continue, except in
China where the Company has recently opened an office in Beijing to take advantage of demand from local telecommunication equipment manufacturers.





Since 2001, in view of general economic and business conditions, the Company has limited employee recruitment and thus, expense growth. This is expected to continue until signs of business strength
re-emerge. In the latter part of 2002 the euro strengthened by approximately 10%. This has resulted in increased expenses in terms of U.S. dollars for fiscal 2003 to date by approximately 5%, given that 48% of the Companys expenses are
incurred in euros.





In October 2002, as a result of changes in the market place for its products, the Company
reorganized its revenue generating activities from being along market segment lines to the geographic regions of Americas, Europe and Asia, with the goal of improving sales execution efficiency and productivity. No significant change in operating
costs is anticipated from this change.





Item 6.Directors, Senior Management and Employees





A.    Directors and Senior Management





In accordance with French
law governing a société anonyme, the Companys affairs are managed by its Board of Directors and by its Chairman and Chief Executive Officer, who has full executive authority to manage the affairs of the Company. The
Chairman and Chief Executive Officer, under French law, 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
general shareholders meetings. The Chairman and Chief Executive Officer is in charge of implementing the goals, strategies and budgets of ILOG, which are determined 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. French company Law of May 15, 2001, gives to the Board of Directors the right to elect one person to assume the position of Chairman and Chief Executive Officer or to split the function
between two different persons (the Chairman of the Board and another natural person bearing the




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title of Chief Executive Officer, or Directeur Général). The Company adopted a resolution to amend its statuts to this effect at the general
shareholders meeting held on December 18, 2001. Pursuant to French law and the Companys statuts, the Board of Directors can appoint up to five Directeurs Généraux Déléguéswhose powers and
responsibilities are determined by the Board together with the Chief Executive Officer, who have broad powers to represent and bind the Company in dealings with third parties. Pursuant to the Law of May 15, 2001, if the function of Chairman and
Chief Executive Officer is split between two different persons, the right to propose to the Board the appointment of one or several Directeurs Généraux Déléguéswill belong to the Chief Executive Officer.
The Board of Directors decided to not split the two functions at a Board meeting held on June 3, 2002 and to date the Company has not named any Directeurs Généraux Délégués.





The following table sets forth the names, ages and positions of the Directors and executive officers of ILOG as of September 30, 2002:





Name

Age

Position with the CompanyPierre Haren

49

Chairman and Chief Executive OfficerJean-François Abramatic

53

Senior Vice President, Research and DevelopmentPatrick Albert

46

Technology FellowRobert Bixby

57

President Technical Advisory BoardEric Brisson

37

Vice President, Strategic Business DevelopmentRobert Cooper

50

Vice President, Sales, AmericasChristian Deutsch

57

Vice President, Sales, EuropeDouglas Doyle

46

Vice President, MarketingRoger Friedberger

51

Chief Financial OfficerBounthara Ing

39

Chief Operating OfficerJanet Lowe

44

Vice President, Strategic ProjectsJean Pommier

38

Vice President, Worldwide Professional ServicesSanjay Saigal

39

Vice President, Sales, ILOG DirectJeffrey Williams

47

Vice President, OperationsMichel Alard

48

DirectorMarie-Claude Bernal

55

DirectorPascal Brandys

43

DirectorMarc Fourrier

49

DirectorRichard Liebhaber

67

DirectorTodd Lowe

46

Director (Until April 2002, Executive Vice President and General Manager, Value Chain Management Business
Division)





Pierre Harenis 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 research department of the French Ministry of the Sea. He is also a Director of IPSOS S.A., Ecole Nationale des Ponts et
Chaussées, a scientific advisor to president of INRIA and a member of the Académie des Technologies. Mr. Haren received engineering degrees from Ecole Polytechniquein 1976 and Ecole Nationale des Ponts et
Chausséesin 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, but will be
extended to 2005 upon ILOG shareholder approval at its Ordinary General Meeting to be held on December 17, 2002.





Jean-François 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. From September 1996 to December
2001, Dr. Abramatic was the Chairman of the International World Wide Web Consortium and from September 1996 to September 1997 he was an Associate Director of the MIT Laboratory of Computer Science. From September 1997 to July 2000 Dr. Abramatic was
INRIAs Director of Development and Industrial




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Relations and from 1992 to September 1997 its Director of Development. Dr. 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 Albertis has served as Technology Fellow of the Company since September 2002
having been its Chief Technology Officer from July 1996 to September 2002 and 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.





Robert Bixbyhas served as President of the Companys Technical Advisory Board since its formation in December 2000 and since August 1997 has served as Technology Fellow. Dr. Bixby
co-founded in 1988 CPLEX Optimization, Inc. which was acquired by ILOG in 1997. He served on ILOGs Board of Directors from 1997 to 2000. He is a Research Professor at the Department of Computational and Applied Mathematics of Rice University
and Noah Harding Professor Emeritus. Dr. Bixby earned a BS from the University of California-Berkeley and a Ph.D. from Cornell University. He has held academic positions at Cornell, the University of Kentucky, the University of Wisconsin-Madison,
Northwestern University, the Institut for Operations Research-Bonn, the Institute for Mathematics of the Universität Augsburg, the Konrad-Zuse-Zentrum für Informationstechnikand the Technische Universität Berlin. Dr.
Bixby is chairman of the Mathematical Programming Society and is a member of the National Academy of Engineering.





Eric Brissonhas served as Vice President, Strategic Business Development of the Company since October 2002. From August 2000 to September 2002 he was Vice President and General Manager, Communications Business Division,
previously having held the position of Worldwide Director, Professional Services of the Division since July 2000. From July 1999 to July 2000 he served as a Consulting Manager and 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.





Robert Cooperhas served as Vice President, Sales,
Americas of the Company since October 2002. From April 2002 to September 2002 he was Vice President and General Manager, Industry Solutions Division, previously having held the position of Vice President Sales, North America, Industry Solutions
Division since July 2000. From 1993 to 2000 he was President of McKenzie Cooper Limited, which he founded, a sales outsourcing firm which was a vendor to the Company during this period. Mr. Cooper received a B.A. from Wilfrid Laurier University,
Waterloo, Canada in 1974.





Christian Deutschhas served as Vice President, Sales, Europe of the Company
since October 2002. From April 2002 to September 2002 he was Vice President and General Manager, Value Chain Management Division, previously having held the position of Vice President, Operations since August 2000, and Manager, Corporate Business
Development since January 1999. 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 1972 a Ph.D. in Advanced Mathematics from the University of Paris.





Douglas Doylehas served as Vice President, Marketing of the Company since September 2001. From March 2001 to September 2001 he served as Senior Director, Marketing at iBeam Broadcasting, Inc., from September 2000 to March 2001 he was an independent
consultant and from January 2000 to September 2000 he served as Vice President, Product Marketing at Bigvine, Inc. Previously, from October 1997 to September 2000 he was Director of Retail and Internet Marketing at E*Trade Group, Inc. and from
January 1995 to October 1997 Director of Sales at Eagle River Interactive, Inc. He received a B.A. in economics from the University of California, Los Angeles in 1983 and an M.B.A. from Cornell University in 1987.





Roger Friedbergerhas 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




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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 Inghas served as Chief Operating Officer of the Company since April 2002, as Vice President and General Manager, Industry Solutions Division from July 1999 to April 2002, 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 a software developer and was named Manager of the Graphic Department. Mr. Ing received an Engineering degree from Ecole
Centrale de Parisin 1986.





Janet Lowehas served as Vice President, Strategic Projects since September
2001. From July 1999 until August 2001 she was Vice President and General Manager, ILOG Direct, 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. Ms. Lowe received a B.S. in chemical engineering at the University of Texas in 1980 and an M.B.A. at Rice University in
1988. She is married to Todd Lowe who is a Director of the Company.





Jean Pommierhas served as Vice
President, Worldwide Professional Services since September 2002 and from January 1997 to June 1999. From July 1999 to August 2002 he was Vice President, Americas and Professional Services, Industry Solutions Division. From 1995 to 1996, he was
Director of Consulting and Quality and from 1991 to 1994 he served as Director of Consulting. Mr. Pommier joined the Company in 1987 as a software engineer. Mr. Pommier received an Engineering degree from ENSAM in 1986 and an M.S. in Computer
Science from the University of Nice in 1987.





Sanjay Saigalhas served as Vice President, Sales ILOG Direct
since September 2001, having previously held the position of Manager of Technical Services for ILOG Direct from September 1998. From 1995 to its acquisition by ILOG in August 1998, Mr. Saigal served as the Director of Technical Services at Compass
Modeling Solutions, Inc. From 1991 to 1995 he was a consultant at Decision Focus, Inc. Mr. Saigal earned a B.A. in Mathematics from St. Stephens College in Delhi, India in 1984 and a Ph.D. in Mathematical Sciences from Rice University in 1991.





Jeffrey Williams has served as Vice President, Operations of the Company since April 2002. From March 2001
to April 2002 he was the Companys Vice President of Product Marketing and from March 1998 its Senior Director of Product Marketing. From 1977 to March 1998 he was with Hewlett-Packard holding various marketing and management positions and
since 1997 he was their Director of Operations and Planning for Worldwide Sales and Marketing of their Computer Systems Organization. Mr. Williams received B.S. degrees in computer mathematics and statistics from San Jose State University in 1977
and an M.B.A from the University of Santa Clara in 1985.





Michel Alardhas 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 Polytechniquein 1976 and from the Paris Communications Engineering School in 1978. Mr. Alards term on the Board of Directors expires in 2003.





Marie-Claude Bernalhas served as a Director since December 2000. From 1979 until December 2000 she was a senior vice president, partner and International Equity Portfolio manager at Wellington Management Company. She
is also President of the Supervisory Board of Esker S.A. Ms. Bernal graduated from Frances Haut Enseignement Commercial pour les Jeunes Filles, with a major in finance and accounting in 1967 and received an M.B.A. from the University of
Chicago in finance and computer science in 1971. Ms. Bernals term on the Board of Directors expires in 2002 but will be extended to 2005 upon ILOG shareholder approval at its Ordinary General Meeting to be held on December 17, 2002.





Pascal Brandyshas served as a Director of the Company since September 1998. Mr. Brandys is the President
of Biobank, a global life sciences investment company he co-founded in 2000. Previously Mr. Brandys




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was the Chairman of the Board of Directors and Chief Executive Officer of Genset S.A. which he co-founded in 1989. Mr. Brandys is a Director of Genset S.A., Ceres Inc. and several private
biotechnology companies. Mr. Brandys graduated from the Ecole Polytechniquein 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
Chausséesin 1983. Mr. Brandyss term on the Board of Directors expires in 2003.





Marc Fourrierhas 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 specialized in information technology. He is also a Director of Wavecom S.A. Mr. Fourrier received engineering degrees from Ecole Polytechniquein 1976 and Ecole Nationale des Ponts et
Chausséesin 1978, and an M.S. from MIT in 1978. Mr. Fourriers term on the Board of Directors expires in 2004.





Richard Liebhaberhas served as a Director since December 2000. From 1995 to 2000 he served on the board of Qwest Communications and from 1985 until 1995 he served as a board member and management committee member at MCI
Communications. From 1954 through 1985 Mr. Liebhaber worked at IBM, where he served in a number of positions. He is also a Director of JDS Uniphase, ECI Telecommunications and Avici Systems. He graduated from New York University with a BSEE in 1954.
Mr. Liebhabers term on the Board of Directors expires in 2003.





Todd Lowehas 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 from July 1999 to April 2002, 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 2003. He is married to Janet Lowe, the Companys Vice President, Strategic Projects.





Technical Advisory Board





Since December 2000 the
Company has had a Technical Advisory Board (TAB) consisting of a select group of industry and academic leaders, which is designed to strengthen the Companys links with the technical and research communities as well as stimulate
corporate awareness of fundamental technology issues. Key technologies represented by the board include: business rules and agent technologies; constraint programming; mathematical programming/optimization; visualization; and world wide web. The TAB
meets bi-annually.





Members as of September 30, 2002 are:





Name

Age

PositionRobert Bixby

57

President, Technical Advisory BoardJean-François Abramatic

53

Senior Vice President, Research and DevelopmentPatrick Albert

46

Technology FellowEugene Freuder

57

Professor, University College Cork, IrelandMartin Grötschel

54

Professor, Technische Universität BerlinGilles Kahn

56

Vice President, INRIAOra Lassila

39

Research Fellow, Nokia Research Center and Chief Scientist, Nokia Venture PartnersBen Shneiderman

55

Professor, University of Maryland





Eugene Freuderis a Science Foundation Ireland Research
Professor at University College Cork in Ireland, and Director of the Cork Constraint Computation Centre. Dr. Freuder earned a BA from Harvard and a Ph.D. from MIT. He is a fellow of the American Association for Artificial Intelligence. Dr. Freuder
is the Editor-in-Chief of the journal Constraints and executive chair of the organizing committee of the International Conference




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on Principles and Practice of Constraint Programming. He is the senior technical advisor of Ecora, and a member of the Technical Advisory Board of Celcorp.





Martin Grötschelis Vice President at the Konrad-Zuse-Zentrum für Informationstechnikand a Professor at the
Department of Mathematics, Technische Universität Berlin. Dr. Grötschel studied mathematics and economics in Bochum and earned a Ph.D. and Habilitation in Bonn. He is a member of the Berlin-Brandenburg Academy of Sciences and Humanities.
He is an honorary member of the German Mathematical Society and served as its president from 1993 to 1994, and is a foreign associate of the National Academy of Engineering.





Gilles Kahnis Vice President for Science at INRIA. Dr. Kahn graduated from the Ecole Polytechnique. He is or has been a member of various scientific advisory
boards, including IRISA, IMAG, LABRI, LRI, Ecole Normale Supérieure, ENS, LIX, CERMICS, Greco Calcul Formel, UNU-IIST, CWI Amsterdam, the Franco-Chinese Computer Science Laboratory, the Microsoft Research Center, the Valuation Research
Committee in Computer Science, and LORIA. Dr. Kahn is a member of the French Academy of Sciences, and of the Academia Europaea.





Ora Lassila is a Research Fellow at the Nokia Research Center and the Chief Scientist of Nokia Venture Partners. He has been a member of the Advisory Board of the World Wide Web Consortium (W3C) since 1998, and represented
Nokia in the W3C Advisory Committee from 1998 to 2002. From 1996 to 1997 he was a Visiting Scientist at MIT Laboratory for Computer Science, working with W3C and launched the Resource Description Framework (RDF) standard. His previous positions
included Project Manager at the Robotics Institute of Carnegie Mellon University and Research Scientist at the CS Laboratory of Helsinki University of Technology.





Ben Shneidermanis Professor at the Department of Computer Science, University of Maryland-College Park. Dr. Shneiderman earned his Ph.D. at the State University of
New York-Stony Brook. He is the founding director of the Human-Computer Interaction Laboratory, and a member of the Institute for Advanced Computer Studies and the Institute for Systems Research, both at the University of Maryland-College Park. He
is also a fellow of the ACM and the AAAS, was co-chair of the ACM Policy98 Conference, and is founding chair of the ACM Conference on Universal Usability.





B.    Compensation





The aggregate amount of compensation
comprising of salary, commissions, bonus and benefits, exclusive of stock option grants and gains, of all executive officers of ILOG as a group (15 persons) paid or accrued for services in all capacities for the year ended June 30, 2002, was
approximately $3.1 million of which Messrs. Haren and Lowe received in 2002, $197,000 and $243,000 respectively. In accordance with French law only shareholders may determine directors fees paid to the Board of Directors which for 2002 was
authorized for up to $60,000. 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. Directors compensation, exclusive of stock gains,
for 2002 was as follows:





Fees

Warrants GrantedNumber of Underlying Shares

Exercise Price per
Share

ExpirationMichel Alard

$
6,000

8,000

13.10

December 2006Marie-Claude Bernal


8,000

8,000

13.10

December 2006Pascal Brandys


6,500

8,000

13.10

December 2006Marc Fourrier


8,000

8,000

13.10

December 2006Richard Liebhaber


6,000

8,000

13.10

December 2006$
34,500

40,000

13.10

December 2006





No warrants were exercised in fiscal 2002.




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Under French law, the Company cannot grant options to members of the Board of
Directors (other than the Chairman and Chief Executive Officer or Directeurs Généraux Délégués) who are not employees. Stock options granted under the Companys 1998 and 2001 Stock Option Plans to
executive officers in 2002 were as follows:





Number of Underlying Shares

Exercise Price per
Share

ExpirationPierre Haren

50,000

8.66

November 2011Jean-François Abramatic

35,000

8.66

November 2011Robert Bixby

10,000

8.66

November 2011Eric Brisson

18,000

8.66

November 2011Robert Cooper

20,000

8.23

May 2012Christian Deutsch

15,000 20,000

8.23 8.66


May 2012 November 2011Douglas Doyle

70,000

5.42

September 2011Roger Friedberger

8,000

8.66

November 2011Bounthara Ing

50,000 20,000

8.23 8.66


May 2012 November 2011Janet Lowe

15,000

8.66

November 2011Jean Pommier

4,000

8.66

November 2011Sanjay Saigal

10,000 10,000

9.75 8.66


August 2011 November 2011





Stock options exercised under the Companys Stock Option Plans
by executive officers in 2002 were as follows:





Number of Underlying Shares

Exercise Price per
Share

Exercise DatePatrick Albert

15,000 15,000

5.34 4.88


February 11, 2002 February 11,
2002Todd Lowe

50,000 9,375

5.62 6.70


May 9, 2002 May 9, 2002





For additional information relating to stock options and warrants
granted to ILOGs Directors and executive officers in 2002 see Share Ownership.





C.    Board Practices





Under French law, the Board of Directors
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 18 members. The actual number of Directors must be within such limits as are provided for in the statuts. The number of members of the Board may be increased only by
decision of the shareholders acting as a simple majority. The Companys Board of Directors currently consists of seven members. Each Director must be a shareholder of the Company. Under French law a Director may be an individual or a
corporation in which case, it must appoint a représentant légal, but the Directeur Général and the Chairman must be individuals. 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 appointed by the shareholders at an ordinary meeting and serve until the expiration of their respective terms, or until their resignation,
death or removal, with or without cause, by the shareholders at an ordinary meeting. The Directeur Général may be removed by the Board of Directors at any time, and any Directeur Général
Délégué at any time upon the proposal of the Directeur Général. However, under the Law of May 15, 2001, if either is removed by the Board of Directors without cause, they may obtain damages. Vacancies
which exist in the Board of Directors may be filled by the Board of Directors, pending ratification at the next shareholders meeting. However, if the number of Directors falls below the legal minimum of three, the remaining Directors must
immediately call an ordinary shareholders meeting to elect a sufficient number of Directors to reach the legal minimum.




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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. Meetings of the Board of Directors, which are held as often as the Companys interests require, are normally convened and presided over by the Chairman of the Board. According to
French law, if the Board of Directors has not met for more than two months, at least one-third of the members of the Board of Directors may request that the Chairman convene a meeting of the Board of Directors regarding matters listed on the agenda.
The Board of Directors met 11 times in 2002. According to the Companys statuts, Directors who take part in a meeting of the Board by means of videoconference are deemed present, for calculating the quorum and the majority. 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, deemed to be 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 from the Companys 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 sociétés anonymes, violation of the Companys statutsor mismanagement.
Directors may be held liable for such actions both individually and jointly with the other Directors. A Directeur GénéralDélégué may be held individually responsible for his or her actions if they
are deemed contrary to the Companys interests.





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 statutsof 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. 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.





The Board currently has three committees: the Audit Committee, composed of Marie-Claude Bernal, as Chairperson, Pascal Brandys and Marc Fourrier; a Compensation Committee, composed of Michel Alard and Richard Liebhaber, as
Chairperson; and a Corporate Governance Committee, composed of Marie-Claude Bernal, Richard Liebhaber and Todd Lowe, as Chairperson. Each of the Committees makes recommendations to the Board of Directors for approval by the Board.





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 plans and other employee benefits plans.




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The Corporate Governance Committee was established in October 2002 with the
primary objectives of (i) identifying individuals qualified to become Board members and recommending that the Board select a group of director nominees for each next annual meeting of the Companys stockholders; (ii) ensuring that the
Audit, Compensation, Corporate Governance, and any other future Committees of the Board shall have the benefit of an appropriate number of qualified and experienced independent directors; and (iii) developing and recommending to the
Board a set of effective corporate governance policies and procedures applicable to the Company.





D.    Employees





The following chart indicates the total number of
the Companys employees, and the distribution of the Companys employees by function, as of September 30:





2002

2001

2000Total Employees

602

586

518Sales and Marketing

257

257

224Consulting and Customer Support

115

122

104Research and Development

149

137

128Finance and Administration

81

70

62





The following chart indicates the geographic distribution of the
Companys employees, as of September 30:





2002

2001

2000Europe

375

359

329North America

169

168

138Asia

58

59

51





Employee turnover in 2002 and 2001 was approximately 13% and 20%,
respectively.





The Company has never experienced a strike 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.





The Companys employees are not represented by any unions; however, 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. This agreement allows employees to have between 12 and 22 days additional days vacation depending on their position.




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E.    Share Ownership





The table below sets forth certain
information with respect to the beneficial ownership of shares, options and/or warrants of the Company outstanding as of September 30, 2002 by its Directors and executive officers, where such beneficial ownership represents one percent or more of
the outstanding Shares:





Options & Warrants

Options & Warrants Granted
in 2002Name

Shares(1)

Number of Shares(5)

Exercise Price(s) Euros

Number of Shares

Exercise Price(s) Euros

Shares Beneficially Owned(1)

Percentage (1)All as a group(20 persons)

2,064,083

1,607,983

3.3551.50

400,000

5.4213.10

3,243,858

19.4
%Robert Bixby

633,142

325,000

5.62  8.66

10,000

8.66

947,204

5.7
%Marc Fourrier(2)

232,285

20,000

7.5539.21

8,000

13.10

252,285

1.5
%Pierre Haren(3)

305,124

220,000

3.8110.01

50,000

8.66

487,624

2.9
%Todd and Janet Lowe(4)

714,889

80,000

5.62  8.66

15,000

8.66

780,201

4.7
%


---

|(1) |  | Number of Shares and percentage ownership are based on 16,763,392 Shares outstanding as of September 30, 2002. Beneficial ownership is determined in
accordance with the General Instructions of Form 20-F 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, 2002 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 2 shares held by Delphis, a corporation controlled by Mr. Fourrier and his family.
|--- |  | -------------------------------------------------------------------------------------------

|(3) |  | Includes 56,000 shares held in the name of Mr. Harens children.
|--- |  | ----------------------------------------------------------------

|(4) |  | Shares are held in the name of the Lowe Family Trust of which Mr. & Ms. Lowe are trustees.
|--- |  | ------------------------------------------------------------------------------------------

|(5) |  | Warrants granted to non-executive Directors members expire five years from the date of grant. Options granted to executive officers under the plans described
below expire ten years from the date of grant.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The Company has various employee stock warrant,
stock option and employee purchase plans currently in effect. Under French law, the Company cannot grant options to members of the Board of Directors (other than the Chairman and Chief Executive Officer or Directeurs Généraux
Délégués) who are not employees.





The following is a summary description of each of the
Companys plans.





Warrants for Non-Executive Directors and TAB
Members.    Pursuant to resolutions adopted on September 21, 1999, October 18, December 18, 2000, and December 18, 2001, the shareholders have authorized the Board to issue warrants to the non-executive Directors and TAB
members for the purchase of Shares in the Company, of up to a total of 192,000 Shares. On September 21, 1999, November 22, 2000, January 15, 2001 and December 18, 2001, warrants to purchase 20,000, 32,000, 80,000 and 60,000 Shares, respectively,
were granted to 8 non-executive Directors and 4 TAB members. Warrants representing 180,000 Shares were outstanding as of September 30, 2002. The warrants may be exercised at prices between 7.55 and 39.21 per Share at any time until the
fifth anniversary of the date of grant, when they lapse.





The 1996 Stock Option
Plan.    In 1994, the shareholders of the Company at an extraordinary meeting authorized the Board of Directors to grant, until November 23, 1999, options on up to 500,000 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, 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 at an extraordinary meeting on May 30,




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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 at an extraordinary meeting 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 1/48of the Shares vest each month thereafter provided the optionee continues to render services to the Company. As of September 30, 2002, options with respect to an aggregate of 1,447,325 Shares were outstanding at exercise prices
ranging from 1.95 to 13.54.





The 1998 Stock Option Plan.On
November 4, 1998, the shareholders at an extraordinary meeting approved the 1998 Stock Option Plan, to succeed the 1996 Stock Option Plan, and at that time options representing 1,000,000 Shares 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, 2002, options with respect to an aggregate of 2,835,892 Shares were outstanding at exercise prices ranging from 2.92 to 51.50, and options to purchase or
subscribe for up to 189,571 Shares remained available for future grants under the 1998 Plan.





The 2001 Stock
Option Plan.On September 25, 2001, the shareholders, at an extraordinary meeting, authorized the Board of Directors to grant options, which give the right to subscribe for or purchase up to 1,100,000 Shares, to employees
under the 2001 Stock Option Plan which was approved by shareholders at an ordinary meeting on December 18, 2001. On December 18, 2001, the shareholders ratified and amended the 2001 Stock Option Plan. Pursuant to the 2001 Plan, the issue price of
the Shares will be equal to the closing price for a Share on the Nouveau Marchéon the last trading day preceding the date of the grant of the options, provided that the issue price is not less than (i) 80% of the average of the
closing prices quoted for a Share on the Nouveau Marchéduring the twenty trading days preceding such date of grant and (ii) 80% of the average repurchase price of any Shares held by the Company. Under the 2001 Plan, generally and
unless otherwise specified, one-fourth of the Shares subject to option vest 12 months after the date of grant and 1/48of the Shares vest each month thereafter provided the optionee continues to render services to the Company. As of September 30, 2002, options with respect to an aggregate of 900,000 Shares were outstanding at an exercise price of
8.66, and options to purchase or subscribe for up to 200,000 Shares remained available for grant under the 2001 Plan.





All Options granted under the 1996, 1998 and 2001 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, except for optionees who are French tax
residents at the date of grant of the Options who may exercise their Options until the termination of the term of their Options. 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 and optionees 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 is a French resident subject to French social security at the date of grant of the stock options and disposes of the shares, or converts the shares into bearer form, before the fifth anniversary of the date of grant
of the option. In addition, such difference is treated as salary income for personal income tax purposes if the shares are sold or otherwise disposed of within five years of the grant date. This applies to all options granted to French residents
exercised after January 1, 1997. The Company thus




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subjects options granted to French residents as of January 1, 1997 to a minimum five-year holding period (during which French optionees will not be permitted to sell or dispose of the shares) in
order to benefit from the social contribution favorable regime. In addition, pursuant to a Law of July 2, 1998, both the beneficiary and the Company are exempt from social contributions if the options were granted before January 1, 1997, are
exercised after April 1, 1998 and provided the Company has not been registered for more than 15 years. According to the Law of May 15, 2001, the five-year holding period is reduced to four years with respect to stock options granted on or after
April 27, 2000. In addition, with respect to options exercised after January 1, 1995, an excessive discount, as determined by French law, is subject to French social contributions at the exercise date.





The Company has not recorded a liability for social contributions and certain salary-based taxes which may be assessed for options granted
as of June 30, 2002, 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 prior to the end of the minimum holding period which permits the favorable tax and social contribution regime.





1998 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 September 2001, 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.





French Employee Savings Plan.The Companys French Employee Savings Plan (the Savings
Plan), which was approved by the Companys shareholders in October 1996, and renewed in December 2001 reserves a total of 300,000 Shares for issuance to ILOG S.A. Employee Benefits Trust 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 L.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 will be determined by the Board on the basis of
the fair market value of a Share; more precisely, the Board may determine the issue price of one Share by reference to a sale price of the Share in euros on the Nouveau Marché. However, in no case should the issue price be less than
85% of the mean of the closing sales prices for a Share as quoted on the Nouveau Marchéduring the twenty days of quotation preceding the decision of the Board called to set the opening date for subscription and as reported in La
Tribuneor such other source the Board deems reliable. Investments made on behalf of eligible employees may be distributed on the first day of the fourth month of the




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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, 2002, the Company had issued 46,167 and 242,429 Shares under the Purchase Plan
and Savings Plan, respectively, since December 2001.





Item 7.Major Shareholders and Related Party Transactions





A.    Major Shareholders





The table below sets forth certain
information with respect to the beneficial ownership of shares of the Company as of September 30, 2002 by any person known to the Company to be the owner of five percent or more of the outstanding Shares, and of the Companys Directors and
executive officers, considered as one group:





Name and Address of Beneficial Owner

Shares Beneficially Owned(1)

Percentage Owned(1)Fidelity Investments

894,540

5.3%INRIA

1,237,250

7.4%Robert Bixby(2)

947,204

5.7%All Directors and executive officers as a group (20 persons)(3)

3,243,858

19.4%


---

|(1) |  | Number of Shares and percentage ownership is based on: (i) 16,763,392 Shares outstanding as of September 30, 2002. Beneficial ownership is determined in
accordance with the General Instructions of Form 20-F 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, 2002 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 314,062 shares issuable upon exercise of options to purchase shares which are exercisable within 60 days of September 30, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes 1,179,775 shares issuable upon exercise of options and warrants to purchase shares which are exercisable within 60 days of September 30, 2002.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------




Over the last three years there have been no significant changes in the percentage ownership
held by any of the Companys major shareholders. To the Companys knowledge, it is not owned or controlled by another corporation or by any foreign government or any other natural or legal person.





B.    Related Party Transactions





In 1998 SAP A.G. purchased
685,064 shares in the Company for $10.5 million. In December 1997, SAP and the Company entered into a three-year agreement for the licensing and support of certain ILOG products. Over the three-year period of this agreement, ILOG has received
approximately $19 million in revenues. In 1999, the agreement was amended to include certain additional ILOG products in exchange for $0.9 million. Since December 2000, the three-year agreement has been extended for successive one-year periods in
exchange for additional license and maintenance fees. For the years ended June 30, 2002, 2001 and 2000 revenues received from SAP AG represented respectively 11%, 9% and 10% of ILOG revenues.





In 1999 Temposoft S.A. entered into a licensing agreement for the Companys products. Under the terms of the licensing and other recent agreements ILOG receives
license fees and royalties for certain ILOG products from Temposoft and warrants to purchase Temposoft shares. In September 2001 ILOG exercised the warrants received under the agreement, in full, and participated in a financing of Temposoft for a
total investment of approximately $260,000. As of September 30, 2002 ILOG owned 4.4% of Temposoft. Since February 1998 Mr. Patrick Albert the Companys Technology Fellow has been a Director of Temposoft. Revenues received from Temposoft by
ILOG were $177,000, $778,000 and $173,000 in 2002, 2001 and 2000 respectively.




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Fidelity Investments, through various funds under its management, had during 2002
and 2001 control of between 5% and 10% of the Companys outstanding shares. Fidelity Management and Research Company, which is part of the Fidelity Investments organization, purchased approximately $752,000, $108,000 and $98,000 of software
licenses and services from the Company in 2002, 2001 and 2000, respectively, pursuant to normal orders and contracts negotiated on an arms length basis.





In August 2002, Jeff Williams, who was appointed Vice President, Operations in April 2002, repaid in full a loan he received in August 2001 in connection with his relocation from France to the U.S. The
amount of the loan was $95,000, bore interest at the rate of 3.549%, and was paid in monthly installments of $500 with the remaining balance being due and payable on August 31, 2002 or earlier upon certain events occurring.





C.    Interests of Experts and Counsel





Not Applicable.





Item 8.Financial Information





A.    Consolidated Statements and Other Financial Information





See
Item 18. Financial Statements for a list of the financial statements filed with this Annual Report on Form 20-F.





The Company is a party to legal proceedings from time to time. There is currently no such proceeding which the Company believes is likely to have, or recently has had, 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.





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 euros and under the French Company 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.





B.    Significant Changes





None




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Item 9.The Offer and Listing





A.    Offer and Listing Details





Closing Sale Prices of ILOG ADSs and Shares





In February 1997, the Companys ADSs (each ADS representing one Share) were listed on the Nasdaq
National Market. The following table sets forth the range of low and high reported closing sale prices of the ADSs on the Nasdaq National Market for the fiscal years and periods indicated.





In DollarsLow

High1998(1)

5.625

16.3751999

4.438

16.5002000

5.000

104.5002001

9.594

63.250First Quarter

36.250

63.250Second Quarter

24.125

62.750Third Quarter

9.594

34.000Fourth Quarter

10.875

20.6402002

5.000

17.150First Quarter

5.090

17.150Second Quarter

5.850

12.150Third Quarter

11.400

16.670Fourth Quarter

5.000

16.0012003First Quarter

2.850

6.30MonthlyApril 2002

10.110

16.001May 2002

7.173

10.570June 2002

5.000

7.390July 2002

4.501

6.300August 2002

3.783

4.280September 2002

2.850

3.650


---

|(1) |  | From February 1997.
|--- |  | -------------------




On September 30, 2002, the last sale price for the ADSs as reported on the Nasdaq National Market was $2.99 per ADS.





The Depositary in respect of the ADSs is JPMorgan Chase Bank. Each ADS registered on the books of the Depositary corresponds to one Share. As of September 30, 2002 there were 33 record holders of American Depositary Receipts
evidencing 5,796,950 ADSs.




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In December 1998, the Shares were listed on the Nouveau Marchéof
Euronext Paris. The following table sets forth the range of high and low reported closing sale prices of the Shares on the Nouveau Marchéfor the fiscal years and periods indicated.





In EurosLow

High1999(1)

4.40

12.652000

5.01

107.902001

11.49

23.51First Quarter

39.00

72.50Second Quarter

26.80

72.60Third Quarter

11.49

36.35Fourth Quarter

12.55

24.442002

5.00

19.20First Quarter

5.00

19.20Second Quarter

6.06

13.79Third Quarter

12.60

19.10Fourth Quarter

5.25

18.502003First Quarter

2.80

6.25MonthlyApril 2002

11.10

18.50May 2002

7.20

11.01June 2002

5.25

7.82July 2002

4.60

6.25August 2002

3.87

4.63September 2002

2.80

3.82


---

|(1) |  | From December 1998.
|--- |  | -------------------




On September 30, 2002, the last sale price for the Shares as reported on the Nouveau Marché was 2.90 per Share.





B.    Plan of Distribution





Not Applicable.





C.    Markets





The ADSs are quoted on the Nasdaq National Market
under the symbol ILOG. The shares are also listed on the Nouveau Marchéof Euronext Paris.





General





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





Euronext N.V. has been listed on the Premier Marchéof Euronext Paris since July 2001. In January 2002, Euronext N.V.
acquired the London International Financial Futures and Options Exchange (LIFFE), Londons




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derivatives market. The combination of LIFFE and Euronext N.V. is expected to treble the volume of derivatives business conducted through LIFFE CONNECT TM trading platform. Since February 6, 2002, Bolsa de Valores de Lisboa e Porto (BVLP) has become a wholly-owned subsidiary of Euronext N.V. and was
renamed Euronext Lisbon.





Securities listed on Euronext Paris are traded in one of three markets. The securities
of most large public companies are listed on the Premier Marché, with the Second Marchéavailable for small and medium-sized companies. Trading on the Nouveau Marchéwas 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 Marché Libre OTC.





The Nouveau Marché





The Nouveau Marchéis a regulated market managed and operated by Euronext Paris, the organization which manages and operates the three markets. The Nouveau Marchéis an electronic market that combines a
central order book with market-making to ensure greater liquidity. Member firms of the Nouveau Marché may act in one or more capacities: Listing Advisers/Market-Makers (Introducteurs/Teneurs de Marché,or
ITMs) or broker-dealers (Négociateurs-Courtiers). Admission to the Nouveau Marchéis subject to certain capital adequacy and liquidity requirements determined by the Euronext Pariss regulations. In
addition, companies applying for listing on the Nouveau Marché 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
Marchémay also require certain current shareholders to enter into lock-up arrangements at the time of offerings of securities.





The shares listed on the Nouveau Marchéare placed in one of two categories depending on the volume of transactions, continuor fixing. ILOGs Shares are placed in the category
continu, which includes the most actively traded shares on the Nouveau Marché.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 7:15 a.m. to 9:00 a.m. and a
pre-closing session from 5:25 p.m. to 5:30 p.m. during which transactions are recorded but not executed, and a closing auction at 5:30 p.m. For shares that are not traded continuously, retail orders on the Nouveau Marchéare
matched by the central system at two daily fixings, at 10:30 a.m. and 4:00 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. Trading in securities on the Nouveau Marchémay be suspended by Euronext Paris, if quoted prices exceed certain price limits defined by the regulations of Euronext Paris. In particular, if
the quoted price of a continusecurity varies by more than 10% from the previous days closing price, trading may be suspended for up to four minutes. Once trading has commenced, further suspensions of up to four minutes are also
possible if the price again varies by more than 10% from the threshold at which the suspension was initiated. During the continuous trading session, Euronext Paris also suspends trading for a four-minute period if the quoted price of a
continu security varies by more than 2% from the last traded price. Euronext Paris may also suspend trading of a listed security on the Nouveau Marchéin certain other limited circumstances, including, for example, the
occurrence of unusual trading activity in such security. In addition, in exceptional cases, the Conseil des Marchés Financiers(the CMF) and the Commission des Opérations de Bourse(the COB) may
also suspend trading.





Trades of securities listed on the Nouveau Marchéare settled on a cash basis
on the third trading day following the trade. Market intermediaries are also permitted to offer investors a deferred settlement service (service de règlement différé)for a fee. The deferred settlement service is only
available for trades in securities which either (i) are a component of the Index SBF 120 or (ii) have both a total market capitalization of at least 1 billion euros and a daily average volume of trades of at least 1 million euros. The Shares
are not eligible for the deferred settlement service.





Prior to any transfer of securities held in registered form
on the Nouveau Marché,such securities must be converted into bearer form and inscribed in an account maintained by an accredited intermediary with Euroclear




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France, a settlement organization. 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 Marchéare cleared and settled through Euroclear France S.A., 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.





The Shares have been included in the Index SBF 250, the Index IT CAC and the
Index IT CAC 50.





D.    Selling Shareholders





Not Applicable.





E.    Dilution





Not Applicable.





F.    Expenses of the Issue





Not Applicable.





Item 10.Additional Information





A.    Share Capital





Not Applicable.





B.    Memorandum and Articles of Association





For a discussion of the history of the Company, please see Item 4. Information on the CompanyHistory and Development of ILOG.





The Company is a société anonyme, a form of limited liability company, incorporated under the laws of France. In this
section, the Company summarizes material information concerning the Companys share capital, together with material provisions of applicable French law and the Companys statuts(by-laws). An unofficial English translation of the
Companys statuts is included as an exhibit to this Annual Report on Form 20-F. One may obtain copies of the Companys statutsin French from the Greffeof the Registry of Commerce and Companies of Créteil,
France. Those full documents provide additional details.





1.    Shareholders Meetings and Voting Rights





General





In accordance with French Company Law, there are two types of shareholders general meetings, ordinary and extraordinary.





Ordinary general meetings of shareholders are required for matters such as:





| |  |  | electing, replacing and removing Directors;
| | - |  | -------------------------------------------




| |  |  | appointing independent auditors;
| | - |  | --------------------------------




| |  |  | approving the annual accounts;
| | - |  | ------------------------------




| |  |  | declaring dividends or authorizing dividends to be paid in shares; and
| | - |  | ----------------------------------------------------------------------




| |  |  | issuing debt securities.
| | - |  | ------------------------



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Extraordinary general meetings of shareholders are required for approval of
matters such as amendments to the Companys statuts, including any amendment required in connection with extraordinary corporate actions. Extraordinary corporate actions include:





| |  |  | changing the Companys name or corporate purpose;
| | - |  | -------------------------------------------------




| |  |  | increasing or decreasing the Companys share capital;
| | - |  | -----------------------------------------------------




| |  |  | creating a new class of equity securities;
| | - |  | ------------------------------------------




| |  |  | authorizing or deciding the issuance of investment certificates, convertible or exchangeable securities, or any other securities giving rights to equity
securities; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the voluntary liquidation of the Company.
| | - |  | -----------------------------------------




Annual Ordinary Meetings





French Company Law requires the
Companys Board of Directors to convene an annual ordinary general meeting of shareholders for approval of the annual accounts. This meeting must be held within six months of the end of each fiscal year. This period may, however, be extended by
an order of the President of the Tribunal de Commerce(Commercial Court). The Board of Directors may also convene an ordinary or extraordinary meeting of shareholders upon proper notice at any time during the year. If the Board of Directors
fails to convene a shareholders meeting, the Companys independent auditors may call the meeting. In bankruptcy, the Companys liquidator or court-appointed agent may also call a shareholders meeting in some instances. Any of
the following may request the court to appoint an agent:





| |  |  | one or several shareholders holding at least 5% of the Companys share capital;
| | - |  | -------------------------------------------------------------------------------




| |  |  | any interested party, in cases of urgency;
| | - |  | ------------------------------------------




| |  |  | the workers committee in emergency situations; or
| | - |  | --------------------------------------------------




| |  |  | duly qualified associations of shareholders who have held their shares in registered form for at least two years and who together hold at least a specified
percentage of the Companys voting rights.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Notice of Shareholders Meetings





The Company must announce general meetings at least 30 days in advance by means of a preliminary notice,
which is published in the Bulletin des Annonces Légales Obligatoires, or BALO, and must be sent to the COB prior to publication. This preliminary notice must contain, among other things, the time, date and place of the
meeting, the agenda, a draft of the resolutions to be submitted to the shareholders, a description of the procedures that holders of bearer shares must follow to attend the meeting and the procedure for voting by mail.





At least 15 days prior to the date set for the meetings on first call and at least six days before any second call, the Company must
publish a final notice (avis de convocation)containing among other things, the final agenda, time and place of the meeting and other related information. This final notice must be sent by mail to all registered shareholders who have held
shares for at least one month prior to the date of publication of the final notice, and must also be published in a newspaper authorized to publish legal announcements in the local administrative department (département)in which the
Company is registered, as well as in the BALO, with prior notice having been given to the COB.





In general,
shareholders can only take action at shareholders meetings on matters listed on the agenda for the meeting. As an exception, shareholders may take action with respect to the dismissal of Directors and various matters even though these actions
have not been included on the agenda.




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Additional resolutions to be submitted for approval by the shareholders at the
meeting may be proposed to the Board of Directors within 10 days of the publication of the preliminary notice in the BALO by:





| |  |  | one or several shareholders holding a specified percentage of shares calculated on the basis of a formula relating to the Companys share capital;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | a duly qualified association of shareholders who have held their shares in registered form for at least two years and who together hold at least 1% of the
Companys voting rights; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the workers committee.
| | - |  | -----------------------




The Board of Directors must submit these resolutions to a vote of the shareholders.





In
addition, during the two weeks preceding a meeting of shareholders, any shareholder may submit written questions to the Board of Directors relating to the agenda for the meeting. The Board of Directors is then obliged to respond to these questions.





Attendance and Voting at Shareholders Meetings





Each Share confers on a shareholder the right to one vote. Shareholders may attend ordinary general meetings and extraordinary general meetings and exercise their
voting rights, subject to the conditions specified in French Company Law and the Companys statuts. There is no requirement that a shareholder have a minimum number of shares in order to attend or to be represented at an ordinary or
extraordinary general meeting or to vote by mail.





According to the Companys statuts, in order to
participate in any general meeting, a holder of shares held in registered form must have its shares registered in its name in a shareholder account maintained by the Company or on the Companys behalf by an agent appointed by the Company at
least one day prior to the date of the meeting.





A holder of bearer shares must obtain a certificate from the
accredited intermediary with whom the holder has deposited its shares. This certificate must indicate the number of bearer shares the holder owns and must state that these shares are not transferable until the time fixed for the meeting. The holder
must deposit this certificate at the place specified in the notice of the meeting at least one day before the meeting.





The Companys statuts provide that shareholders may, if the Board of Directors so approve when the meeting is convened, participate in a shareholders meeting by videoconference or by other means of telecommunication
provided shareholder identification is possible in accordance with applicable laws and regulations.





Proxies
and Votes by Mail





In general, all shareholders who have properly registered their Shares or duly presented a
certificate from their accredited financial intermediary may participate in general meetings. Shareholders may participate and vote in general meetings either in person, by proxy, by mail, by videoconference or by any other means of
telecommunication which allows shareholders to be identified.





Proxies will be sent to any shareholder on request
with, among other things, the text of the resolutions to be passes at the relevant meeting. In order to be counted, such proxies must be received at the Companys registered office, or at any other address indicated on the notice convening the
meeting, prior to the date of the meeting. A shareholder may grant proxies to his or her spouse or to another shareholder. A shareholder that is a corporation may grant proxies to a legal representative. Alternatively, the shareholder may send the
Company a blank proxy without nominating any representative. In this case, the chairman of the meeting will vote the blank proxies in favor of all resolutions proposed or agreed by the Board of Directors and against all others.




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With respect to votes by mail, the Company must send shareholders a voting form.
The completed form must be returned to the Company at least three days prior to the date of the shareholders meeting.





Quorum





French Company Law requires that shareholders having at least 25% of the shares
entitled to voting rights must be present in person or voting by mail, by proxy or by videoconference or by any other means of telecommunication which allows shareholders to be identified to satisfy the quorum requirement for:





| |  |  | an ordinary general meeting; and
| | - |  | --------------------------------




| |  |  | an extraordinary general meeting where an increase in the Companys share capital is proposed through incorporation of reserves, profits or share premium.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------




The quorum requirement is 331/3% of the shares entitled to voting rights, on the same basis, for any other extraordinary general meeting.





If a quorum is not present at a meeting, the meeting is adjourned. When an adjourned ordinary meeting is resumed, there is no quorum
requirement. No quorum is required when an adjourned extraordinary general meeting is resumed only to approve an increase in the Companys share capital through incorporation of reserves, profits or share premium. In the case of any other
resumed extraordinary general meeting, shareholders having at least 25% of outstanding voting rights must be present in person or voting by mail or by proxy and, by videoconference or by any means of telecommunication allowing them to be identified
for a quorum. If a quorum is not present, the reconvened meeting may be adjourned for a maximum of two months. No deliberation by the shareholders may take place without a quorum. However, only questions which were on the agenda of the adjourned
meeting may be discussed and voted upon.





Majority





A simple majority of shareholders may pass a resolution at either an ordinary general meeting or an extraordinary general meeting deciding upon a capital increase by
incorporation of reserves, profits or share premium. At any other extraordinary general meeting, a two-thirds majority of the shareholder votes cast is required.





A unanimous shareholder vote is required to increase liabilities of shareholders.





Abstention from voting by those present either in person, by videoconference or by any means of telecommunication allowing shareholders to be identified, or those represented by proxy or voting by mail is counted as a vote against
the resolution submitted to a shareholder vote.





In general, each shareholder is entitled to one vote per share at
any general meeting. Under French Company Law, shares of a company held by entities controlled directly or indirectly by that company are not entitled to voting rights and do not count for quorum or majority purposes.





Financial Statements and Other Communications with Shareholders





In connection with any shareholders meeting, the Company must provide a set of documents, including the Companys annual report and a summary of the results of
the five previous fiscal years, to any shareholder who so requests. French Company Law requires that a special report be provided to the ordinary shareholders meeting regarding stock options authorized and/or granted by the Company.





2.    Dividends





The Company may only distribute dividends out of the Companys distributable profits, plus any amounts held in the Companys reserve which the
shareholders decide to make available for distribution, other than those




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reserves which are specifically required by law or the Companys statuts.Distributable profits consist of the Companys unconsolidated net profit in each fiscal
year, as increased or reduced by any profit or loss carried forward from prior years, less any contributions to the reserve accounts pursuant to law or the Companys statuts.





Legal Reserve





French Company
Law provides that each French société anonyme, such as the Company, must allocate 5% of their unconsolidated statutory net profit for each year to their legal reserve fund before dividends may be paid with respect to that year.
Funds must be allocated until the amount in the legal reserve is equal to 10% of the aggregate nominal value of the share capital. This restriction of payment of dividends also applies to each of the Companys French subsidiaries on an
unconsolidated basis. The legal reserve of any company subject to this requirement may only be distributed to shareholders upon liquidation of the company.





Approval of Dividends





According to French Company Law, the
Board of Directors may propose a dividend for approval by the shareholders at the annual general meeting of shareholders. If the Company has earned distributable profits since the end of the preceding fiscal year, as reflected in an interim income
statement certified by the Companys auditors, the Board of Directors may distribute interim dividends, to the extent of the distributable profits for the period covered by the interim income statement. The Board of Directors may declare such
dividends, subject to French law, and may do so, for interim dividends paid in cash, without obtaining shareholder approval. For interim dividends paid in shares, prior authorization by an ordinary shareholders meeting is required.





Distribution of Dividends





If a priority dividend is paid in full, dividends are distributed to shareholders pro-rata according to their respective holdings of shares. Outstanding dividends are
payable to shareholders on the date of the shareholders meeting at which the distribution of dividends is approved. In the case of interim dividends, distributions are made to shareholders on the date of the Board of Directors meeting in
which the distribution of interim dividends is approved. The actual dividend payment date is decided by the shareholders in an ordinary general meeting, or by the Board of Directors in the absence of such a decision by the shareholders.





In addition, the Companys statuts authorize the shareholders, in an ordinary meeting, to authorize
the grant to each shareholder an option to receive all or part of any annual or interim dividends in either cash or shares.





Timing of Payment





According to French Company Law, the Company must pay any dividends
within nine months of the end of the Companys fiscal year, unless otherwise authorized by court order. Dividends on shares that are not claimed within five years of the date of declared payment revert to the French State.





3.    Changes in Share Capital





Increases in Share Capital





As
provided by French Company Law, the Companys share capital may be increased only with the shareholders approval at an extraordinary general meeting following a recommendation of the Board of Directors. Increases in the Companys
share capital may be effected by:





| |  |  | issuing additional shares;
| | - |  | --------------------------




| |  |  | increasing the nominal value of existing shares; or
| | - |  | ---------------------------------------------------




| |  |  | issuing investment certificates or a new class of shares.
| | - |  | ---------------------------------------------------------



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Increases in share capital by issuing additional shares, investment certificates
or a new class of shares may be effected by issuing such securities:





| |  |  | for cash;
| | - |  | ---------




| |  |  | for assets contributed in kind;
| | - |  | -------------------------------




| |  |  | by conversion, exchange or redemption of debt securities convertible, redeemable or exchangeable into the Companys Shares;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------




| |  |  | upon the exercise of stock options, warrants or other similar securities comprising rights to subscribe for the Companys Shares;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------




| |  |  | by capitalization of profits, reserves or share premiums;
| | - |  | ---------------------------------------------------------




| |  |  | subject to various conditions, in satisfaction of debt incurred by the Company; or
| | - |  | ----------------------------------------------------------------------------------




| |  |  | any combination of the above.
| | - |  | -----------------------------




Decisions to increase the share capital through the capitalization of reserves, profits and/or share premiums require the approval of an extraordinary general meeting, acting under the quorum and majority requirements
applicable to ordinary shareholders meetings. Increases effected by an increase in the nominal value of shares require unanimous approval of the shareholders, unless effected by capitalization of reserves, profits or share premiums. All other
capital increases require the approval of an extraordinary general meeting.





The shareholders may delegate the
right to carry out any increase in share capital (other than for in-kind contribution) to the Board of Directors, provided that this increase has been previously authorized by the shareholders. The Board of Directors may further sub-delegate this
right to the Companys Chairman and Chief Executive Officer. Each time the shareholders decide on a capital increase or decide to delegate to the Board of Directors the right to carry out a capital increase, they must decide on whether or not
to proceed with a capital increase reserved to employees of the Company and its subsidiaries or whether or not to delegate to the Board of Directors the right to carry out such reserved capital increase.





Decreases in Share Capital





According to French Company Law, any decrease in the Companys share capital requires approval by the shareholders entitled to vote at an extraordinary general meeting. In the case of a capital
reduction, other than a reduction to absorb losses or a reduction as part of a program to purchase the Companys own shares, all holders of shares must be offered the possibility to participate in such a reduction. The share capital may be
reduced either by decreasing the nominal value of the outstanding share capital or by reducing the number of outstanding shares. The number of outstanding shares may be reduced either by an exchange of shares or by the repurchase and cancellation of
shares. Holders of each class of shares must be treated equally unless each affected shareholder agrees otherwise.





4.    Preemptive Subscription Rights





According to French
Company Law, if the Company issue new securities for cash giving rights, either immediately or at a later date, to subscribe to the Companys new shares, current shareholders will have preemptive subscription rights to these securities on a
pro-rata basis. These preemptive rights require the Company to give priority treatment to those shareholders. Preemptive subscription rights are transferable during the subscription period relating to a particular offering of shares. These rights
may also be listed on Euronext Paris or any relevant stock exchange.





A two-thirds majority of the shares entitled
to vote at an extraordinary general meeting may vote to waive preemptive subscription rights with respect to any particular offering. French Company Law requires that the




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Board of Directors and the Companys independent auditors present reports that specifically address any proposal to waive preemptive subscription rights. In the event of a waiver, the issue
of securities must be completed within the period prescribed by law. The shareholders may also decide at an extraordinary general meeting to give existing shareholders a non-transferable priority right to subscribe to such new equity securities
during a limited period of time. Shareholders also may notify the Company that they wish to waive their own preemptive subscription rights with respect to any particular offering if they so choose.





5.    Form, Holding and Transfer of Shares





Form of Shares





The
Companys statutsprovide that the Shares may be held in registered or bearer form.





Holding of
Shares





In accordance with French law concerning dematerialization of securities, ownership of shares are not
represented by share certificates but by book entries.





The Company maintains a share account with Euroclear
France(Euroclear) in respect of all shares in registered form which is administered by BNP Paribas. In addition, the Company maintains separate accounts in the name of each shareholder either directly, or, at the shareholders
request, through his accredited intermediary. Each shareholder account shows the name of the holder and the number of shares held through an accredited intermediary, the shareholder account shows that the shares are held through such intermediary.
BNP Paribas, as a matter of course, issues confirmations to each registered shareholder as to shares registered in the shareholders account, but these confirmations do not constitute documents of title.





Shares held in bearer form are held on the shareholders behalf in an account maintained by an accredited intermediary and are
registered in an account maintained by such accredited intermediary with Euroclear. This account is separate from the Companys account with Euroclear. Each accredited intermediary maintains a record of shares held through it and will issue
certificates of registration in respect thereof. The Companys statutspermit the Company to request that Euroclear provide the Company at any time with the identity of the holders of the Companys shares or other securities
granting immediate or future voting rights, held in bearer form, and with the number of shares or other securities so held.





In addition, according to French Company Law, shares held by non-French residents may be held by an intermediary on the shareholders behalf in a collective account or in several individual accounts. The intermediary must declare his
position as an intermediary holding shares on behalf of the beneficial owner. Consequently, the owner of shares recorded in the collective account or in several individual accounts by an intermediary will be represented in shareholders
meetings by this intermediary.





Transfer of Shares





The Companys statutsdo not contain any restrictions relating to the transfer of shares.





Registered shares must be converted into bearer form before being transferred on Euronext Paris and, accordingly, must be registered in an account maintained by an
accredited intermediary. A shareholder may initiate a transfer by giving instructions to the relevant accredited intermediary.





A fee or commission is payable to the French broker, accredited intermediary or other agent involved in the transaction regardless of whether the transaction occurs within or outside France. No registration duty is normally payable
in France, unless a transfer instrument has been executed in France.




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6.    Liquidation Rights





If the Company is liquidated, any assets remaining after payment of the Companys debts, liquidation expenses and all of the
Companys remaining obligations will be distributed first to repay in full the nominal value of the Companys shares. Any surplus will be distributed pro rataamong shareholders in proportion to the nominal value of their
shareholdings.





7.    Requirements for Holdings Exceeding Certain Percentages





French Company Law provides that any individual or entity (including a holder of ADSs), acting alone or in concert with others, that
becomes the owner, directly or indirectly, of more than 5%, 10%, 20%, 331/3%, 50% or 662/3% of the outstanding shares or the voting rights of a listed company in France such as the Company, or that
decreases its shareholding or voting rights above or below any of these percentages, must notify the company within 15 calendar days of the date it crosses each threshold of the number of shares or ADSs it holds and their voting rights. The
individual or entity must also notify the CMF within five trading days of such date of the number of equity securities it holds and the voting rights attached thereto.





French law and the COB impose additional reporting requirements on persons, acting alone or in concert with others, who acquire more than 10% or 20% of the outstanding
shares or voting rights of a listed company. These persons must file with the CMF, the COB and such listed company, a report within fifteen calendar days of the date such thresholds being crossed. In this report the acquirer must specify its
intentions for the following 12-month period including whether or not such person or persons intend to continue its purchases, to acquire the control of such company or to seek a nomination to the companys Board of Directors. This report must
be filed with the CMF, the COB and such listed company. The CMF publicly releases the notice. The acquirer must also publish a press release stating its intentions in a financial newspaper of national circulation in France. The acquirer may amend
its stated intentions, provided that it does so on the basis of significant changes in its own situation or its shareholders. Upon any change of intention, it must file a new report. These requirements also apply to accredited intermediaries that
hold shares on behalf of shareholders who are not French residents.





Under the regulations of the CMF, and subject
to limited exemptions granted by the CMF, any person or persons acting in concert who comes to own more than 331/3% of the share capital or voting rights of a French listed company must initiate a public tender offer for the balance of the share capital of such company.





In order to permit intermediaries or shareholders to give the notice required by law, the Company must publish information with respect to the total number of voting rights
outstanding as of the date of the Companys annual general meeting in the BALO not later than 15 calendar days after such meeting. In addition, if the number of outstanding voting rights changes by at least 5% or more between two ordinary
general meetings, the Company must publish in the BALO, within 15 calendar days of such change, the number of voting rights then outstanding and provide the CMF with a written notice. The CMF publishes the total number of voting rights so notified
by all listed companies in a weekly notice (avis), mentioning the date each such number was updated. In order to facilitate compliance with the notification requirements, a holder of ADSs may deliver any such notification to the depositary
and the depositary shall, as soon as practicable, forward such notification to the Company and to the CMF.





In the
case of a violation of the notification requirements provided for under French Company Law, the undeclared share capital interest in excess of the required notification level will be deprived of voting rights for all shareholders meetings
until the end of a two-year period following the date on which the owner thereof complies with such notification requirement. In addition, any shareholder who fails to comply with the above legal requirements may have all or part of its voting
rights suspended for up to five years by the Commercial Court at the request of the Companys chairman, any shareholder or the COB, and may be further subject to a 18,000 fine.




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If the accredited intermediary which holds shares on behalf of a shareholder, who
is not a French resident, does not comply with the above legal notification requirement, the voting rights of the shares for which the accredited intermediary is registered cannot be exercised until such date as the notification requirement has been
met and the payment of the corresponding dividend is postponed until such date. In addition, if the accredited intermediary knowingly fails to comply with such legal notification requirement, a court located in the jurisdiction of the headquarters
of the Company may, at the request of the Company or one or several shareholders representing at least 5% of the share capital of the Company, deprive the shares in excess of the relevant threshold of attached voting rights and possibly dividends
for a period not to exceed 5 years.





8.    Purchase of the Companys Own Shares





Under French Company Law, the Company may not subscribe its own shares. However, the Company may, directly or through an
intermediary acting on its behalf, acquire the Companys own shares for, among other things:





(a)  to reduce the Companys share capital by canceling such acquired shares, with approval of the Companys shareholders at an extraordinary meeting,





(b)  to obtain shares for distribution to the Companys employees under a profit-sharing plan or stock option plan or,





(c)  to acquire up to 10% of the Companys share capital in connection with a corporate share
repurchase program, provided the Companys shares are listed on a regulated market (e.g., the Premier Marché, the Second Marché, or the Nouveau Marché). The Company has filed a Note
dinformationand has received the approval, or visa, from the COB on November 21, 2001, as well as the Companys shareholders approval at an ordinary general meeting held on December 18, 2001. The COB visa number
is 01-1339. A new resolution will be submitted to this effect to the next general shareholders meeting convened to approve the financial statements for the fiscal year ended June 30, 2002.





The Company must hold any Shares it repurchases in registered form. These shares also must be fully paid up. Shares repurchased by the Company are deemed outstanding
under French law but are not entitled to dividends or voting rights, and the Company may not exercise any preemptive subscription rights attached to them.





The shareholders, at an extraordinary general meeting, may decide not to take these shares into account in determining the preemptive subscription rights attached to other shares. However, if the
shareholders decide to take them into account, the Company must either sell the rights attached to the shares the Company holds on the market before the end of the subscription period or distribute them to the other shareholders on a pro ratabasis.





On December 18, 2001, the shareholders authorized the Board of Directors to repurchase up to 10% of
the Companys total outstanding share capital. The total amount of such purchase may not exceed 10 million euros. This authorization voids and replaces the one which was granted by the Companys general shareholders meeting on December 18,
2000. This authorization will expire on the date of the annual shareholders meeting called to approve the accounts for the fiscal year ending June 30, 2002. A new resolution will be submitted to this effect at the November, 2002
shareholders general meeting convened to approve the accounts for the fiscal year ended June 30, 2002.





9.    Trading the Companys Shares





Under
RèglementNo. 90-04 of the COB, as amended, the Company may not trade in its shares for the purpose of manipulating the market. There are three requirements for trades by a company in its own shares to be considered valid.
Specifically, in order to be valid:





| |  |  | trades must be executed on behalf of the Company by only one intermediary or, if the issuer uses its share repurchase program in part by way of derivatives, by
two intermediaries provided that the issuer is able to ensure an appropriate coordination between the intermediaries,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | any block trades may not be at a price above the current market price, and
| | - |  | --------------------------------------------------------------------------




| |  |  | each trade must be made at a price that falls between the lowest and the highest trading price of the trading session during which is executed.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------




If a companys shares, such as ILOGs, are continuously quoted (cotation en continu), then
a trade must meet the following further requirements to be considered valid:





| |  |  | the trade must not influence the determination of the quoted price before the opening of trading, at the opening of the trading or session, at the first trade
of the shares, at the reopening of trading following a suspension, or, as applicable, in the last half-hour of any trading session or at the fixing of the closing price,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the trade must not be carried out in order to influence the price of a derivative instrument relating to the companys shares, and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------




| |  |  | the trade must not account for more than 25% of the average total daily trading volume on the Nouveau Marchéin the shares during the 15 trading
days immediately preceding the trade. This last requirement applies only to trades in shares that, like the Companys shares, are traded on the immediate settlement market and are not eligible for the deferred settlement service.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




If a companys shares are quoted at fixings, then a trade must meet one further requirement to be
considered valid:





| |  |  | the trade must not account for more than 25% of the average daily trading volume of the Nouveau Marché in the shares during the 15 trading days
immediately preceding the trade.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Trading volume restrictions do not apply to purchases of
securities on behalf of an issuer by an authorized investment firm (prestataire de services dinvestissement) acting pursuant to a liquidity agreement (contrat de liquidité) in conformity with a code of ethics
(charte de déontologie) that has been approved by the COB. The first code of ethics was adopted by the Association Française des entreprises dinvestissement (AFEI) and approved by the COB on
February 13, 2001.





However, there are two periods during which the Company is not permitted to trade in the
Companys own securities: the 15-day period before the date on which the Company make the Companys consolidated or annual accounts public, and the period beginning on the date at which the Company become aware of information that, if
disclosed, would have a significant impact on the market price of its securities and ending on the date this information is made public.





After making an initial purchase of its own shares, the Company must file monthly reports with the COB and the CMF that contain specified information about subsequent transactions. The CMF makes this information publicly
available.





C.    Material Contracts





None.





D.    Exchange Controls





Exchange Controls





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. The payment of any dividends to foreign
shareholders




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must be effected through an authorized intermediary. All registered banks and substantially all credit establishments in The Republic of France are authorized intermediaries.





Ownership of ADSs or Shares by Non-French Residents





Under French law, there is no limitation on the right of non-French residents or non-French shareholders to own, or where applicable, to vote securities of a French
company.





A French law dated February 14, 1996 abolished the requirement that a person who is not a resident of
the European Union obtain an autorisation préalable,or prior authorization, prior to acquiring a controlling interest in a French company. However, both E.U. and non-E.U. residents must file a déclaration administrative,or administrative notice, with French authorities in connection with the acquisition of a controlling interest in any French company. Such déclaration administrativemust also be filed in connection with the acquisition made by a
French company under foreign control. Under existing administrative rulings, a French company listed on a regulated market is regarded as under foreign control if 20% or more of its share capital or voting rights is held by a non-French resident or
French company under foreign control, but a lower percentage may be held to constitute foreign control in certain circumstances (depending, for instance, upon such factors as the acquiring partys intentions and its ability to elect Directors
or financial reliance by the French Company on the acquiring party).





E.    Taxation





The following is a general summary of the 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 holders of ADSs are advised to consult their own tax advisors, with respect to the U.S. federal, state and local tax consequences, French tax consequences, or foreign tax consequences of the ownership and disposition 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 pronouncements, in force as of the date of this Annual Report on Form 20-F, and as a consequence are subject to any change or changes in interpretation 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.





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 and certain other entities 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




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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.





This summary does not address
all aspects of U.S. federal income taxation that may apply to U.S. Holders or U.S. Resident Holders that are subject to special tax rules, including U.S. expatriates, insurance companies, tax-exempt organizations, financial institutions, persons
subject to the alternative minimum tax, securities-broker dealers, investors that directly, indirectly or by attribution own 10% or more of the outstanding share capital or voting stock of ILOG, persons holding their ADSs as part of a straddle,
hedging transaction or conversion transaction, persons who acquired their ADSs pursuant to the exercise of employee stock options or similar derivative securities or otherwise as compensation, or persons whose functional currency is not the U.S.
dollar. Such Holders may be subject to U.S. federal income tax consequences different from those set forth below. If a partnership holds ADSs, the tax treatment of a partner generally will depend upon the status of the partner and the activities of
the partnership. If a U.S. Holder or U.S. Resident Holder is a partner in a partnership that holds ADSs, the Holder is urged to consult its own tax advisor regarding the specific tax consequences of the ownership and disposition of the ADSs.





Deposits or withdrawals of Shares by a U.S. Holder for ADSs will not be subject to United States federal income
tax.





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. ADS Holders should be treated as the owners of the Shares corresponding to such ADSs. Accordingly, the French and U.S. federal tax consequences discussed below generally should be applicable to U.S. Holders of Shares.





Taxation of Dividends





In France, companies may only pay dividends out of income remaining after tax has been paid. A resident of France is generally 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 fiscalis generally
equal to:





| |  |  | 50% of the dividend paid for (i) individuals and (ii) companies which own at least 5% of the capital of the French distributing company and meet the conditions
to qualify under the French parent-subsidiary regime; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | 25% of the dividend paid for the other shareholders who used the avoir fiscalin 2001, and 15% of the dividend paid for such other shareholders who will
use the avoir fiscalas of January 1, 2002.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




In addition, if the distribution of
dividends by the company gives rise to the précompte, shareholders entitled to the avoir fiscalat the rate of 25%, and then 15%, will generally be entitled to an additional amount of avoir fiscalequal to:





| |  |  | 50% of the précomptepaid in cash by the company for shareholders entitled to use the avoir fiscalat the rate of 25%; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------




| |  |  | 70% of the précomptepaid in cash by the company for shareholders entitled to use the avoir fiscalat the rate of 15%.
| | - |  | --------------------------------------------------------------------------------------------------------------------



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As indicated below, the précompteis a tax which is paid by French
companies when they distribute dividends out of certain profits and such dividends give rise to the avoir fiscal (see paragraph below relating to the précompte).





Under French domestic law, dividends paid to non-residents are usually subject to a 25% withholding tax and non-residents 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 fiscalmay, 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 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 published 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 fiscalas 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 that may be entitled to receive payments of the avoir fiscal 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 fiscalonly if such holder is subject to U.S. federal income tax on the payment of the avoir
fiscaland 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 fiscaland 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 fiscalof 50, less a 15% withholding tax on that amount equal to 7.50. As noted below, the payment of the avoir fiscalless 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




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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 fiscalis 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 fiscalless 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 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
Impôts des Non-Résidentswith 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 known as the précompte if they give rise to the avoir fiscal. The précompteis paid by the distributing company to
the French tax authorities. The amount of the précompteis equal to 50% of the net dividends before withholding tax.





If a U.S. Resident Holder is not entitled to the avoir fiscalpayment 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 précompte 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 précompte) 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 the Company (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. To the extent that the amount of any distribution exceeds current and accumulated earnings and profits of the
Company as calculated for U.S. federal income tax purposes, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of the U.S. Holders ADSs (thereby increasing the amount of gain, or
decreasing the amount of loss, the U.S. Holder will recognize on a subsequent disposition of the ADSs), and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange. 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 fiscalpayment (or précompterefund) in euros will be converted
to U.S. dollars at the spot 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




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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 the Company and imposed on related payments of avoir fiscal(or
précompte) may, subject to certain generally applicable conditions and limitations, be taken 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 précompte) 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. Alternatively, a U.S. Holder may claim the foreign
taxes as an itemized deduction for the taxable year within which they are paid or accrued. A deduction does not reduce U.S. tax on a dollar-for-dollar basis like a tax credit. The deduction, however, is not subject to the limitations applicable to
foreign tax credits.





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, a U.S. Holder generally will 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, and will be treated as a long-term capital gain or loss if the U.S. Holders holding period in the ADSs exceeds one year. The deductibility of capital losses is subject to significant
limitations. In the case of individual U.S. Holders, any adjusted capital gains are generally subject to U.S. federal income tax at preferential rates if specified minimum holding periods are met.





Passive Foreign Investment Company Status





A non-U.S. corporation such as the Company will be classified as a Passive Foreign Investment Company (a PFIC) for any taxable year if at least 75% of its gross income consists of passive
income (such as dividends, interest, rents, royalties, or gains on the disposition of certain minority interests), or at least 50% of the average value of its assets consist of assets that produce, or are held for the production of, passive income.
If the Company were characterized as a PFIC for any taxable year, U.S. Holders would suffer adverse tax consequences. These consequences may include having gains realized on the disposition of ADSs treated as ordinary income rather than capital
gains and being subject to punitive interest charges on certain dividends and on the proceeds of the sale or other disposition of the ADSs. U.S. Holders should consult their own tax advisors regarding the potential application of the PFIC rules to
their ownership of ADSs in the Company.





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 the corporate earnings of the Company.




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U.S. Information Reporting and Backup Withholding





Dividend payments made to a Holder and proceeds paid from the sale, exchange, redemption or disposal of ADSs may be subject to information
reporting to the Internal Revenue Service and possible U.S. federal backup withholding at a current rate of 30%. Certain exempt recipients (such as corporations) are not subject to these information reporting requirements. Backup withholding will
not apply to a holder who furnishes a correct taxpayer identification number of certificate of foreign status and makes any other required certification, or who is otherwise exempt from backup withholding. U.S. persons who are required to establish
their exempt status generally must provide Internal Revenue Service Form W-9 (Request for Taxpayer Identification Number and Certification). Non-U.S. Holders generally will not be subject to U.S. information reporting or backup withholding. However,
such Holders may be required to provide certification of non-U.S. status in connection with payments received in the United States or through certain U.S. related financial intermediaries. Backup withholding is not an additional tax. Amounts
withheld as a backup withholding may be credited against a Holders U.S. federal income tax liability, and a Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund
with the Internal Revenue Service and furnishing any required information. Holders should consult their own tax advisors regarding the application of the U.S. information reporting and backup withholding rules.





Foreign Currency Issues





If dividends are paid in euros, 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, 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.





F.    Dividends and Paying Agents





Not Applicable.





G.    Statements by Experts





Not Applicable.





H.    Documents on Display





The documents filed by the Company with the Securities and Exchange Commission can be read at the Securities and Exchange
Commissions public reference facilities at Room 1024, 450 Fifth Street N.W., Washington D.C. 20549, and at the Northwest Atrium Centre, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.





I.    Subsidiary Information





Not Applicable.





Item 11.Quantitative and
Qualitative Disclosures About Market Risk





Approximately 26% of the Companys revenues and 48%
of the Companys expenses in 2002 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, 2002, the effect of a 10% hypothetical uniform strengthening in




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the value of the euro relative to the U.S. dollar would result in an increase in revenues of $2.1 million and expenses of $3.9 million with a decrease in operating income and a decrease of other
income of approximately $1.8 million and decrease of earnings per share of $0.10.





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-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. Until June 2001 the Company did not undertake any hedging activities, However, in
July 2001 the Company started some limited hedging activities in the form of forward contracts selling U.S. dollars for euros that are designed to mitigate the effect of changing exchange rates on earnings per share. For a further discussion
regarding the hedging investments utilized by the Company in 2002, see Note 3 to the Consolidated Financial Statements.





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 12.Description of Securities Other Than Equity Securities





Not Applicable.





---




PART II





Item
13.Defaults, Dividend Arrearages and Delinquencies





None.





Item 14.Material Modification to the Rights of Security Holders and Use of Proceeds





None.





Item 15.[Reserved]





Item
16.[Reserved]





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PART III





Item 17.Financial Statements





Not Applicable.





Item 18.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:





PageReport of Independent Auditors

F-1Consolidated Balance Sheets

F-2Consolidated Statements of Income

F-3Consolidated Statements of Shareholders Equity

F-4Consolidated Statements of Cash Flows

F-5Notes to Consolidated Financial Statements

F-6Schedule II to Financial Statements

F-21





(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)





Item 19.Exhibits





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





| | 1. |  | Statuts (by-laws), of ILOG S.A., as amended (unofficial English translation)
| | -- |  | ----------------------------------------------------------------------------




| | 3. |  | Subscription Agreement, dated as of June 29, 1998, between ILOG S.A. and SAP Aktiengesellschaft (incorporated by reference to Exhibit 3 on Form 20-F of the
Company for the fiscal year ended June 30, 1998, Commission file Number 0-29144)
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 8. |  | Subsidiaries of the Registrant (see Item 4. Information on the CompanyOrganizational Structure)
| | -- |  | --------------------------------------------------------------------------------------------------



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ILOG S.A.





REPORT OF INDEPENDENT AUDITORS





The Directors and Shareholders


ILOG S.A.





We have audited the accompanying consolidated balance sheets of ILOG S.A. as of June 30, 2002 and 2001 and the related consolidated statements of income, shareholders equity and cash flows for each of the three years in the
period ended June 30, 2002. Our audits also included the financial statement schedule listed in the Index at Item 18. These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.





We conducted our audits in accordance
with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits 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. at June 30, 2002 and 2001, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects the information set forth therein.





ERNST & YOUNG Audit





LOGO





Represented by John Mackey





Paris, France


July 29, 2002




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##### Table of Contents

ILOG S.A.





CONSOLIDATED BALANCE SHEETS


(In thousands, except for share data)





June 30,2002


2001ASSETSCurrent assets:Cash and cash equivalents

$
31,368


$
20,870Accounts receivable (less allowance for doubtful accounts of $692 and $1,074 at June 30, 2002 and 2001,
respectively)


19,163



22,215Value-added tax collectible on accounts receivable


1,043



1,135Other receivables


3,534



2,958Prepaid expenses


1,332



1,303Total current assets


56,440



48,481Property and equipment


15,771



13,237Less accumulated depreciation and amortization


(9,049
)


(6,555
)Property and equipmentnet


6,722



6,682Other assets


493



214Total assets

$
63,655


$
55,377LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses

$
6,610


$
7,827Accrued compensation


8,846



7,139Value-added tax payable


1,005



1,276Lines of credit






1,303Current portion of long-term debt






1,707Current portion of capitalized lease obligations


430



320Deferred revenue


10,474



8,015Total current liabilities


27,365



27,587Long-term portion of capitalized lease obligations


340



262Total liabilities


27,705



27,849Commitments and contingenciesShareholders equity:Shares, 0.61 nominal value 16,670,665 and 16,152,850 shares issued and outstanding at June 30, 2002 and 2001,
respectively


11,390



11,109Additional paid-in capital


65,960



62,863Accumulated deficit


(39,816
)


(40,625
)Cumulative translation adjustment


(1,584
)


(5,819
)Total shareholders equity


35,950



27,528Total liabilities and shareholders equity

$
63,655


$
55,377





See notes to consolidated financial statements




F-2




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##### Table of Contents

ILOG S.A.





CONSOLIDATED STATEMENTS OF INCOME


(In thousands, except for share and per share data)





Year Ended June 30,2002


2001


2000Revenues:License fees

$
53,173


$
52,325


$
46,776Services


29,480



27,301



25,059Total revenues


82,653



79,626



71,835Cost of revenues:License fees


1,163



1,258



1,065Services


12,785



13,179



13,630Total cost of revenues


13,948



14,437



14,695Gross profit


68,705



65,189



57,140Operating expenses:Marketing and selling


44,622



40,958



35,625Research and development


15,289



14,804



12,195General and administrative


7,898



8,709



8,115Write-off of acquired intangibles










253Total operating expenses


67,809



64,471



56,188Income from operations


896



718



952Interest expense


(142
)


(312
)


(424
)Interest income


646



775



483Foreign exchange gain


209



535



735Net income before income taxes


1,609



1,716



1,746Income taxes


(800
)


(789
)


(566
)Net income

$
809


$
927


$
1,180Net income per sharebasic

$
0.05


$
0.06


$
0.08diluted

$
0.05


$
0.05


$
0.07Number of shares used in computing net income per sharebasic


16,378,856



15,764,770



14,628,098diluted


17,717,172



17,546,904



17,854,659








See notes to consolidated financial
statements




F-3




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##### Table of Contents

ILOG S.A.





CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


(In thousands, except for share data)





Shares

Additional Paid-in Capital

Accumulated Deficit


Accumulated Other Comprehensive Income (Loss)


Shareholders Equity (Deficit)Shares

AmountBalance June 30, 1999

14,096,500

$
9,918

$
52,506

$
(42,732
)

$
(1,667
)

$
18,025Options exercised

874,301


514


3,321










3,835Issuance of shares

391,918


240


2,042










2,282Amortization of deferred stock compensation







24










24Components of comprehensive income:Translation adjustment














(1,264
)


(1,264
)Net income










1,180







1,180Total comprehensive loss


















(84
)Balance June 30, 2000

15,362,719


10,672


57,893


(41,552
)


(2,931
)


24,082Options exercised

761,891


421


4,186










4,607Issuance of shares

28,240


16


774










790Amortization of deferred stock compensation







10










10Components of comprehensive income:Translation adjustment














(2,888
)


(2,888
)Net income










927







927Total comprehensive loss


















(1,961
)Balance June 30, 2001

16,152,850


11,109


62,863


(40,625
)


(5,819
)


27,528Options exercised

151,567


82


746










828Issuance of shares

366,248


199


2,276










2,475Issuance of warrants







75










75Components of comprehensive income:Translation adjustment














4,235



4,235Net income










809







809Total comprehensive income


















5,044Balance June 30, 2002

16,670,665

$
11,390

$
65,960

$
(39,816
)

$
(1,584
)

$
35,950





See notes to consolidated financial statements




F-4




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##### Table of Contents

ILOG S.A.





CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)





Year Ended June 30,2002


2001


2000Cash flows from operating activities:Net income

$
809


$
927


$
1,180Adjustments to reconcile net income to net cash provided by (used for) operating activities:Depreciation and amortization


3,157



2,079



2,163Unrealized gain on derivative instruments


(342
)






Non-cash compensation


75



10



24Loss on sales of fixed assets


19



98



5Increase (decrease) in cash from:Accounts receivable


3,737



(154
)


(9,154
)Value-added tax collectible on accounts receivable


242



(255
)


453Other receivables


10



(26
)


(1,379
)Prepaid expenses


219



(565
)


17Accounts payable and accrued expenses


(807
)


666



1,288Accrued compensation


751



576



1,816Deferred revenue


1,690



1,537



727Value-added tax payable


(349
)


233



95Other


504



(257
)


244Net cash provided by (used for) operating activities


9,715



4,869



(2,521
)Cash flows from investing activities:Purchases of property and equipment


(2,235
)


(4,510
)


(1,534
)Acquisition of intangible assets






(284
)


Proceeds from sale of property and equipment






1



25Net cash used for investing activities


(2,235
)


(4,793
)


(1,509
)Cash flows from financing activities:Repayment of loans


(1,817
)


(1,699
)


(1,558
)Proceeds (repayment) of line of credit


(1,300
)


(302
)


502Principal payments on capital lease obligations


(447
)


(453
)


(479
)Cash proceeds from issuance of shares


3,303



5,347



6,318Net cash provided by (used for) financing activities


(261
)


2,893



4,783Effect of exchange rate changes on cash and cash equivalents


3,279



(2,415
)


(965
)Net increase (decrease) in cash and cash equivalents


10,498



554



(1,216
)Cash and cash equivalents, beginning of period


20,870



20,316



21,532Cash and cash equivalents, end of period

$
31,368


$
20,870


$
20,316Supplemental disclosureIncome taxes paid

$
1,321


$
380


$
302Capital lease obligation incurred

$
530


$
415


$
507





See notes to consolidated financial statements




F-5




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##### Table of Contents

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 société 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, system integrators, value added resellers, independent software vendors and original equipment manufacturers.





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.





Foreign Currency Translation





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 average
exchange rates for the year, and (3) shareholders equity accounts at historical exchange rates. Translation 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.





Revenue Recognition





The Company recognizes revenue from product licensing fees,
whether sold directly or through distributors, when the product is shipped, the fee is fixed or determinable, 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 with Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), as




F-6




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##### Table of Contents

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 Construction-Type Contracts, using the relevant guidance in SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.





Service revenue from software maintenance agreements is recognized ratably over the maintenance period, which in most instances is for one year. Accordingly, deferred
revenues mostly comprises of deferrals for invoiced maintenance services, not yet recognized as revenues. Other service revenue, primarily consulting and training, are generally recognized at the time the service is performed. When consulting
services are considered essential or the arrangement involves customization or modification of the software, both the license and consulting service revenue under the arrangement are recognized under the percentage of completion method of contract
accounting. 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 Per Share





Basic net income per share is computed using the weighted average number of shares outstanding during the period. Diluted net income 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. See also Note 7, Earnings Per Share.





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 consist
principally of money market funds, certificates of deposits, and commercial paper. The cost associated with 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, 2002
and 2001. Unrecognized gains 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, 2002 and 2001, 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




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approximated their market values, based on the short-term maturities of these instruments. There was no long-term debt at June 30, 2002 and 2001.





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:





Computer equipment and purchased software

1-3 yearsFurniture and other equipment

4-8 yearsLeasehold improvements

10 years, or lease term if less





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 flows is 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 euros and primarily among Crédit Lyonnais, Société Générale and Crédit
Agricole Indosuez.





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. Collateral is generally not required.





Sales to one customer, SAP A.G., accounted for approximately 11%, 9% and 10% of revenues for the years ended June 30, 2002, 2001 and 2000, respectively.





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, 2002, 2001 and 2000, 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




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##### Table of Contents

$757,000, $824,000 and $880,000 received in the years ended June 30, 2002, 2001 and 2000, has been recorded as reductions to the related research and development expenses in each such year.





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 $3,882,000, $3,589,000, and $2,578,000 for the years ended June 30, 2002, 2001, and 2000, respectively.





Derivative Instruments and Hedging





The Company complies with the Financial
Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activity (FAS 133). 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. Fair value is determined by reference to published exchange rate.





For the year ended June
30, 2002, the Company entered into limited hedging activities as described below in note 3. For the years ended June 30, 2001 and 2000 the Company did not have any hedging activity. These transactions can be considered as hedges in economic terms
but the required conditions for hedge accounting per FAS 133 were not met. In the Companys case the hedging instruments and the hedged item were reported independently as if there were no hedging arrangements, thus the derivatives are
initially recorded at cost including transaction costs, and reported at fair value, with changes in fair value included in foreign exchange gain (loss). The Company generally limits the use of hedge accounting for certain significant transaction.
Consequently as at 30 June 2002, the Company had no fair value hedges, cash flow hedges or hedges of net investment in a foreign entity that meet the strict requirements to qualify for hedge accounting under FAS 133.





Recent Accounting Pronouncements





In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Impairment of long-Lived Assets (FAS 144). FAS 144 supercedes Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets




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to be Disposed Of (FAS 121). FAS 144 retains the requirements of FAS 121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from
its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and the fair value of the asset. FAS 144 removes goodwill from its scope. FAS 144 is applicable to financial statements issued for
fiscal years beginning after December 15, 2001. The adoption of FAS 144 is not expected to have any material adverse impact on the Companys financial position or results of its operations.





In November 2001, the Financial Accounting Standards Board issued a Staff Announcement Topic D-103, Income Statement Characterization of Reimbursement Received
for Out-of-Pocket Expenses Incurred. Topic D-103 establishes that reimbursements received for out-of-pocket expenses should be reported as revenue in the statement of operations. Previously, reimbursable expenses were not
reported as revenues and costs. The services revenues and costs, as reported, reflect the implementation of this new rule. This change increased both services revenues and costs by $462,000, $470,000 and $540,000 for the years ended June 30, 2002,
2001 and 2000, respectively. The Companys adoption of this rule does not and will not affect earnings in any past or future periods.





2.    Cash and Cash Equivalents





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





June 30,2002

2001(In thousands)Cash held at bank

$
8,686

$
7,224Cash equivalents


22,682


13,646Total cash and cash equivalents

$
31,368

$
20,870





Gross realized gains and losses on sales of available-for-sale
securities during 2002, 2001 and 2000 were immaterial. There was no unrealized holding gains or losses on available-for-sale securities at June 30, 2002 or 2001.





As of June 30, 2002 and 2001, all cash equivalents have contractual maturities of less than three months.





3.    Financial instruments





The following table presents the
carrying amount of financial instruments at June 30, 2002:





2002Notional Amount

Fair ValueForward sale contracts of U.S. dollars for euros

$
3,200,000

$
3,542,000Forward sale contracts of Japanese yen for euros


1,900,000


2,035,000





These financial instruments are designed to mitigate the effect of
changing exchange rates on the Companys earnings per share. They do not qualify as hedges under FAS 133 and changes in fair value are recognized to earnings. In 2002 the Company derived a gain of approximately $0.5 million from such hedging
activities which is included as part of foreign exchange gain.





These financial instruments have a maturity date
of less than 12 months. Management believes counterparty risk on financial instruments is minimal since the Company deals with major banks and financial institutions.





The Company does not use derivative financial instruments for trading or speculative purposes.




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4.    Property and Equipment





Property and equipment includes:





June 30,2002


2001(In thousands)Computer equipment and purchased software

$
11,486


$
9,476Furniture and other equipment


2,772



2,494Leasehold improvements


1,513



1,267Total property and equipment


15,771



13,237Accumulated depreciation and amortization


(9,049
)


(6,555
)Property and equipment, net

$
6,722


$
6,682





Equipment purchased under capital leases in the years ended June
30, 2002 and 2001 totaled $530,000 and $415,000, respectively. The cost of such equipment included in property and equipment at June 30, 2002 and 2001 totaled $2,500,000, and $1,926,000, respectively. Accumulated amortization of this equipment
totaled $1,706,000 and $1,318,000 at June 30, 2002 and 2001, respectively.





5.    Debt





The following table presents a summary of the Companys debt:





June 30,2002

2001(In thousands)Short-term debt:Lines of credit

$


$
1,303Current portion of interest-free loans from French government agencies, denominated in euros





40Current portion of capital lease obligation


430


320Current portion of notes payable to stockholders





1,667Total short-term debt

$
430

$
3,330Long-term debt:Long-term portion of capital lease obligation

$
340

$
262Total long-term-debt

$
340

$
262





In November 2001, the Company established a line of credit with a
bank secured on its accounts receivable in the U.S. that allows for a maximum borrowing of $3 million, subject to certain covenants. The line of credit matures on November 9, 2002 and bears interest at the U.S. banks prime rate plus 1.5%. In
December 2001, the Company repaid a $1.3 million line of credit with another bank.





Notes payable to stockholders
for $5,000,000 were issued in 1997, in connection with an acquisition. The final installment of $1,667,000 was paid in August 2001.




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





2003

$
4542004


2652005


85Minimum lease payments


804Less amount representing interest


(34
)Present value of net minimum lease payments


770Less current portion


(430
)Long-term portion

$
340





Interest paid in the years ended June 30, 2002, 2001 and 2000
totaled $38,000, $32,000 and $38,000, respectively.





6.    Shareholders Equity





General





At
June 30, 2002, 2001 and 2000, the issued and outstanding share capital of the Company consisted of 16,670,665, 16,152,850, and 15,362,179 shares, respectively, with a nominal value of 0.61.





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 by-laws. The Company has not distributed any dividends since its inception. The accumulated deficit for statutory purposes totaled approximately
$32,000,000 at June 30, 2002. Dividend distributions, if any, will be made in euros.





Stock Options and Warrants





Stock options have been granted to employees under the Companys 1996, 1998 and 2001 Stock Option
Plans.





All Options granted under the 1996, 1998 and 2001 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. One-fourth of the shares subject to option vest 12 months after the date of grant of options and 1/48of the shares vest each month thereafter provided the optionee continues to render services to the Company. 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 except for optionees, who are French tax residents at
the date of grant of the Options who may exercise their Options until the termination of the term of their Options. 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




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##### Table of Contents

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.





The exercise price of the shares under option are equal to the closing market price for a Share on the last trading day
preceding the date of the grant of the options, provided that the issue price is not less than (i) 80% of the average of the closing prices quoted for a Share during the twenty trading days preceding such date of grant and (ii) 80% of the average
repurchase price of any shares held by the Company.





In December 1996, the French parliament adopted a law that
requires French companies and optionees 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 is a French resident subject to French social security at the date of grant of the stock options and disposes of the shares, or converts the shares into bearer form,
before the fifth anniversary of the date of grant of the option. In addition, such difference is treated as salary income for personal income tax purposes if the shares are sold or otherwise disposed of within five years of the grant date. This
applies to all options granted to French residents exercised after January 1, 1997. The Company thus subjects options granted to French residents after January 1, 1997 to a minimum five-year holding period in order to benefit from the favorable tax
treatment. In addition, pursuant to a Law of July 2, 1998, both the beneficiary and the Company are exempt from social contributions if the options were granted before January 1, 1997, are exercised after April 1, 1998 and provided the Company has
not been registered for more than 15 years. According to the Law of May 15, 2001, the five-year holding period is reduced to four years with respect to stock options granted on or after April 27, 2000. In addition, with respect to options exercised
after January 1, 1995, an excessive discount, as determined by French law, is subject to French social contributions at the exercise date.





The Company has not recorded a liability for social contributions and certain salary-based taxes which may be assessed for options granted as of June 30, 2002, 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 prior to the end of the minimum holding period which permits the favorable tax treatment.




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





Shares Reserved for
Future Grants


Options Granted and Outstanding


Weighted Average Exercise Price in euros

Weighted Average Exercise Price in U.S. dollarsBalances at June 30, 1999

454,441


3,934,456


6.94

7.74Options authorized

900,000







Options granted

(1,124,850
)

1,124,850


9.89

9.93Options exercised




(871,801
)

4.53

4.54Options canceled

300,305


(300,305
)

7.09

7.10Plan termination

(138,131
)






Balances at June 30, 2000

391,765


3,887,200


7.73

7.10Options authorized

1,250,000







Options granted

(1,405,490
)

1,405,490


40.75

36.70Options exercised




(764,891
)

6.65

5.99Options canceled

283,329


(283,329
)

18.43

16.60Plan termination

(128,084
)






Balances at June 30, 2001

391,520


4,244,470


18.14

15.37Options authorized

1,100,000







Options granted

(1,253,300
)

1,253,300


8.60

7.70Options exercised




(151,567
)

6.25

5.60Options canceled

156,122


(156,122
)

26.83

24.04Plan termination

(11,077
)






Balances at June 30, 2002

383,265


5,190,081


15.92

15.88





At June 30, 2002, 2001 and 2000, 2,871,355, 1,995,275 and
1,675,236, respectively, of the outstanding options were exercisable at weighted average exercise prices of 13.54 ($12.15), 7.17 ($6.08) and 6.61 ($6.63), respectively. The following table summarizes the status of the
Companys stock options outstanding and exercisable at June 30, 2002:





Stock Options Outstanding

Stock Options ExercisableRange of exercise prices in euro

Number of shares

Weighted average remaining contractual
life

Weighted average exercise price in euros

Number of shares

Weighted average exercise
price in euros0  to    5.15

125,136

4.3

4.25

125,040

4.255.16  to  10.30

3,651,653

7.2

7.32

2,129,470

6.7810.31  to  15.45

111,437

7.3

13.12

69,075

12.5615.46  to  36.05

72,550

8.5

28.62

24,571

31.0836.06  to  41.20

925,547

8.3

39.21

374,386

39.2146.35  to  51.50

303,758

8.0

51.17

148,813

51.125,190,081

7.4

15.92

2,871,355

13.54





The weighted average remaining contractual life of those options is
7.4 years.





Warrants have been granted to non-executive Directors and members of the Companys Technical
Advisory Board. The warrants may be exercised anytime within 5 years of the date of grant.




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##### Table of Contents




A summary of warrant activity is as follows:





Warrants Granted and Outstanding


Weighted Average Exercise
Price in euros

Weighted Average Exercise
Price in U.S. dollars2000Warrants granted

20,000


7.55

7.58Warrants exercised

(2,500
)

7.55

7.58Balance at June 30, 2000

17,500


7.55

7.58Warrants granted

112,000


39.06

35.18Warrants exercised

(9,000
)

7.55

6.80Warrants canceled

(500
)

7.55

6.80Balance at June 30, 2001

120,000


36.96

31.32Warrants granted

60,000


13.10

11.74Balance at June 30, 2002

180,000


29.01

28.94





As allowed under SFAS 123, the Company has elected to continue
using APB 25 in accounting for its employee stock options and warrants. Under APB 25, when the exercise price of the Companys employee stock options or warrants is less than the market price of the underlying shares at the date of grant,
compensation expense is recognized. During the years ended June 30, 2001 and 2000, the Company recorded compensation expense related to options issued in prior years of $10,000 and $24,000, respectively. In addition, under APB 25, compensation
expense is recognized for the warrants granted to the members of the Technical Advisory Board in exchange for their services. During the year ended June 30, 2002, the Company recorded compensation expense related to warrants of $75,000.





Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been
determined as if the Company had accounted for its employee stock options and warrants under the fair value method of SFAS 123. The fair value for these options and warrants was estimated at the date of grant using a Black-Scholes option pricing
model with the following average assumptions for 2002, 2001 and 2000, 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 0.88, 1.78 and 1.23,
for 2002, 2001 and 2000; 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.





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





2002


2001


2000Pro forma net loss

$
(14,288
)

$
(11,991
)

$
(12,448
)Pro forma loss per sharebasic

$
(0.87
)

$
(0.76
)

$
(0.85
)Pro forma loss per sharediluted

$
(0.80
)

$
(0.69
)

$
(0.70
)




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The weighted-average value of options and warrants granted during 2001, 2000 and
1999 was as follows:





2002

2001

2000Options and warrants whose exercise price equaled market price of the underlying shares on the grant date

$
6.03

$
33.18

$
9.93Options and warrants whose exercise price was more than the market price of the underlying shares on the grant
date

$


$


$
Options and warrants whose exercise price was less than the market price of the underlying shares on the grant
date

$


$


$






Employee Stock Purchase Plan





Under the 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 September 2001 the Companys shareholders authorized the issuance of up to 600,000 shares to employees pursuant to the terms of these Plans. 366,248 shares were issued
under the Plans during the year ended June 30, 2002.





7.    Earnings Per Share





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





Year Ended June 30,2002

2001

2000(In thousands, exceptper share amounts)Numerator:Net income

$
809

$
927

$
1,180Denominator:Weighted average shares outstanding


16,379


15,765


14,628Incremental shares attributable to shares exercisable under employee stock plans and warrants


1,338


1,782


3,227Denominator for diluted earnings per share


17,717


17,547


17,855Net income per sharebasic

$
0.05

$
0.06

$
0.08Net income per sharediluted

$
0.05

$
0.05

$
0.07





8.    Income Taxes





Income before income taxes comprises of the following components:





Year Ended June 30,2002


2001


2000(In thousands)France

$
5,300


$
2,812


$
2,390United States


(5,808
)


(3,029
)


(189
)Rest of the world


2,117



1,933



(455
)Total

$
1,609


$
1,716


$
1,746




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##### Table of Contents




The provision for income taxes consists of the following;





Year Ended June 30,2002

2001

2000(In thousands)France

$
205

$
42

$
United States


5


5


Rest of the world


590


742


566Total

$
800

$
789

$
566





A reconciliation of income taxes computed at the French statutory
rate (35.4% in 2002, 36.4% in 2001 and 37.8% in 2000) to income tax expense is as follows:





Year Ended June 30,2002


2001


2000(In thousands)Income tax expense computed at the French statutory rate

$
570


$
625


$
660Effect of foreign tax rates differential


(34
)


(211
)


(186
)Change in valuation allowance


3,272



(338
)


(1,182
)Capitalization of a loan to a foreign subsidiary


(3,742
)






Other individually immaterial items


734



713



1,274Total income taxes

$
800


$
789


$
566





Components of the Companys deferred tax assets and
liabilities consist of the following:





Year Ended June 30,2002


2001(In thousands)Deferred tax assets:Net operating loss carryforwards

$
25,637


$
18,604Acquired intangibles capitalized and amortized for tax purposes


427



2,225Provisions and accruals not currently deductible


550



510Other


294



1,11726,908



22,456Valuation allowance


(26,908
)


(22,456
)Net deferred taxes

$



$






The valuation allowance for deferred tax assets increased by $2,291
and $4,452 in 2001 and 2002, respectively. Net operating loss carryforwards and the valuation allowance include $3,730 and $23 in 2001 and 2002 attributed to stock options, the benefit of which will be credited to additional paid-in capital when
realized.





Due to its history of losses in tax jurisdictions which account for substantially all of the
Companys deferred tax assets, 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, 2002 the Company had net
operating loss carryforwards for French tax purposes of approximately $25,000,000 which have no expiration date. The Company also has U.S. net operating loss carryforwards for federal and state tax purposes of approximately $41,700,000 and
$10,900,000, respectively, that expire in the years 2003 through 2022. The Company has U.K. net operating losses of approximately




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##### Table of Contents

$2,700,000, which have no expiration date. 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.





9.    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.
ILOGs obligation calculated, as of June 30, 2002, as the present value of estimated future benefits to be paid, was $175,000, and is included under accrued compensation.





10.    Operating Lease Commitments





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





2003

$
3,6982004


3,2132005


2,3572006


2,02820072010


2,052





Rental expense for the years ended June 30, 2002, 2001 and 2000 was
approximately $3,534,000, $3,234,000 and $3,225,000, respectively.





11.    Segment and Geographic Information





Segments:    ILOG is organized into three divisions, each operating in different
markets. They each handle industry marketing, sales, consulting and some product development. The Industry Solutions Division (ISD) focuses on the e-commerce, finance, transportation and defense industries. 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 Communications Business Division (COM) is dedicated to network management, and customer management, service and billing. Corporate & other includes segments which do not meet the
quantitative threshold for determining reportable segments, and corporate overhead and other expenses which are not allocated to reportable segments.





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.





Revenues

Income (loss) from Operations2002

2001

2000

2002


2001


2000(In thousands)Industry Solutions Division (ISD)

$
33,431

$
25,545

$
23,911

$
5,572


$
2,897


$
2,101Value Chain Management (VCM)


24,766


25,196


19,925


6,459



6,580



3,617Communications (COM)


15,185


18,250


20,422


(1,162
)


(888
)


1,337Corporate & Other


9,271


10,635


7,577


(9,973
)


(7,871
)


(6,103
)$
82,653

$
79,626

$
71,835

$
896


$
718


$
952




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##### Table of Contents




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:





France(1)

United States

Asia

Europe,excludingFrance

Elimination


Consolidated2002Net revenues:Customers

$
24,212

$
37,358

$
7,995

$
13,088





$
82,653Intercompany


14,898










$
(14,898
)


39,110


37,358


7,995


13,088


(14,898
)


82,653Long-lived assets


2,913


3,391


511


400






7,2152001Net revenues:Customers


23,287


36,698


8,760


10,881






79,626Intercompany


13,926











(13,926
)


37,213


36,698


8,760


10,881


(13,926
)


79,626Long-lived assets


1,935


4,000


595


366






6,8962000Net revenues:Customers


22,846


32,421


6,686


9,882






71,835Intercompany


12,055











(12,055
)


34,901


32,421


6,686


9,882


(12,055
)


71,835Long-lived assets


1,598


1,682


562


416






4,258


---

|(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 $14,500,000, $12,996,000 and $11,737,000 for the years ended June 30, 2002, 2001 and 2000, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




12.    Related Party Transactions





In 1998 SAP A.G. purchased 685,064
shares in the Company for $10.5 million. In December 1997, SAP and the Company entered into a three-year agreement for the licensing and support of certain ILOG products. Over the three-year period of this agreement, ILOG has received approximately
$19 million in revenues. In 1999, the agreement was amended to include certain additional ILOG products in exchange for $0.9 million. Since December 2000, the three-year agreement has been extended for successive one-year periods in exchange for
additional license and maintenance fees. For the years ended June 30, 2002, 2001 and 2000 revenues received from SAP AG represented respectively 11%, 9% and 10% of ILOG revenues.





In 1999 Temposoft S.A. entered into a licensing agreement for the Companys products. Under the terms of the licensing and other recent agreements ILOG receives
license fees and royalties for certain ILOG products from Temposoft and warrants to purchase Temposoft shares. In September 2001 ILOG exercised the warrants received under the agreement, in full, and participated in a financing of Temposoft for a
total investment of approximately $260,000. As of September 30, 2002 ILOG owned 4.4% of Temposoft. Since February 1998 Mr. Patrick Albert the Companys Technology Fellow has been a Director of Temposoft. Revenues received from Temposoft by
ILOG were $177,000, $778,000 and $173,000 in 2002, 2001 and 2000, respectively.




F-19




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Fidelity Investments, through various funds under its management, had during 2002
and 2001 control of between 5% and 10% of the Companys outstanding shares. Fidelity Management and Research Company, which is part of the Fidelity Investments organization, purchased approximately $752,000, $108,000 and $98,000 of software
licenses and services from the Company in 2002, 2001 and 2000, respectively, pursuant to normal orders and contracts negotiated on an arms length basis.





In August 2002, Jeff Williams, who was appointed Vice President, Operations in April 2002, repaid in full a loan he received in August 2001 in connection with his relocation from France to the U.S. The
amount of the loan was $95,000, bore interest at the rate of 3.549%, and was paid in monthly installments of $500 with the remaining balance being due and payable on August 31, 2002 or earlier upon certain events occurring.




F-20




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ILOG S.A.





SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS


(in thousands)





Col. A

Col. B

Col. C

Col. D

Col. EDescription

Balance at Beginning of Period

Additional

Deductions

Balance at End of PeriodCharged to Costs and Expenses

Charged to Other
AccountsYear ended June 30, 2002Reserves and allowances deducted from asset accounts:Allowance for doubtful accounts

$
1,074

$
7

$


$
389

$
692Valuation allowance for deferred tax assets


27,899


3,334








31,233Year ended June 30, 2001Reserves and allowances deducted from asset accounts:Allowance for doubtful accounts


691


543





160


1,074Valuation allowance for deferred tax assets


24,967


2,932








27,899Year ended June 30, 2000Reserves and allowances deducted from asset accounts:Allowance for doubtful accounts


941


206





456


691Valuation allowance for deferred tax assets


20,399


4,568








24,967




F-21




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SIGNATURES





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





ILOG S.A.LOGORoger D. Friedberger Chief Financial Officer





Dated:    October 31, 2002




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CERTIFICATION OF CHIEF EXECUTIVE OFFICER





I, Pierre Haren, Chairman and Chief Executive Officer of ILOG, a société anonyme organized under French law, certify that:





(a) I have reviewed this Annual Report on Form 20-F;





(b) Based on my knowledge, this Annual Report on Form 20-F does not contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report on Form 20-F; and





(c) Based on my knowledge, the financial statements, and other financial information included in this Annual Report on
Form 20-F, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report on Form 20-F.





By:

LOGOName: Pierre HarenTitle:   Chairman and Chief Executive Officer





Dated:    October 31, 2002




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CERTIFICATION OF CHIEF FINANCIAL OFFICER





I, Roger D. Friedberger, Chief Financial Officer of ILOG, a société anonyme organized under French law, certify that:





(a)  I have reviewed this Annual Report on Form 20-F;





(b)  Based on my knowledge, this Annual Report on Form 20-F does not contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report on Form 20-F; and





(c)  Based on my knowledge, the financial statements, and other financial information included in this Annual
Report on Form 20-F, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report on Form 20-F.





By:

LOGOName: Roger D. Friedberger Title:   Chief Financial Officer





Dated:    October 31, 2002