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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F

[   ]  Registration Statement Pursuant to Section 12(b) or 12(g) of The Securities Exchange Act of 1934

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the year ended December 31, 2002.

[   ]  Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

COMMISSION FILE NUMBER: 000-30224

CRYPTOLOGIC INC.








(Name of Registrant as specified in its Charter)


Ontario, Canada



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(Jurisdiction of Incorporation or Organization)


1867 Yonge Street, 7th Floor
Toronto, Ontario M4S 1Y5
Canada



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(Address of Principal Executive Offices)


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

|                               |  |                                              
|------------------------------ |  | ---------------------------------------------
|Title
of Each Class:           |  | Name of Each Exchange
On Which Registered:   
|Common Stock without par value |  | NASDAQ National Market
Toronto Stock Exchange

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

Securities for which there is a reporting obligation pursuant to section 15(d)
of the Act: NONE

The number of outstanding shares of each of the issuers classes of capital or
common stock as of December 31, 2002 was 12,205,868 Common Stock.

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

[X]  Yes     [   ]  No

Indicate by check mark which financial statements item the registrant has
elected to follow:

ITEM 17  [X]     ITEM 18  [   ]





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TABLE OF CONTENTS



|         |                                                                                       |                                           |  |  |  |  |  | 
|-------- | ------------------------------------------------------------------------------------- | ----------------------------------------- |  |  |  |  |  | 
|PART I  
|         | ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        
|         | ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                                      
|         | ITEM 3. KEY INFORMATION                                                              
|         |                                                                                       | SELECTED FINANCIAL DATA                  
|         |                                                                                       | RISK FACTORS                             
|         | ITEM 4. INFORMATION ON THE COMPANY                                                   
|         |                                                                                       | A. HISTORY AND DEVELOPMENT OF THE COMPANY
|         |                                                                                       | B. BUSINESS OVERVIEW                     
|         |                                                                                       | C. ORGANIZATIONAL STRUCTURE              
|         |                                                                                       | D. PROPERTY, PLANTS AND EQUIPMENT        
|         | ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 
|         | ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   
|         | ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            
|         | ITEM 8. FINANCIAL INFORMATION                                                        
|         | ITEM 9. THE OFFER AND LISTING                                                        
|         | ITEM 10. ADDITIONAL INFORMATION                                                      
|         | ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS                 
|         | ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                      
|PART II 
|         | ITEM 13. DEFAULTS, DIVIDEND ARRERAGES AND DELINQUENCIES                              
|         | ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|PART III
|         | ITEM 15. CONTROLS AND PROCEDURES                                                     
|         | ITEM 16. AUDIT COMMITTEE FINANCIAL EXPERT/CODE OF EXPERTS                            
|         | ITEM 17. FINANCIAL STATEMENTS                                                        
|         | ITEM 19. EXHIBITS                                                                    



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Table of Contents

|         |                                                                                       |                                           |    |    |    | 
|-------- | ------------------------------------------------------------------------------------- | ----------------------------------------- | -- | -- | -- | 
|PART I   |                                                                                       |                                           | 1  |   
|         | ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                         |                                           |    | 1  |   
|         | ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                                       |                                           |    | 1  |   
|         | ITEM 3. KEY INFORMATION                                                               |                                           |    | 2  |   
|         |                                                                                       | SELECTED FINANCIAL DATA                   |    |    | 2  | 
|         |                                                                                       | RISK FACTORS                              |    |    | 3  | 
|         | ITEM 4. INFORMATION ON THE COMPANY                                                    |                                           |    | 11 |   
|         |                                                                                       | A. HISTORY AND DEVELOPMENT OF THE COMPANY |    |    | 11 | 
|         |                                                                                       | B. BUSINESS OVERVIEW                      |    |    | 13 | 
|         |                                                                                       | C. ORGANIZATIONAL STRUCTURE               |    |    | 22 | 
|         |                                                                                       | D. PROPERTY, PLANTS AND EQUIPMENT         |    |    | 22 | 
|         | ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                  |                                           |    | 23 |   
|         | ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                    |                                           |    | 29 |   
|         | ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                             |                                           |    | 38 |   
|         | ITEM 8. FINANCIAL INFORMATION                                                         |                                           |    | 39 |   
|         | ITEM 9. THE OFFER AND LISTING                                                         |                                           |    | 39 |   
|         | ITEM 10. ADDITIONAL INFORMATION                                                       |                                           |    | 40 |   
|         | ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS                  |                                           |    | 49 |   
|         | ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       |                                           |    | 49 |   
|PART II  |                                                                                       |                                           | 50 |   
|         | ITEM 13. DEFAULTS, DIVIDEND ARRERAGES AND DELINQUENCIES                               |                                           |    | 50 |   
|         | ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS |                                           |    | 50 |   
|PART III |                                                                                       |                                           | 50 |   
|         | ITEM 15. CONTROLS AND PROCEDURES                                                      |                                           |    | 50 |   
|         | ITEM 16. AUDIT COMMITTEE FINANCIAL EXPERT/CODE OF EXPERTS                             |                                           |    | 50 |   
|         | ITEM 17. FINANCIAL STATEMENTS                                                         |                                           |    | 51 |   
|         | ITEM 19. EXHIBITS                                                                     |                                           |    | 52 |   

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PART I

Introduction

This annual report on Form 20-F relates to the common shares of
CryptoLogic Inc., a corporation registered to carry on business under the
Business Corporations Act(Ontario) on March 7, 1996.

In this annual report, except as otherwise indicated or as the context
otherwise requires, the Company, we, us and our refers to CryptoLogic
Inc. and its operating subsidiaries. All amounts are in U.S. dollars, unless
otherwise indicated.

Accounting Periods and Principles

We have prepared our audited annual consolidated financial statements as
of December 31, 2002 and for the previous five years in U.S. dollars in
accordance with Canadian generally accepted accounting principles (Canadian
GAAP), which conform, in all material respects applicable to our company, with
generally accepted accounting principles in the United States (U.S. GAAP).
Additional disclosure required under U.S. GAAP is provided, where applicable.
Percentages and some amounts in this annual report have been rounded for ease
of presentation. Any discrepancies between totals and the sums of the amounts
listed are due to rounding.

Cautionary Statement Regarding Forward-Looking Information

CryptoLogic Inc. cautions readers that certain important factors
(including without limitation those set forth in this Form 20-F) may affect the
Companys actual results and could cause such results to differ materially from
any forward-looking statements that may be deemed to have been made in this
Form 20-F annual report, or that are otherwise made by or on behalf of the
Company. For this purpose, any statements contained in the annual return that
are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
may, would, expect, plan, anticipate, estimate, believe,
intend, could, or continue or the negative or other variations of
comparable terminology, are intended to identify forward-looking statements.




ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.




ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

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ITEM 3. KEY INFORMATION




SELECTED FINANCIAL DATA

The following financial information of our company is only a summary and
should be read in conjunction with, and is qualified in its entirety by
reference to, the audited annual consolidated financial statements of our
Company and the related notes, which are included in this annual report. The
selected historical financial data set forth below as of and for each of the
years ended December 31, 2002, 2001, 2000, 1999 and 1998 have been derived from
our consolidated financial statements, which have been audited by KPMG,
Chartered Accountants, Toronto, Ontario, Canada, independent accountants. Our
financial statements have been prepared in U.S. dollars in accordance with
Canadian GAAP, and conform in all material respects with U.S. GAAP, except as
described in the Notes to Financial Statements, which are included under Item
17 of this annual report.

Our audited annual consolidated financial statements as of and for each of
the years ended December 31, 2002, 2001 and 2000 are included in this annual
report.

|                                                  |                                     |      |        |       |     |      |        |      |  |      |        |      |  |     |        |      |  |  |        |      | 
|------------------------------------------------- | ----------------------------------- | ---- | ------ | ----- | --- | ---- | ------ | ---- |  | ---- | ------ | ---- |  | --- | ------ | ---- |  |  | ------ | ---- | 
|For the Years Ended December 31,                  |                                     | 2002 |        | 2001  |     | 2000 |        | 1999 |  | 1998
|                                                  |                                     |      |        |       |     |      |        |      |  |     
|Financial Data                                    |                                     |      |        |       |     |      |        |      |  |      |        |      |  |     |        |      |  |  |        |     
|(in thousands of U.S. dollars)                    |                                     |      |        |       |     |      |        |      |  |      |        |      |  |     |        |      |  |  |        |     
|Revenue                                           |                                     |      | 34,427 |       |     |      | 43,550 |      |  |      | 34,390 |      |  |     | 30,980 |      |  |  | 22,132 |     
|Interest income                                   |                                     |      | 642    |       |     |      | 2,215  |      |  |      | 3,254  |      |  |     | 1,704  |      |  |  | 789    |     
|Net income before special charge                  |                                     |      | 7,728  |       |     |      | 18,078 |      |  |      | 15,485 |      |  |     | 20,561 |      |  |  | 16,713 |     
|Net income (loss) after special charge            |                                     |      | (2,129 | )     |     |      | 18,078 |      |  |      | 15,485 |      |  |     | 20,561 |      |  |  | 16,713 |     
|Net margin                                        |                                     |      | 22     | %*    |     |      | 42     | %    |  |      | 45     | %    |  |     | 66     | %    |  |  | 76     | %   
|Operating cash flow                               |                                     |      | 9,997  |       |     |      | 19,572 |      |  |      | 5,985  |      |  |     | 21,783 |      |  |  | 13,271 |     
|Cash, equivalents and short term investments      |                                     |      | 28,346 |       |     |      | 42,822 |      |  |      | 42,696 |      |  |     | 40,977 |      |  |  | 19,400 |     
|Working capital                                   |                                     |      | 35,812 |       |     |      | 54,283 |      |  |      | 55,341 |      |  |     | 44,245 |      |  |  | 24,282 |     
|Total assets                                      |                                     |      | 52,530 |       |     |      | 68,445 |      |  |      | 62,456 |      |  |     | 49,561 |      |  |  | 27,436 |     
|Long-term debt                                    |                                     | Nil  |        |       | Nil |      |        | Nil  |  |      | Nil    |      |  | Nil |       
|Shareholders equity                              |                                     |      | 41,096 |       |     |      | 61,089 |      |  |      | 57,610 |      |  |     | 45,840 |      |  |  | 25,012 |     
|                                                 
|                                                 
|Per Share Data                                    |                                     |      |        |       |     |      |        |      |  |      |        |      |  |     |        |      |  |  |        |     
|(in U.S. dollars, except shares outstanding)      |                                     |      |        |       |     |      |        |      |  |      |        |      |  |     |        |      |  |  |        |     
|Before special charge, net of tax:                |                                     |      |        |       |     |      |        |      |  |      |        |      |  |     |        |      |  |  |        |     
|                                                  | Earnings per share (basic)          |      |        | 0.63  |     |      |        | 1.33 |  |      |        | 1.18 |  |     |        | 2.40 |  |  |        | 1.99 | 
|                                                  | Earnings per share (diluted)        |      |        | 0.60  |     |      |        | 1.21 |  |      |        | 1.03 |  |     |        | 1.40 |  |  |        | 1.15 | 
|After special charge, net of tax:                 |                                     |      |        |       |     |      |        |      |  |      |        |      |  |     |        |      |  |  |        |     
|                                                  | Earnings (loss) per share (basic)   |      |        | (0.17 | )   |      |        | 1.33 |  |      |        | 1.18 |  |     |        | 2.40 |  |  |        | 1.99 | 
|                                                  | Earnings (loss) per share (diluted) |      |        | (0.17 | )   |      |        | 1.21 |  |      |        | 1.03 |  |     |        | 1.40 |  |  |        | 1.15 | 
|Operating cash flow (basic)                       |                                     |      | 0.82   |       |     |      | 1.44   |      |  |      | 0.46   |      |  |     | 2.50   |      |  |  | 1.58   |     
|Operating cash flow (diluted)                     |                                     |      | 0.78   |       |     |      | 1.31   |      |  |      | 0.40   |      |  |     | 1.39   |      |  |  | 0.87   |     
|Basic weighted average number of shares (000s)   |                                     |      | 12,257 |       |     |      | 13,567 |      |  |      | 13,103 |      |  |     | 8,570  |      |  |  | 8,396  |     
|Diluted weighted average number of shares (000s) |                                     |      | 12,879 |       |     |      | 14,944 |      |  |      | 15,070 |      |  |     | 15,420 |      |  |  | 15,298 |     
|                                                 

*     Before non-recurring special charge

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RISK FACTORS

We operate in a rapidly changing environment that involves numerous risks
and uncertainties, many of which are beyond our control and which could have a
material adverse effect on our business, revenues, operating results and
financial condition. The following discussion highlights some of these risks
and uncertainties.

Risks Related to the Industry

Our business may be materially affected by possible changes to, or
interpretation of, government regulation around the world that may apply to
online gaming.

The Company and its licensees are subject to applicable laws in the
jurisdictions in which they operate. At the present time, our licensees hold
online gaming licenses issued by governments in three jurisdictions, Isle of
Man, Alderney and Curacao that legalize and regulate online gaming. Some
jurisdictions have introduced regulations attempting to restrict or prohibit
Internet gaming, while other jurisdictions have taken the position that
Internet gaming is legal and/or have adopted or are in the process of
considering legislation to regulate Internet gaming.

Currently, Great Britain is establishing regulated markets for online
gaming. In 2001, the Isle of Man and Alderney  both part of the British
Commonwealth  established regulated environments for Internet gaming, based
on high standards consistent with land-based gaming. Also that year, Britains
Gambling Review Board released The Budd Report outlining recommendations to
reform the countrys gaming industry including the licensing and regulation of
online casinos. In 2002, the British government confirmed its plans to
establish a regulated and licensed jurisdiction for Internet gaming in line
with recommendations made in the Budd Report.

As companies and consumers involved in Internet gaming are located around
the globe, including the end-users of our licensees, there is uncertainty
regarding exactly which government has jurisdiction or authority to regulate or
legislate with respect to various aspects of the industry. However, legislation
designed to restrict or prohibit Internet gaming may be adopted in the future
in the United States or other jurisdictions.

While certain legislative initiatives could be indicative of a trend
toward a regulated environment for online gaming, their future and impact is
unclear. Future decisions may have a material impact on our operations and
financial results. Existing legislation, including United States federal and
state statutes, have been and could continue to be construed to prohibit or
restrict gaming through the use of the Internet, and there is a risk
governmental authorities may view us or our licensees as having violated such
statutes. There is a risk that criminal and civil proceedings, including class
actions brought by or on behalf of public entities or private individuals,
could be initiated against us, our licensees, Internet service providers,
credit card processors and others involved in the Internet gaming industry.
Legal proceedings relating to Internet gaming could involve substantial
litigation expense, penalties, fines, injunctions or other remedies or
restrictions being imposed upon us or our licensees or others and could divert
the attention of key executives. Such proceedings could have a material
adverse effect on our business, revenues, operating results and financial
condition.

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Given the legislative uncertainty particularly in the U.S., we are focused on
increasing our international diversification in global markets that embrace
online gaming. Nevertheless, there can be no assurances that additional
legislation or the burdens associated with complying with such legislation or
regulations, which could have a material adverse effect on our business,
revenues, operating results and financial condition, will not be proposed and
passed in the United States or in other potentially relevant jurisdictions to
regulate various aspects of the Internet or the Internet gaming industry.

Some U.S. banks have ceased the processing of online gaming transactions
through their credit cards. This may inhibit the growth of the industry and
our business.

Starting in December 2001 and into 2002, certain financial institutions in
the United States ceased to accept online gaming transactions through their
credit cards due to the uncertainty regarding the legislation of Internet
gaming in that country. This event has had a negative impact on the Internet
gaming industry as a whole, on our licensees, and on our company, as evidenced
in lower revenues in 2002. There can be no assurance that other financial
institutions or credit card issuers in the United States and/or other countries
will not enact additional restrictions. Such developments would have a material
adverse effect on our business, revenues, operating results and financial
condition.

The adoption of new laws or changes to or the application of existing laws
relating to Internet commerce may affect the growth of our business.

In addition to regulations pertaining specifically to online gaming, we
may become subject to any number of laws and regulations that may be adopted
with respect to the Internet and electronic commerce. As well, current laws,
which predate or are incompatible with Internet commerce, may be enforced in a
manner that restricts the electronic commerce market. However, the
application of such pre-existing Canadian, U.S. and international laws
regulating communications or commerce in the context of the Internet and
electronic commerce is uncertain.

Moreover, it may take years to determine the extent to which existing laws
relating to issues such as intellectual property ownership and infringement,
libel and personal privacy are applicable to the Internet. The United States
Federal Trade Commission and government agencies in certain states of the
United States have been investigating certain Internet companies regarding
their use of personal information. We could incur additional expenses if these
agencies choose to investigate , or if any new regulations regarding the use of
personal information are introduced affecting the way in which we do business.

New laws and regulations that address issues such as user privacy,
pricing, online content regulation, taxation, advertising, intellectual
property, information security, and the characteristics and quality of online
products and services may be enacted.

The adoption of new laws or regulations relating to the Internet, or
particular applications or interpretations of existing laws, could decrease the
growth in the use of the Internet, decrease the demand for our products and
services, increase our cost of doing business or could otherwise have a
material adverse affect on our business, revenues, operating results and
financial condition.

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Risks Related to Our Business

Our business depends on the continued acceptance of electronic commerce by the
public.

The use of the Internet for commercial transactions is growing. The
success of our electronic commerce services will depend in large part on the
widespread adoption of the Internet for commercial transactions. As the
marketplace for electronic commerce is in the development stage, it is subject
to frequent and rapid technological changes. It is not possible to fully
predict any trend and therefore any eventual impact on our operations and
financial results.

Our business depends on the reliability of the infrastructure that supports the
Internet and the viability of the Internet.

The Internet has experienced, and may continue to experience, significant
growth in the number of users and amount of traffic. This growth has caused
frequent interruptions and delays in processing and transmitting data over the
Internet. There can be no assurance that the Internet infrastructure will
continue to be able to support the demands placed on it by its continued
growth.

In addition, the Internet could lose its viability due to delays in the
development or adoption of new standards and protocols to handle increased
levels of Internet activity or due to increased governmental regulation.
Moreover, critical issues concerning the commercial use of the Internet
(including security, reliability, cost, ease of use, accessibility and quality
of service) remain unresolved and may negatively affect the growth of Internet
use or the attractiveness of commerce and communication on the Internet. Any
well-publicized compromise of security could deter more people from using the
Internet or from using it to conduct transactions that involve the transmission
of confidential information, including the purchase of goods and services. If
critical issues concerning the commercial use of the Internet are not favorably
resolved, if the necessary infrastructure is not developed, if the Internet is
no longer a viable commercial marketplace, or if other technologies and
technological devices eclipse the Internet as a viable channel, our business,
revenues, financial condition and operating results will be materially
adversely affected, and we may be forced to cease operations.

End-users of our software depend on Internet service providers, online
service providers and gaming site operators for access to the Internet gaming
sites operated by our licensees and their competitors. Many of these services
have experienced service outages in the past and could experience service
outages, delays and other difficulties due to system failures unrelated to our
systems or our licensees. Our licensees may lose customers as a result of
delays or interruption in service, including delays or interruptions relating
to high volumes of traffic or technological problems, which could materially
adversely affect our business, revenues, operating results and financial
condition.

Internet gaming is a relatively new industry and therefore, we do not know if
the market will continue to develop and our products and services will continue
to be in demand.

Both the Internet and Internet gaming industries are relatively new
industries that continue to rapidly evolve and are characterized by an
increasing number of market entrants. The demand and market acceptance for
recently introduced products and services are typically subject to a high level
of uncertainty. There can be no assurance that gaming on the Internet will
become widespread.

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Substantially all of our revenues to date have been derived from the
licensing of our Internet gaming software and the support of our associated
services through our licensing subsidiary. Our continued success will depend in
large part upon the success of our Internet gaming software. If the market
fails to develop, develops more slowly than expected, or becomes saturated with
competitors or if our services do not achieve market acceptance, our business,
revenues, operating results and financial condition could be materially
adversely affected.

Internet gaming software and electronic commerce services are subject to
security risks, which may inhibit the growth of the industry and the acceptance
of our products and services.

Our Internet gaming software and electronic commerce services are reliant
on technologies and network systems to securely handle gaming and e-commerce
transactions and user information over the Internet, which may be vulnerable to
system intrusions, unauthorized access or manipulation. As users become
increasingly sophisticated and devise new ways to commit fraud, our security
systems may be tested and subject to attack. We have experienced such system
attacks in the past and implemented measures to protect against these
intrusions. However, there is no assurance that all such intrusions/attacks
will or can be prevented in the future, and any system intrusion may cause a
delay, interruption or financial loss, which could have a material effect on
our business, revenue, operating results and financial condition.

We may be vulnerable to delays or interruptions due to our reliance on other
parties.

Our electronic commerce product for handling transactions over the
Internet relies on Internet Service Providers (ISP) to allow our licensees
customers and servers to communicate with each other. If all of the ISPs
experienced lengthy service interruptions, it would prevent communication over
the Internet and would greatly impair our ability to carry on business.

Our ability to process e-commerce transactions depends on bank processing
and credit card systems. In order to prepare for certain types of system
problems, we have developed and tested a formal disaster recovery plan.
Nevertheless, any system failure, including network, software or hardware
failure, which causes a delay or interruption in our e-commerce services could
have a material adverse effect on our business, revenues, operating results and
financial condition.

We face growing competition from known competitors and new entrants in the
Internet gaming, e-commerce and broader entertainment industries.

Licensees of our software compete with existing and more established
recreational services and products, in addition to other forms of
entertainment. Our success will depend, in part, upon our ability to enhance
our products and services to keep pace with technological developments, respond
to evolving customer requirements and achieving continued market acceptance.

We compete with a number of public and private companies, which provide
electronic commerce and/or Internet gaming software. Given the emerging
development of the industry and the multitude of private organizations
operating in the industry, information about the nature of our competitors,
their operations and their resources is difficult to compile. In addition to
known current competitors, traditional land-based casino operators and other
entities, many of which have significant financial resources and name brand
recognition, may provide Internet gaming services in the future, and thus
become our competitors.

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Potential electronic commerce competitors include credit card companies,
banks, Internet service providers and other entities. The involvement or
expansion into the electronic commerce market by major credit card companies or
financial institutions could have a material adverse effect on our business,
revenues, operating results and financial condition. In particular, as such
companies have greater financial resources, an entrenched position in the
market and brand recognition in respect of commercial transaction processing,
they may be able to require that their own software, rather than the software
of others, including our ECash software and services, be used in connection
with their payment mechanisms.

Furthermore, the barriers to entry into most Internet markets, including
the electronic commerce software segments, are relatively low, making them
accessible to a wide number of entities and individuals. We believe the
principal competitive factors in our industry that create certain barriers to
entry include reputation, technology, financial stability and resources, proven
track record, regulatory compliance, independent oversight and transparency of
business practices. Thus, in addition to our known competitors, it is most
likely that several new competitors may be established in the near future.

Increased competition from current and future competitors has and could
result in price reductions and reduced margins, or could result in the loss of
market share, any of which could materially adversely affect our business,
revenues, operating results and financial condition.

Our revenues are generated from a concentration of key licensees.

A substantial portion of our revenue is derived from certain key
licensees. In fiscal 2002, our top 5 licensees accounted for approximately 92%
of our total revenue, a similar concentration to 2001, although representing a
different mix of licensees. In addition, a large majority of key licensees
operate from one licensing jurisdiction. The loss of one or more of these key
licensees or their license in their respective jurisdiction could have a
material adverse effect on our business, revenues, operating results and
financial condition.

We are subject to risks associated with a significant portion of our business
conducted in non-North American jurisdictions.

A significant portion of our revenues is derived from licensing and
support fees in non-North American countries. The Company and its licensees are
subject to local laws and regulations in those jurisdictions in which they
operate. While some jurisdictions have introduced regulations designed to
restrict Internet gaming, other jurisdictions have demonstrated acceptance of
such activities. Currently, more than 70 jurisdictions worldwide regulate or
are in the process of legalizing some form of Internet gaming according to the
River City Group.

As companies and consumers involved in Internet gaming, including the
end-users of our licensees, are located around the globe, there is uncertainty
regarding exactly which government has jurisdiction or authority to regulate or
legislate with respect to various aspects of the industry. The uncertainty
surrounding the regulation of Internet gaming in the various jurisdictions in
which we operate could have a material adverse effect on our business,
revenues, operating results and financial condition.

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In addition to uncertainty regarding the local legal status of Internet
gaming in other jurisdictions, there are certain difficulties and risks
inherent in doing business internationally as a Canadian based corporation,
including the burden of complying with multiple and conflicting regulatory
requirements, foreign exchange controls, potential restrictions or tariffs on
gaming activities that may be imposed, potentially adverse tax consequences and
tax risks. Changes in the political and economic stability, regulatory and
taxation structures, and the interpretation thereof, of jurisdictions in which
we or our subsidiaries operate, and in which our licensees customers are
located could have a material adverse effect on our business, revenues,
operating results and financial condition.

Our ability to expand our business in certain countries will require
modification of our products, particularly domestic language and currency
support. Once a licensee has posted its gaming site on the Internet, the site
is available to users around the world. However, there can be no assurance
that we will be able to sustain or increase revenue derived from international
operations or that we will be able to penetrate linguistic, cultural or other
barriers to new foreign markets.

Our financial results are reported in U.S. currency, which is subject to
fluctuations in respect of the currencies of the countries in which we operate.
The operations of our licensees are conducted only in U.S. dollars, British
pound sterling and Euros, and we earn revenue from these sources in such
currencies, as well as incurring expenses in Canadian dollars. Accordingly,
fluctuations in the exchange rate of world currencies could have a positive or
negative effect on our reported results. Given the constantly changing currency
exposures and the substantial volatility of currency exchange rates, we cannot
predict the effect of exchange rate fluctuations upon future operating results.
We utilize a hedging program to mitigate our currency risks, but there can be
no assurance that we will not experience currency losses in the future, which
could have a material adverse effect on our business, revenues, operating
results and financial condition.

We are subject to litigation and copyright challenges that arise in the
ordinary course of business.

We, and certain of our subsidiaries, are involved in litigation arising in
the ordinary course and conduct of business including former licensee claims.
The outcome of such matters cannot be predicted with certainty. Therefore,
there is a potential risk that the outcome of such proceedings could have a
material adverse effect on our business, revenues, operating results and
financial condition.

Moreover, from time to time, third parties have asserted and may continue
to assert patent, trademark, copyright and other intellectual property rights
to technologies that we consider important. There can be no assurance that the
assertion of such claims will not result in litigation or that we would prevail
in such litigation or be able to obtain a license for the use of any infringed
intellectual property from a third party or, if such a license is required,
that it would be available on terms acceptable to us.

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We may fail to protect our intellectual property and reduce our competitive
position.

We rely on a combination of laws and contractual provisions to establish
and protect our rights in our software and proprietary technology. We believe
that much of our competitive position is dependent upon our ability to protect
our proprietary technology. In an attempt to protect our intellectual property
rights, we generally enter into non-disclosure and invention agreements with
employees, licensees, consultants and customers, and historically have
restricted access to our software products source codes. We regard our source
codes as proprietary information, and attempt to protect the source code
versions of our products as trade secrets and unpublished copyrighted works.
Despite our precautions and measures implemented to protect against such
attempts, unauthorized parties may have or could in the future copy or
otherwise reverse engineer portions of our products or otherwise obtain and use
information that we regard as proprietary.

We do not possess any patent or copyright registrations in Canada, the
United States or any other jurisdiction. However, our company and subsidiaries
have trademarks in certain jurisdictions and are in the process of applying for
further trademark registrations, which would provide such protection in
relevant jurisdictions. Certain provisions of our license agreements, including
provisions protecting against unauthorized use, transfer and disclosure, may be
unenforceable under the laws of certain jurisdictions.

The software industry is characterized by rapid technological change,
therefore we believe that patent, trademark, copyright and other legal
protections are less significant to our success than other factors such as the
knowledge, ability and experience of our personnel, new product and service
developments, frequent product enhancements, customer service and ongoing
product support.

In addition to protection of our proprietary software, we also have a
proprietary interest in our name. The names CryptoLogic and WagerLogic
have become well known in the Internet gaming industry. Accordingly, our
competitive position could be affected if our name was misappropriated and our
reputation in any way compromised.

There can be no assurance that the steps we have taken to protect our
proprietary rights will be adequate to deter misappropriation of our technology
or independent development by others of technologies that are substantially
equivalent or superior to our technology. Any misappropriation of our name,
technology or development of competitive technologies could have a material
adverse effect on our business, revenues, operating results and financial
condition.

We could incur substantial costs in protecting and enforcing our
intellectual property rights. Furthermore, litigation, regardless of its
outcome, could result in substantial costs to us and divert managements
attention and resources from our operations.

We have a limited operating history from which to evaluate our business.

Founded in 1995 with commercial operations commencing in 1996, we are a
young organization and in an evolving stage of development. As a result, we
have about a six-year operational history from which our performance can be
assessed and there can be no assurance of continued market acceptance of our
products and services or that we will sustain profitability.

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Our revenue in general, and our licensing and support revenue in
particular, are relatively difficult to forecast and vary from quarter to
quarter. Other factors that make it difficult to forecast quarterly revenue
include the possible seasonal nature of recurring licensing and support revenue
and the marketing plans of our licensees. Due to these factors,
quarter-to-quarter comparisons of our operating results may not give a good
indication of future performance.

We rely on a key group of qualified people, and if we cannot hire and retain
qualified personnel, our operations may be materially affected.

Our future success is dependent on certain key management and technical
personnel. The loss of key personnel or the inability to attract and retain
highly qualified personnel, consultants or advisors could have a material
adverse effect on our business, revenues, operating results and financial
condition.

There is no assurance that we will continue to effectively develop and manage
growth in our business.

We have a history of growth. The expansion of our business and the
increasing complexity of our product offerings, coupled with the rapid
evolution of our markets, have placed, and are expected to continue to place, a
significant strain on our management and operational resources and to increase
demands on our internal systems, procedures and controls. Our future operating
results will depend on managements ability to develop and manage growth, hire
and retain significant numbers of qualified employees, accurately forecast
revenues and control expenses. A decline in the growth rate of our revenues
without a corresponding and timely slowdown in our expense growth or our
inability to manage or build future growth efficiently could have a material
adverse effect our business, revenues, operating results and financial
condition.

Our operations may be subject to risks associated with future acquisitions.

As part of our business strategy, we may make acquisitions of or
significant investments in businesses that offer complementary products,
services, and technologies. Any acquisitions or investments will be accompanied
by the risks commonly encountered in acquisitions of businesses. Such risks
include, among other things, the difficulty of assimilating the operations and
personnel of the acquired businesses; the potential disruption of management
from our business; the inability of management to maximize the financial and
strategic position of our company and acquired businesses; the maintenance of
uniform standards, controls, procedures and policies; and the impairment of
relationships with employees and clients as a result of and integration of new
management personnel.

Our stock price has been and may continue to be volatile.

The market price of our common shares has experienced significant
fluctuations and may continue to fluctuate significantly. The market price of
the common shares may be significantly adversely affected by various factors,
many of which are beyond our control, such as proposed Internet gaming
legislation or enforcement of existing laws, the announcement of new products
or product enhancements by us or our competitors, technological innovation by
us or our competitors, quarterly variations in our revenue and results of
operations or those of our competitors, changes in earnings estimates by
financial analysts, speculation in the press or analyst community and general market conditions or market conditions
specific to particular industries, including the Internet and gaming.

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In addition, the stock market has from time to time experienced
extreme price and volume fluctuations. These company-specific or broad market
fluctuations may adversely affect the market price of our common shares.
Anti-online gaming legislation could also impact our ability to remain listed.




ITEM 4. INFORMATION ON THE COMPANY




A.     HISTORY AND DEVELOPMENT OF THE COMPANY

CryptoLogic Inc. was formed by articles of amalgamation under the Business
Corporations Act(Ontario) effective March 7, 1996 pursuant to an amalgamation
agreement dated January 19, 1996 between Inter.tain.net Inc., a private
corporation, and Biroco Kirkland Mines Limited. Immediately prior to the
amalgamation, Biroco Kirkland Mines Limited did not carry on active operations.
Each shareholder of Biroco received one post-amalgamation convertible
non-cumulative preference share of the Company for each common share of Biroco
held at the amalgamation date. Such preference shares were convertible into
Common Shares of the post-amalgamation Company at the election of the holder
until May 27, 1996 and were redeemable by the Company at a price of Cdn$0.10
per share.

Our registered office is located at 220 Bay Street, 7th Floor, Toronto,
Ontario, Canada, M5J 2W4. Our principal executive offices are located at 1867
Yonge Street, 7th Floor, Toronto, Ontario, Canada, M4S 1Y5, telephone:
416-545-1455.

On June 28, 1996, we changed our name from Inter.tain.net Inc. to our
current name, CryptoLogic Inc.

CryptoLogic is an Internet software and services provider with proprietary
e-commerce enabling technology that permits secure, reliable, efficient, and
rapid financial transactions over the Internet. To date, we are focused on
providing proprietary software technology and related support services to the
Internet gaming industry. As at December 31, 2002, through our wholly-owned
subsidiary, WagerLogic, we license and support our proprietary Internet-based
software package to 18 licensees located around the world including a number of
brand name and land-based gaming organizations in the United Kingdom, who hold
Internet gaming licenses issued by governments where the licensees online
gaming operations are domiciled.

In fiscal 2000, we capitalized on the growing Internet gaming industry
through a focus on (a) expanding our major brand name, land-based gaming
licensees, (b) investing in regulatory compliance to provide the controls and
safeguards important to land-based groups and their clientele, and (c)
investing in technology, infrastructure and customer care to provide the
software and services required to support our expanded group of customers.

During fiscal 2000, our licensing subsidiary, WagerLogic entered into five
new license agreements with name brand clients in markets around the world
including Australia, Argentina, and New Zealand. Leading U.K. sports book
operator, William Hill, launched its online casino using CryptoLogic-developed
software, which represented the first land-based brand name to enter the online
casino market. We established a subsidiary in the United Kingdom to assist
with our strategy of focusing on Europe, one of our key growth markets.

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In response to the worldwide government focus on the need to regulate
online gaming, we established a dedicated group to ensure regulatory compliance
in all jurisdictions where we and our licensees operate. During fiscal 2000,
we continued certification (i.e. independent third party software testing and
verification) of our gaming software in Australia, which provided one of the
most stringently regulated Internet gaming markets in the world (subsequently
in 2001, the Australian government introduced restrictions to its online gaming
regulations, which resulted in a number of major Australian operators
discontinuing their online casino initiatives including CryptoLogics
Australian licensee).

Throughout the year, we continued to invest in advanced technology for our
products, and in November 2000, we introduced version 4.0 of our gaming
software, providing greater interactivity, new games and expanded consumer
controls. In addition to focusing on software development, we also invested in
talent, global infrastructure and customer care.

During 2001, we advanced our market-driven growth strategy centred on
player-oriented product development, regulatory compliance and licensing name
brand, land-based customers. A significant European-focused licensee,
Littlewoods Gaming, was signed in September, and at year end a British pound
sterling casino was under development. We extended our regulatory compliance
efforts into multiple jurisdictions during the year. Leveraging the work done
toward certification of our gaming software in Australia, we undertook
certification in the Isle of Man and Alderney  two regulated online gaming
markets opened by the British government that adhere to high standards imposed
on land-based gaming.

In 2001, we continued to emphasize market-driven product development and
initiatives to help our licensees develop strong player relationships and
extend their market reach. In December 2001, we launched our fifth generation
casino software incorporating loyalty features, including payouts in Euro
currency, new tournaments and VIP functions. To capitalize on the market trend
toward broader gaming options, we commenced software development of new
products targeting the emerging, high-growth online bingo and poker markets. In
addition, we began development of some of our most popular casino games on the
Java platform, which provides an entertaining gaming experience without the
wait of a software download. As well, we launched JackpotMania.com, a portal
linking Internet casinos which allows our licensees to offer popular
progressive jackpot games similar to those found in Las Vegas and is a strong
marketing draw for players. Our acquisition of WinnerOnLine, an online gaming
portal, offered licensees a popular marketing channel.

Also in 2001, we expended a net cash outlay of $14.9 million to fund the
repurchase and cancellation of 1.4 million common shares through our Normal
Course and Substantial Issuer Bids.

2002 was a year marked by both internal and industry-wide challenges,
which required us to focus on stabilizing our core business. In February 2002,
we invested $6.1 million in SCG Enterprises Ltd., a wholly-owned subsidiary of
Sports.com, to allow us to expand into the regulated online sports betting
market in the U.K., a major new gaming area. SCG was subsequently placed into
bankruptcy, which resulted in a 100% write-down of our investment in 2002.

As well in 2002, we expended a net cash outlay of $17.9 million to fund
the repurchase and cancellation of 1.3 million in common shares through our
Normal Course and Substantial Issuer Bids.

In January 2002, a new Chief Financial Officer was appointed as part of
our evolution from founder management, followed by a new Interim President and
CEO in July 2002, who was confirmed President and CEO in March 2003.

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During 2002, ongoing legislative and regulatory uncertainty in the U.S.
regarding online gaming continued to affect the online gaming industry, which
reinforced our focus on increasing development of international opportunities.
To that end, our new leadership team defined and began to act on a
three-pronged growth strategy: i) build and expand our international customer
base and diversification; ii) emphasize the strictest regulatory compliance;
and iii) deliver market-driven products and services.

We launched two U.K. customers into the Internet casino market 
Littlewoods Gaming and The Ritz Club London Online. These major customers
contributed positively to our overall licensees revenues derived from
international markets, which rose from approximately 30% in 2001 to about 40%
in 2002. Our gaming software was certified in the Isle of Man, thus
establishing CryptoLogic as one of the worlds few software providers to be
regulated to the most stringent online gaming standards comparable to
land-based gaming requirements. We also continued to invest in research and
development, and released new products  poker and bingo; introduced our
non-downloadable Java version of our casino product; and offered new currencies
and a host of new languages to appeal to broader gaming audiences worldwide and
to enable our customers to expand into new revenue and high-margin game
segments. As part of our commitment to offer our customers players the
broadest range of payment options and convenience, we added six new payment
solutions.

From inception to 2002, our software solutions have processed $11 billion
in secure online wagers for more than 1.4 million players in 240 countries
worldwide since inception.




B. BUSINESS OVERVIEW

CryptoLogic is a publicly-traded corporation on the Toronto Stock Exchange
(symbol: CRY) and Nasdaq National Market (symbol: CRYP) with operating
subsidiaries located in Cyprus, the United Kingdom, Canada and Alderney that
provide licensing, marketing and customer support services of its Internet
gaming solutions to third-party gaming operators around the world.

As at December 31, 2002, our wholly-owned subsidiary, WagerLogic, licenses
and supports our proprietary Internet-based software package to 18 licensees
located around the world including a number of brand name and land-based gaming
organizations in the United Kingdom, who hold Internet gaming licenses issued
by governments where the licensees online gaming operations are domiciled,
principally in Curacao of the Netherlands Antilles and the Isle of Man, part of
the British Commonwealth.

Substantially all of our revenue is of a recurring nature in that we earn
an ongoing license and support fee from the licensing and supporting of our
software, calculated as a percentage of each licensees net transaction
revenues. Additional revenues are derived from the provision of software
customization, e-cash and advertising services. Historically, we experience
seasonality with slower sales in the third quarter, as the use of the Internet
is not as strong in the summer months, when players tend to spend less time indoors and at their
computers. Consequently, our first and fourth quarters (during the winter and
fall seasons) are typically our strongest revenue periods.

CryptoLogic is an Internet software and services provider with proprietary
e-commerce enabling technology that permits secure, reliable, efficient, and
rapid financial transactions over the Internet. We are focused on providing
proprietary software technology and related support services to the Internet
gaming industry through WagerLogic, a wholly-owned subsidiary. Our gaming
solution comprises a total suite of more than 60 Internet-based slot and table
casino games, bingo and player-to-player poker games in multi-languages
(English, Spanish, Japanese, Chinese, French, German, Italian) and
multi-currencies (U.S. dollars, British pound sterling and Euros) with an
integrated e-cash management system and customer support. Our Internet game
software package is available in both play-for-fun and play-for-cash mode.

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The proprietary Internet-based software and electronic commerce software
products are used by licensees to create virtual casinos, bingo halls or poker
rooms. The downloadable software package transfers the front end information
(i.e., playing cards, roulette wheel, dice numbers) between users and remote
servers. The software package utilizes each users computer to generate the
graphics of the virtual casino, bingo hall or poker room, while the licensees
gaming servers perform the dealer function, generating the random numbers of
playing cards, roulette numbers and dice numbers, as applicable. Our most
popular casino games are also available on the Java platform, which provides an
entertaining gaming experience without the wait of a software download.

Among other things, our software contains proprietary encryption features,
which allow secure transmission of data, and permits our licensees to offer
multi-player games, a 3D panoramic virtual casino floor populated by real
players, progressive jackpots, Internet browsing features and inter-player
chatting.

As part of our commitment to safe and responsible gaming, our gaming
solution provides personal options and security features including deposit and
bet limits, temporary and permanent account locks, personal identification
verification, and online tracking of a players gaming activity and e-cash
transactions in real-time.

Our gaming solution is complemented by an integrated e-cash management
system. We provide Internet-based electronic commerce support and technology
to our licensee customers and maintain, through subsidiaries, electronic
commerce accounts for both merchants of our electronic commerce software and
their end-users. At present, we report and remit to our licensees the net
transaction revenues less licensing and support fees payable to the Company (as
outlined in the applicable licensing agreement). As the online gaming industry
matures, our licensees may utilize their own e-cash systems to enable an
integrated account of all their online offerings, which would have our
licensees remit payment to us.

Utilizing our electronic commerce software, users can purchase electronic
cash through a wide range of payment options  by credit card, debit card,
electronic wallet, electronic check, transfer from their bank account, wire
transfer, or personal check, and can either spend the cash with a third party
business merchant of the Company, or have the balance in their account returned
through their credit card account or by check. Users of our electronic
commerce software products are charged nominal fees for using this service.

We also provide 24/7 customer support in all the languages and currencies
supported by our software for enhanced convenience to our licensees global
player base, which is always available to help players with technical questions or assistance with the
gaming software and e-cash accounts.

It is our objective to continue to introduce innovative software products
that appeal to broad segments of gaming audiences worldwide.

BUSINESS AND MARKETING STRATEGIES

We intend to capitalize on the vast growth potential of the global online
gaming industry  one of the fastest growing markets on the Internet. Industry
experts forecast the global online gaming market to continue solid growth,
increasing from $3.5 billion in revenue in 2002 to $5.0 billion in 2003, yet
still only representing about 1.5% of the size of the land-based gaming market
worldwide (See Industry Overview on page 18).

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To advance our long-term growth and market leadership, we provide one of
the most comprehensive and innovative product suites for online gaming across
the gaming spectrum from casino and bingo to multi-player table poker games.
We work with some of the worlds best-known names in land-based and online
gaming including William Hill, one of the top two sports book operators in the
U.K.; InterCasino, one of the worlds first play-for-cash online casinos;
Littlewoods Gaming, a household gambling name in the U.K.; and the Ritz Club,
an exclusive and prestigious gaming club. We are also at the regulatory
forefront, seeking approval to the strictest standards available worldwide for
online gaming comparable to high land-based standards  our gaming software is
certified in the Isle of Man and we are a licensed provider in Alderney.

In our view, the near-term future of online gaming is outside North
America. Two approaches to online gaming have crystallized in the U.S. 
licensing and regulation versus prohibition. Until this regulatory uncertainty
is definitively resolved, growth prospects in North America will be tempered.
This is why our first core strategy is to continue to focus on building and
expanding our strong roster of blue chip, brand name customers in international
markets such as Europe and Asia.

We also recognize the importance of trust on the Internet. To that end,
we target well-respected, brand name operators looking to leverage their
trusted reputations and large player base to capitalize on the growth prospects
in Internet gaming.

Our second key imperative is our regulatory commitment to support the most
exacting government-regulated standards for online gaming. We have long
advocated regulation as the best solution for governments, operators, suppliers
and consumers to ensure the safe, secure and responsible use of this form of
entertainment. We work with major organizations that have solid reputations,
and they depend on us for software that their players can trust. As well, as
more jurisdictions see the value of a regulated approach, few companies are in
a better position than CryptoLogic to prosper in an increasingly regulated
global market. We have and will continue to subject ourselves, including our
directors, executives and senior officers, to extensive government probity and
independent third party testing and verification of our gaming software.

To date, our gaming software has been certified to the Isle of Mans
rigorous requirements. As well, we are a regulated and licensed software
vendor in Alderney, and The Ritz Club London Online is now using
CryptoLogic-developed software to gain certification and establish a highly
regulated online operation in that jurisdiction. As a result, we are one of
only a few software vendors in the world today approved to the most stringent
regulated online gaming standards comparable to land-based requirements.

Globally, the trend toward regulating Internet gaming to land-based
standards is encouraging the growing presence of land-based operators and
creating a credible and sophisticated marketplace, and driving the expansion of
online gaming into the broader, mainstream gaming population. Our experience
and acceptance in highly regulated jurisdictions provide a competitive
advantage for CryptoLogic as and when more land-based operators migrate onto
the Internet and government regulation continues to proliferate worldwide
including the U.Ks recent decision to establish a licensed and regulated
environment for online gaming.

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In an increasingly competitive market, our third core focus is to offer
the broadest, market-driven product suite to drive growth for our customers by
enhancing player loyalty and revenue with expanded choices in gaming, currency,
language, payment options and support tools. We continue to expand our product
portfolio, most recently releasing new poker and bingo games, introducing our
non-downloadable Java casino version, and offering new currencies and a range
of new languages to appeal to broader gaming audiences worldwide, to enable our
customers to drive organic growth, and expand into new revenue and high-margin
game segments on the Internet. We also continue to expand our payment
offerings to provide our customers players with the widest choice and
convenience, having added six new payment methods in 2002.

As well, we are identifying and evaluating strategic opportunities that
leverage our core competency beyond Internet-based games and into new
distribution channels such as wireless and interactive TV, particularly as we
focus on growth in Europe and Asia. Given the favorable acceptance in the U.K.
for mobile and interactive TV gaming, we are considering potential
opportunities in these areas that may leverage our strong customer base in the
U.K.

We may evaluate from time to time strategic alliances or acquisitions that
would accelerate our development and entry into new games, channels and markets
that will strongly position us for future growth on an ongoing basis.

We currently market our technology and services through a select marketing
strategy whereby a senior sales team identifies key potential customers that
meet our licensee profile, and then contacts such prospects directly. We also
participate in industry trade shows around the world to generate new sales
prospects, and respond to referrals from existing customers and other industry
participants.

We do not limit our marketing and advertising efforts to particular
jurisdictions. However as the U.S. market continues to face challenges,
particularly in the casino segment, we are leveraging our strong international
presence in the U.K. to expand our sales and marketing efforts into
high-potential markets, particularly Europe and Asia  regions that are
experiencing a growing Internet population and more favorable attitudes towards
gaming as well as pursuing opportunities in large, emerging game segments such
as poker and bingo.

Our plans in Europe and Asia include multi-language and multi-currency
versions  both actively marketing current languages and currencies and
introducing new ones with existing and new customers, as well as exploring
foreign payment options that increase the ability of our customers to attract a
broader, international player base. We have retained professional advisors to
assist us in preparing an application for a listing on the London Stock
Exchange to help increase our international visibility.

Gaining entry into Asia involves an intimate understanding of different
cultural practices and navigating a fragmented regulatory environment. To
accelerate our penetration in this region, we are attending Asian-Pacific trade
shows and identifying local partners that can help us establish meaningful
contacts with governments and major, brand name gaming organizations.

THE COMPANYS PRODUCTS AND SERVICES

We offer a fully customizable gaming software solution that simulates the
sights and sounds of a real casino, bingo hall and poker room and branded to
the look and feel desired by each licensed operator. Our state-of-the-art software enables a
realistic, entertaining gaming experience, online interactivity between
multiple players from around the world, while allowing players to play for fun
or real money.

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Each year, we continue to expand and enhance our online game suite and now
offer more than 60 casino table and slot games. Expanded currencies  U.S.
dollar, British pound sterling and Euros  and a wider range of languages 
English, Spanish, German, Italian, French, Chinese and Japanese  are also
available to enhance global appeal. In addition to our download games, we
offer non-downloadable Java versions of our most popular casino games. Java
technology provides an entertaining gaming experience without the wait of a
software download. Benefits to players include ease-of-use and the convenience
of being able to play on different computers as no software download is
necessary. Because Java is platform independent, licensees can also tap into an
expanded new market  Macintosh users.

We recently expanded into emerging, high-margin markets with our new bingo
and poker products. Bingos social and entertaining experience appeals to the
casual player and a larger mainstream audience. Emulating the traditional
75-number bingo game played in bingo halls around the world, our virtual bingo
product offers play-for-money and play-for-fun halls, with themes customizable
to the preference of each licensee.

Players can choose the hall that is right for them and play from a
selection of regularly scheduled games or specialized tournaments. They can
also purchase sets of cards, just like at a real hall. Other customizations
include male and female number-callers, different dabber colors and patterns,
full chat, progressive jackpots, ball-movement and selection animations and an
automatic card-marking option. Our bingo product also comes complete with a
bingo management tool for setting ordinal levels throughout the day, as well as
an affiliate program for attracting new players.

Poker is the worlds most popular card game. Table poker is a new
high-growth market for the Internet. The success of a poker product depends on
quantity of players. That is why our multi-player poker software aims to create
a critical mass of players by directing different licensee customers into a
centralized poker room to build a large poker community. With this critical
mass of players established, players can always find a game at the stake they
want, and operators get the consistent traffic to build a successful online
poker room.

Players can also bet in their preferred currency  U.S. dollars, British
pound sterling and Euros  all at the same poker table. Other features
include an anti-collusion service, user-friendly log view allowing players to
track each hand they play, chat, animations and an all-in option should their
Internet provider disrupt their connection.

We continue to invest in new product innovations, functionality and tools
that provide our customers with a premium and comprehensive interactive game
offering to retain and attract a broader, global player base. We have most
recently expanded our product portfolio with a number of new wireless games.
New Flash-based casino products are currently under development as well as
other new technologies that will enhance the social and interactive gaming
experience for players, and continue to distinguish CryptoLogic as a
market-leading software provider in the global Internet gaming industry.

Our gaming solution provides an integrated e-cash management system through our
ECash Direct subsidiary based in the U.K. ECash Direct allows users to perform
secure electronic financial transactions with a full suite of payment solutions
for the Internet including credit card, debit card, electronic check,
electronic wallet, personal check, certified check or money order and wire transfer. All transactions are processed in U.S. dollars, British pound
sterling, Euros or currency equivalent, and the exchange rate is set in
accordance with the payment method used.

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Since November 1996, our ECash Direct system has processed more than $11
billion worth of securely processed electronic wagers. ECash Direct
incorporates a variety of fraud prevention measures and is supported by a
dedicated fraud team that allows us to maintain a relatively low fraud rate
(the percentage of total credit card transactions that are repudiated).

Our ECash products are specifically designed for consumers and online
businesses to make online shopping and the transmission of information
convenient and secure. In developing our own proprietary encryption/decryption
algorithms, we have been able to implement fast and reliable client-server,
Java and web technology applications.

We continue to expand our suite of payment options to provide our
customers players with the broadest choice and convenience in payment methods.

We also provide 24/7 customer support in all the languages and currencies
supported by our software, which is always available to help players with
technical questions or assistance with the gaming software and e-cash accounts.

INDUSTRY OVERVIEW

Global Internet Gaming Industry

Since its inception in 1995, the online gaming industry has become and
continues to be one of the fastest growth markets on the Internet. According
to Bear Stearns1, the global Internet gaming market grew to $3.5 billion in
revenue in 2002  across casino, sports betting, poker, bingo and lotteries  and equally dramatic is the rise to more than 1,800 Internet gaming sites
currently on the Web. Internet gaming continues to represent considerable
growth potential, and today, the industry only accounts for about 1.5% of the
global land-based gaming industry.

Large Potential of Internet Gaming: 1.5% of Land-Based Gaming

(LARGE POTENTIAL INTERNET GAMING BAR GRAPH)

Source: World Lottery Association, Christiansen Capital, Bear Stearns,
CryptoLogic Estimates

*     Based on revenue, not handle or wager



---

1 Industry market
information discussed in the Industry Overview section of
this annual report was obtained from publicly available sources. Neither Bear
Stearns nor Christiansen Capital presently provides capital market or other
services to the Company. Neither Bear Stearns nor Christiansen Capital has
approved or disapproved of the use of this data in this annual report.


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Estimated Annual Global Internet Gaming Revenue

(EST. ANNUAL GLOBAL INTERNET GAMING REVENUE BAR GRAPH)

Source: Bear Stearns 2002

Given the early and rapid adoption of Internet usage in North America, the
United States initially represented the largest market for online gaming.
However, given the uncertain regulatory climate in the United States and the
affect of certain U.S. banks discontinuing use of their credit cards for online
gaming, we expect growth prospects in North America will be tempered in the
near term. Christiansen Capital estimated that Internet gamers from the U.S.
represented more than 50% of the market in 2002, but is expected to account for
less than 40% by 2004.

We believe growth in Internet gaming will come from international markets.
Europe and Asia  regions that are experiencing a growing Internet population
and more favorable attitudes to gaming  offer the greatest potential.

As well, with the vast majority of online gaming sites currently in
English and using U.S. dollars, the U.S. market is well penetrated,
particularly in the casino segment. We believe that growth will come from
international casino offerings and large, emerging game segments such as poker,
bingo and lotteries.

Internet Gamers

(INTERNET GAMERS BAR GRAPH)

Source: Christiansen Capital

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Global Regulatory Environment

Since 1995, Internet gaming has quickly grown into a large, multi-billion
dollar industry, but with regulatory inconsistencies between countries and
limited formal regulation. Laws around the world are often outdated, ambiguous
and continue to develop on a country-by-country basis. While legislative
uncertainties continue, most prominently in the United States, there has also
been support for regulation in parts of the U.S. and around the world. We
believe that government plays an important role and is in the best position to
regulate this industry to provide consumer protection, preserve the integrity
of the online gaming industry, and build a credible and business-friendly
marketplace.

Since 1998, there have been several U.S. legislative proposals, primarily
by Senator Kyl, Congressmen Goodlatte, LaFalce, and more recently Congressmen
Leach and Oxley, aimed at prohibiting Internet gaming in the U.S. and these
efforts persist.

More recently, two opposing views of the future of online gaming have
crystallized in the U.S.  licensing and regulation versus prohibition.
There have also been developments at the federal, state and judicial levels
supporting a regulated approach. Most notable was the first federal bill
introduced by Congressman John Conyers in 2002 to consider regulation of
Internet gaming in the U.S. State legislators in New Jersey, Nevada and
California have also enacted or proposed legislation to legalize online gaming
within their jurisdictions. As well, the U.S. 5th District Court in Louisiana
upheld a decision that online casino gaming does not violate the Federal Wire
Act, and therefore is not illegal under that act. Until the regulatory
uncertainty in the U.S. is definitively resolved, we expect growth prospects to
be outside North America.

Currently, more than 70 jurisdictions worldwide regulate or are in the
process of legalizing varying forms of online gaming according to the River
City Group. We have identified the Asian market as one of the largest
untapped markets for online gaming, but only limited online gaming has been
adopted in Hong Kong, Korea, Macau, Taiwan, the Philippines and Vietnam.

Europe has demonstrated growing interest in Internet gaming, and Europeans
appear to be among the most avid online gamers in the world. We believe
European markets present some of the best growth opportunities for e-gaming in
the next few years.

Recent legislative developments in Europe have included Germanys first
state-licensed and regulated, real-money online casino in Hamburg; Belgium
passing a new lottery act granting the National Lottery a monopoly on the
virtual gaming market; and Malta establishing a licensing and regulated regime
for online gaming, expected to be implemented in 2003.

We are seeing a global trend to regulate Internet gaming to the same
strict standards as land-based gaming, which is encouraging the entry of brand
name operators and creating a credible and sophisticated marketplace. For
example, in 2001, the Isle of Man and Alderney  both part of the British
Commonwealth  established regulated environments for Internet gaming,
requiring extensive government probity and independent, third party software
testing and verification.

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The U.K. government has issued several reports recommending the reform of
its gaming laws including the licensing and regulation of online gaming as
published in the Budd Report in July 2001, and subsequent reports in 2002.
Most recently in April, 2003, the Department of Culture, Media and Sport issued
its position paper titled, The Future Regulation of Remote Gambling outlining
how the U.K. government plans to proceed, with the goal of implementing
regulations by 2004/2005.

As a result, CryptoLogics focus is to grow its customer base in
international regulated markets. This is reflected in our compliance efforts
in the Isle of Man and Alderney; a growing number of international, blue chip,
brand name customers in Europe including William Hill, the Ritz Club London
Online, Littlewoods Gaming and ukbetting plc; as well as the localization of
our products in a multitude of languages and currencies; and the expansion of
our product suite into new bingo and poker games to appeal to broader gaming
audiences worldwide.

COMPETITION

Although online gaming is a young and fast-growing industry. Industry
experts suggest that the global market for online gaming, which comprises
casino games, sports betting, bingo, poker and lotteries, will rise to $5
billion in annual gaming revenue by 2003, up from $3.5 billion in 2002.
Equally dramatic has been the rise of new Internet gaming sites, now up to more
than 1,800 according to Bear Stearns.

Customers of our software compete with existing and more established
recreational services and products, in addition to other forms of
entertainment. Our success will depend, in part, upon our ability to enhance
our products and services to keep pace with technological developments, respond
to evolving customer requirements and achieve continued market acceptance.

We compete with a number of public and private companies, which provide
electronic commerce and/or Internet gaming software. Given the emerging
development of the industry and the multitude of private organizations
operating in the industry, information about the nature of our competitors,
their operations and their resources is difficult to compile. In addition to
current known competitors, traditional land-based gaming operators and other
entities, many of which have significant financial resources and name brand
recognition, may provide Internet gaming services in the future, and thus
become competitors of CryptoLogic.

The global nature of Internet makes most Internet markets, including the
online gaming industry, relatively accessible to a wide number of entities and
individuals. We believe the principal competitive factors in our industry that
create certain barriers to entry include reputation, technology, financial
stability and resources, proven track record, regulatory compliance,
independent oversight and transparency of business practices.

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C. ORGANIZATIONAL STRUCTURE

Our organizational structure and operating subsidiaries as of December 31,
2002 are set forth below. In all cases in the below chart, except for A.L.I.
Online Inc., the parent company owns directly or indirectly, all of the issued
and outstanding shares of the applicable subsidiary.

(ORGANIZATIONAL STRUCTURE CHART)




D. PROPERTY, PLANTS AND EQUIPMENT

We have offices in Toronto and Vancouver, Canada; Nicosia, Cyprus; and
London, England to support our international customer base. CryptoLogics
corporate headquarters are located in about 19,700 square feet of commercial
office space at 1867 Yonge Street, 6th and 7th Floors, Toronto, Ontario,
Canada. These headquarters house our head office management and research and
development group. Under the terms of our lease, which terminates on April 29,
2004, with a renewal option thereafter of up to two years on terms to be
negotiated at that time, we pay an annual rent of Cdn$580,000.

Our WagerLogic Limited subsidiary leases a 1,400 square feet office space
located in Office 101, 51 Prodomos Street, Strovolos, Nicosia, Cyprus for
$12,000 per annum, which houses our sales and licensing operations. The current
lease expires on December 31, 2003. This agreement can be renewed annually
subject to a 7% increase.

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Our Ecash Direct (UK) Limited and WagerLogic (UK) Limited subsidiaries
occupy 5,000 square feet at Level 7 Westec House, West Gate Road, Hanger Lane,
London, W5 1YZ, United Kingdom that is leased for $255,000 per annum, and
expires on February 21, 2007. This facility houses our 24/7 customer support
call center team available to assist our customers global players with
technical questions, assistance with the gaming software and their e-cash
accounts in all the languages and currencies supported by our software.

Our Ads Dot Com Limited subsidiary provides marketing services for our
customers licensed by WagerLogic. Ads Dot Com occupies 1,200 square feet of
office space at 103-105 Crawford Street, London, W1H 2H3, United Kingdom that
is leased for $98,000 per annum for a 5-year term, terminating on June 11,
2006.

Our A.L.I. Online Inc. subsidiary operates the WinnerOnLine.com gaming
portal providing online gaming news, gaming site reviews and advertising
services, and is located at 1107 Homer Street, Suite 201, Vancouver, British
Columbia, V6B 2Y1, Canada. A.L.I. leases this 2,300 square feet facility for
Cdn$30,000 per annum, which lease agreement terminates on June 30, 2006.




ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Forward-Looking Statements

Some of the information in this section contains forward-looking any
forward-looking statements that involve risks and uncertainties. You can
identify these statements by forward looking words such as may, would,
expect, plan, anticipate, estimate, believe, intend, could, or
continue or the negative or other variations of comparable terminology, are
intended to identify forward-looking statements. Statements that we make in
this section that are not statements of historical fact also may be
forward-looking statements. Forward-looking statements are not guarantees of
our future performance, and involve, risks, uncertainties and assumptions that
may cause our actual results to differ materially from the expectations we
describe in our forward-looking statements. There may be events in the future
that we are not accurately able to predict, or over which we have no control.
You should not place undue reliance on forward-looking statements. We do not
promise to notify you if we learn that our assumptions or projections are wrong
for any reason. We disclaim any obligation to update our forward-looking
statements. See Risk Factors for more information.

The following discussion should be read in conjunction with our
consolidated financial statements and related notes for the years ended
December 31, 2002, 2001 and 2000 as set out in this annual report.

Results of Operations

Revenue

Revenue was $34.4 million in 2002 down from $43.6 million in 2001, owing
to the impact on our licensees revenues due to the restrictive use of credit
cards by some U.S. banks being faced by the entire Internet gaming industry.

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In 2001, revenue rose 27% from 2000 to $43.6 million, due primarily to our
focus on creating organic growth through existing licensees by offering
market-driven products and support to increase player loyalty. A significant
contributor to the revenue growth was the success of licensee William Hills
online casinos, which launched its U.S. dollar-based casino in January 2000 and
its British pound sterling-based casino in March 2001.

Substantially all of our revenue is earned from WagerLogics ongoing
licensing and support of our gaming software. Licensing and support revenue is
comprised primarily of recurring revenue due to the relatively long-term nature
of WagerLogics contracts. As well, one-time customization fees are charged to
new licensees. Effective January 1, 2003, customization fees are amortized
over the term of the agreement.

Recurring revenue represented 98% of licensing and support revenue in
2002, versus 100% in 2001. At December 31, 2002, we had 18 licensing agreements
in place with customers around the globe, compared to 19 in the prior year.

In 2001, recurring revenue represented 100% of licensing and support
revenue, versus 98% in 2000. At December 31, 2000, WagerLogic had 20 licensing
agreements in place with customers around the globe.

In response to a mature online casino market in North America, and the
decline in credit card use by certain U.S. banks in 2002, we continue to
emphasize revenue diversification in global markets and new product segments,
which demonstrated positive results in 2002.

Launched in the third quarter of 2002, our new bingo and poker products
contributed 1% to our revenue in 2002.

Our licensee customers saw their revenue derived from international
markets rise to approximately 40% of total 2002 revenue up from approximately
30% in 2001.

Interest income was reported as part of total revenue in 2000 and prior
years. Effective the first quarter of 2001, interest income has been
reclassified, and is shown below income from operations in the Consolidated
Statements of Income.

Expenses

Our operating expenses are classified into four categories: software
development and support costs, general and administrative costs, finance costs
and amortization. Our expenses amounted to $26.8 million in 2002, $26.5 million
in 2001 and $19.8 million in 2000.

Software Development and Support Costs

Software development and support costs include all personnel, licensee
support and customer service costs, as well as compliance-related expenditures.
As well, these costs were specifically associated with the development of our
new bingo and poker products; Java and multi-language and multi-currency casino
versions; new non-credit card payment options; and compliance costs related to
regulatory compliance initiatives in Australia, Isle of Man, and Alderney.

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For fiscal 2002, software development and support costs amounted to $19.4
million, down 12% from $22.0 million in 2001. This decline was due to:



| |  | cost saving opportunities and efficiency programs including the implementation of a staff rationalization program and a
freeze on new hires and capital expenditures; and
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | consolidation of our customer care organization to the U.K. to support a growing global licensee and player base.                                                        

For fiscal 2001, software development and support costs rose by 34% to
$22.0 million compared to $16.4 million in 2000. The increase was due to our
strategic investment in several key initiatives, including poker, bingo and
Java technology, to support our long-term growth, as well as the $1.1 million
write-off associated with an insurance claim relating to a system intrusion.

Software development costs are 100% expensed as incurred.

General and Administrative Costs

General and administrative costs include administrative costs, travel
expenses, professional fees and overhead related expenditures.

In 2002, general and administrative costs reached $5.9 million, up from
$3.8 million in 2001. This increase was primarily attributed to:



| |  | business development efforts aimed at attracting new international licensees and building partnerships with existing licensees; and
|- |  | -----------------------------------------------------------------------------------------------------------------------------------
| 
| |  | legal costs associated with regulatory compliance activities and the defense of various legal claims.                              

General and administrative costs increased by 26% to $3.8 million in 2001
from $3.0 million in 2000. The primary factors contributing to the increase
related to higher infrastructure costs associated with the growth in our work
force, heightened international business development, and the incorporation of
overheads associated with the acquisition by WagerLogic of the WinnerOnLine
marketing channel.

Finance Costs

Finance costs include bank charges for operating bank accounts and letters
of credit issued in support of cash reserve requirements. All letters of credit
are secured by cash deposits. These deposits are classified as restricted cash
on our balance sheet.

In 2002, finance costs rose to $0.5 million from $0.3 million the previous
year due to expanded relationship requirements with international credit card
companies and increased bank charges relating to bank draft facilities.

In 2001, finance costs increased to $0.3 million from $0.2 million in 2000
due to increased value of letters of credit to support higher processing
volumes and expanded international credit card company relationship
requirements.

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Amortization

Amortization costs are based on the estimated useful lives of capital
assets.

Amortization expense rose to $1.0 million in 2002 from $0.4 million in
2001. The increase was primarily attributable to our investments in new
computer equipment and software to support our customer relationship management
project, regulatory compliance initiatives and establishment of our customer
support facilities in the United Kingdom.

In 2001, amortization expense was $0.4 million, up from $0.2 million in
2000 due to our increased investment in computer equipment and office equipment
to support our growth.

Interest Income

Interest and other income consisted principally of interest income in 2002
and 2001. Interest and other income in 2002 was $0.7 million, down 70% from
$2.2 million last year. The year-over-year reduction reflected a decline in
cash reserves due to our share repurchases and investing activities as well as
lower interest rates earned on cash holdings during the year.

Interest income decreased in 2001 to $2.2 million from $3.3 million in
2000. During the year, the use of cash due to share repurchases, combined with
a significantly lower interest rate environment relative to that which
prevailed in 2000, contributed to the year-over-year decrease in interest
income.

Special Charge

CryptoLogic reported a non-recurring special charge of $10.5 million ($9.9
million on an after tax basis) in 2002. The charge included:



| |  | the 100% write-down of our $6.1 million investment in SCG Enterprises Ltd., a wholly-owned subsidiary of Sports.com
Limited, which was placed into bankruptcy;                                               
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | $1.0 million in investment write-downs in iPayment Technologies Inc., Forty-Ninth Parallel Inc. and LasVegasFromHome.com
Entertainment Inc., which were deemed to have incurred a permanent decline in value;
| 
| |  | $135,000 gain on sale of our interest in Dot Com Entertainment Group;                                                                                                                                        
| 
| |  | $1.5 million in reorganization costs related to the consolidation of our customer support operation to the U.K. and
various reorganization and cost reduction initiatives; and                               
| 
| |  | $1.9 million as a reserve for estimated legal and other costs associated with defending various disputes.                                                                                                    

Income Taxes

For fiscal 2002, we recorded a tax credit of $0.1 million as a result of
the special charge and lower earnings in the year compared to a tax expense of
$1.2 million in 2001. The tax effect of the special charge was $0.6 million.

Income taxes for 2001 were $1.2 million, versus $2.3 million in 2000. The
decrease reflected a taxable income mix that was lower in Canada compared with
income derived from foreign subsidiaries.

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Net Income and Earnings per Share

For fiscal 2002, net operating income (before non-recurring special
charge) was $7.7 million or $0.60 earnings per share on a diluted basis. This
compared with $18.1 million in net income or $1.21 diluted earnings per share
in 2001. The earnings decline was primarily due to credit card restrictions by
certain U.S. banks on licensees, the cost of initiatives to diversify into new
payment options and global markets, and lower interest income earned on cash
reserves. As a result, our net margin was 22% in 2002 compared to 42% in 2001.
In 2002, return on equity was 18% compared to 31% in the previous year.

After the $9.9 million non-recurring special charge (net of income tax),
we sustained a loss of $2.1 million in 2002, versus a net profit of $18.1
million in 2001. On a fully diluted basis, the loss per share was $0.17 in
2002, compared to net income per share of $1.21 on a fully diluted basis in
2001.

In 2001, net income increased by 17% to $18.1 million or $1.21 earnings
per share on a diluted basis versus $15.5 million or $1.03 earnings per share
on a diluted basis in 2000. Profit margins were 42% in 2001 versus 45% in 2000.
In 2001, return on equity was 31% compared to 30% in the previous year.

Net margins dropped in 2001 compared to 2000 due to expenses incurred in
2001 to fund strategic product development initiatives  bingo and poker
launched in 2002  and due to the $1.1 million write-off associated with an
insurance claim relating to a system intrusion.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

We have consistently maintained a strong cash base to fund working capital
needs, strategic initiatives and synergistic acquisitions consistent with our
growth strategy.

At December 31, 2002, we had cash, cash equivalents and short term
investments of $28.4 million, versus cash and cash equivalents of $42.8 million
at the end of 2001. The year-over-year decline is primarily due to our decision
to repurchase and cancel $20.3 million worth of our common stock during the
year.

At December 31, 2001, we had $42.8 million in cash and cash equivalents,
slightly higher than the $42.7 million at December 31, 2000.

We also maintain cash reserves as security for letters of credit granted
to foreign banks that process credit card transactions on our behalf. These
reserves, which are classified as restricted cash on our balance sheet, are not
available for general corporate purposes as long as the letters of credit
remain outstanding. We had restricted cash of $15.7 million at the end of 2002,
down from $16.8 million a year ago as a result of lower deposit processing
volumes associated with our year-over-year decline in revenue. Restricted cash
increased from $14.0 million in 2000 to $16.8 million in 2001 due to higher
processing volumes and expanded international credit card company
relationships.

In 2002, we generated operating cash flow of $10.0 million, compared to
$19.6 million in 2001. Reduced cash flow in 2002 was largely attributable to
the impact of lower licensees revenue due to a reduction in U.S. credit card
processing.

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Operating cash flow rose to $19.6 million in 2001 from $6.0 million in
2000. This increase was primarily due to higher net earnings, a normalized
restricted cash requirement during the year compared with 2000 when a $9.0
million addition to restricted cash was necessitated mainly by the addition of
a credit card processor and an increase in the amount of funds on deposit due
to a larger user base.

We have no debt and believe our working capital is sufficient for our
present requirements. We expect foreseeable cash needs to be funded through our
existing cash resources and operating cash flow.

Financing Activities

We used a large portion of operating cash flow to fund the repurchase of
our common shares.

In 2002, the net cash outlay to finance share repurchases was $17.9
million. Approximately $20.3 million was used to fund the repurchase and
cancellation of 1.3 million common shares through our Normal Course and
Substantial Issuer Bids in 2002. The exercise of 350,000 stock options
contributed an additional $2.4 million to CryptoLogics cash flow in 2002.

In 2001, the net cash outlay to finance share repurchases was $14.9
million. We repurchased and cancelled approximately 1.4 million common shares
through our Normal Course and Substantial Issuer Bid programs at a total cost
of approximately $17.3 million. The exercise of 275,336 common share purchase
options and 160,000 Class C purchase warrants contributed $2.4 million to our
cash flow in 2001.

In 2000, we repurchased and cancelled approximately 490,000 common shares
through our Normal Course and Issuer Bid program at a total cost of
approximately $6.7 million. The exercise of 195,350 common share purchase
options and 5.4 million Class A warrants contributed $3.0 million to our cash
flow in 2000.

Investing Activities

We used $17.5 million for investing activities in 2002. Of this amount,
$10.9 million was invested in short term money market instruments and corporate
bonds in order to generate a higher level of interest income. We also invested
approximately $0.6 million in new capital assets during the year, as well a
further $0.6 million was paid in the second of three installments towards
CryptoLogics 2001 acquisition of ALI Online Inc., the operator of the
WinnerOnLine gaming content portal.

We invested approximately $6.1 million in SCG Enterprises Ltd., a
subsidiary of Sports.com Limited, which was subsequently written off during
2002 (see Special Chargeabove). The divestiture of CryptoLogics interest in
Dot Com Entertainment Group Inc. contributed $1.1 million to our cash flow in
2002.

Uses of cash in investing activities during 2001 included $2.4 million for
capital assets, which incorporated the purchase of customer relationship
management software tools, continued investment in regulatory compliance in
international jurisdictions and office equipment to support an increased number
of employees. WagerLogic also paid proceeds of $1.3 million toward the
acquisition of ALI Online Inc., the operator of the WinnerOnLine gaming portal.
Investments of $0.9 million included the acquisition of common shares in Dot
Com Entertainment Group Inc., a provider of bingo and casino software, and a
debenture agreement entered into with LasVegasFromHome.com Entertainment Inc.

$0.6 million was spent for miscellaneous capital expenditures such as
computer equipment, office equipment and leasehold improvements in 2000.

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RESEARCH AND DEVELOPMENT

We make significant investments in research and development to keep pace
and remain competitive with technology advancements and product evolution in
the global online gaming market. Accordingly, over 50% of our workforce is
comprised of research and development personnel. Our research and development
expenditures are accounted for as part of software and support costs, which
totaled $19.4 million, $22.0 million and $16.4 million respectively in the
fiscal years ended December 31, 2002, 2001 and 2000.

TREND INFORMATION

Substantially all of our revenues to date have been derived from licensing
of our Internet gaming software and support of our associated services through
our licensing subsidiary. Internet gaming is a relatively new market and
continues to evolve. Specifically, the regulatory status of online gaming
remains unsettled, including the interpretation of existing regulations or
proposal or adoption of new laws.

While some jurisdictions have introduced legislation attempting to
restrict or ban Internet gaming, other jurisdictions around the world permit or
are in the process of establishing regulations for Internet gaming. This
regulatory debate  license and regulate versus prohibition  is expected to
continue, and future decisions or legislative outcomes may materially affect
our operations and financial results.

In particular, the ongoing uncertainty regarding the legislation of
Internet gaming in the United States has resulted in some financial
institutions in that country no longer accepting online gaming transactions
through their credit cards. This event has had a negative impact on the
Internet gaming industry as a whole, on our licensees, and on our company, as
evidenced in the decline in our 2002 revenues compared to 2001. We may
continue to see other financial institutions in the U.S. adopt similar
restrictive practice. As a result, we continue to focus on increasing our
international diversification in global markets that embrace online gaming.




ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Directors and Senior Management

The following table and the narrative that follows set forth the names,
ages, residence, position, date of first election of directors and senior
management, and common shares and stock options held as at May 1, 2003.

|                                   |  |                      |  |                  |  |               |        |         |  |          |         |                    |  |           |  |                 
|---------------------------------- |  | -------------------- |  | ---------------- |  | ------------- | ------ | ------- |  | -------- | ------- | ------------------ |  | --------- |  | ----------------
|                                   |  |                      |  | Date of          |  |               |        |         |  |          |         |                    |  |           |  |                 
|                                   |  |                      |  | First Election   |  |               |        |         |  | No. of   |         | Option             |  |          
|                                   |  |                      |  | as Director/(5)  |  | Common Shares |        | Options |  | Exercise |         |                   
|Name and Municipality of Residence |  | Principal Occupation |  | Officer          |  | Held(7)       |        | Held    |  | Price    |         | Option Expiry Date
|                                   |  |                      |  |                  |  |               |        |         |  |          |         |                   
|Lewis Rose(4)                      |  |  President & CEO    |  | July 15, 2002    |  |               | 15,000 |         |  |          | 320,000 |                    |  | Cdn$8.59  |  | July 22, 2007   
|Toronto, Ontario                   |  |  Director           |  |                  |  |               |        |         |  |          | 125,000 |                    |  | Cdn$7.61  |  | January 13, 2008
|                                  
|James Ryan                         |  |  CFO                |  | January 22, 2002 |  |               | 6,100  |         |  |          | 60,000  |                    |  | Cdn$26.09 |  | January 4, 2007 
|Caledon East, Ontario              |  |                      |  |                  |  |               |        |         |  |          | 25,000  |                    |  | Cdn$8.16  |  | August 13, 2007 
|                                   |  |                      |  |                  |  |               |        |         |  |          | 35,000  |                    |  | Cdn$7.61  |  | January 13, 2008
|                                  

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|                                       |  |                       |  |                  |  |               |           |         |  |          |        |                    |  |           |  |                  
|-------------------------------------- |  | --------------------- |  | ---------------- |  | ------------- | --------- | ------- |  | -------- | ------ | ------------------ |  | --------- |  | -----------------
|                                       |  |                       |  | Date of          |  |               |           |         |  |          |        |                    |  |           |  |                  
|                                       |  |                       |  | First Election   |  |               |           |         |  | No. of   |        | Option             |  |          
|                                       |  |                       |  | as Director/(5)  |  | Common Shares |           | Options |  | Exercise |        |                   
|Name and Municipality of Residence     |  | Principal Occupation  |  | Officer          |  | Held(7)       |           | Held    |  | Price    |        | Option Expiry Date
|                                       |  |                       |  |                  |  |               |           |         |  |          |        |                   
|Robert Stikeman(2)(4)                  |  |  Director            |  | March 7, 1996    |  |               | 5,000     |         |  |          | 65,000 |                    |  | Cdn$13.25 |  | December 13, 2005
|Toronto, Ontario                       |  |                       |  |                  |  |               |           |         |  |          | 30,000 |                    |  | Cdn$7.03  |  | September 4, 2007
|                                      
|Stephen H. Freedhoff, CA, CFP(1)(3)(4) |  |  Director            |  | May 1, 2003      |  |               |          |         |  |          | 30,000 |                    |  | Cdn$9.01  |  | May 1, 2008      
|Toronto, Ontario                       |  |                       |  |                  |  |               |           |         |  |          |        |                    |  |           |  |                  
|                                      
|Edward L. Greenspan, Q.C.(2)(3)(4)     |  |  Director            |  | May 1, 2003      |  |               |          |         |  |          | 30,000 |                    |  | Cdn$9.01  |  | May 1, 2008      
|Toronto, Ontario                       |  |                       |  |                  |  |               |           |         |  |          |        |                    |  |           |  |                  
|                                      
|Lorne Abony(1)(2)(4)                   |  |  Director            |  | May 1, 2003      |  |               |          |         |  |          | 30,000 |                    |  | Cdn$9.01  |  | May 1, 2008      
|London, England                        |  |                       |  |                  |  |               |           |         |  |          |        |                    |  |           |  |                  
|                                      
|Randall Abramson(1)(3)4)               |  |  Director            |  | May 1, 2003      |  |               | 1,352,186 | (6)     |  |          | 30,000 |                    |  | Cdn$9.01  |  | May 1, 2008      
|Toronto, Ontario                       |  |                       |  |                  |  |               |           |         |  |          |        |                    |  |           |  |                  
|                                      
|Michael Starzynski                     |  |  Chief Technology    |  | March 17, 2003   |  |               |          |         |  |          | 60,000 |                    |  | Cdn.$5.98 |  | March 6, 2008    
|Whitby, Ontario                        |  | Officer               |  |                  |  |               |           |         |  |          |        |                    |  |           |  |                  
|                                      
|Serguei Bourenkov(8)                   |  |  VP, Research &      |  | January 14, 2003 |  |               | 34,379    |         |  |          | 30,000 |                    |  | Cdn$40.20 |  | February 22, 2004
|Toronto, Ontario                       |  | System Architecture   |  |                  |  |               |           |         |  |          | 15,000 |                    |  | Cdn$11.50 |  | December 23, 2004
|                                       |  |                       |  |                  |  |               |           |         |  |          | 15,000 |                    |  | Cdn$8.16  |  | August 13, 2 007 
|                                       |  |                       |  |                  |  |               |           |         |  |          | 10,000 |                    |  | Cdn$7.61  |  | January 13, 2008 
|                                      
|A. J. Slivinski                        |  |  VP, Business        |  | January 14, 2003 |  |               |          |         |  |          | 30,000 |                    |  | Cdn$7.61  |  | January 13, 2008 
|Toronto, Ontario                       |  | Development           |  |                  |  |               |           |         |  |          |        |                    |  |           |  |                  
|                                      
|Marilyn Shabot                         |  |  VP, Human Resources |  | January 14, 2003 |  |               | 869       |         |  |          | 12,000 |                    |  | Cdn$8.16  |  | August 13, 2007  
|Brampton, Ontario                      |  |                       |  |                  |  |               |           |         |  |          | 12,500 |                    |  | Cdn$7.61  |  | January 13, 2008 
|                                      
|John FitzGerald                        |  |  General Counsel and |  | March 6, 2003    |  |               |          |         |  |          | 25,000 |                    |  | Cdn$7.61  |  | January 13, 2008 
|Toronto, Ontario                       |  | Compliance Officer    |  |                  |  |               |           |         |  |          |        |                    |  |           |  |                  
|                                      

Notes:



|(1) |  | Member of audit committee.                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Member of corporate governance & compliance committee.                                                                                                                                                                                                                                                                                                                                                             
|   
|(3) |  | Member of compensation committee.                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(4) |  | Member of nominating committee.                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(5) |  | Each director is elected annually to hold office until the next annual
meeting of shareholders.                                                                                                                                                                                                                                                                                                                    
|   
|(6) |  | Includes 1,331,236 shares held in accounts managed by Strategic Capital
Partners Inc., a Canadian dealer, or Strategic Advisors Corp., a Canadian
adviser. Mr. Abramson indirectly controls both Strategic Capital Partners
and Strategic Advisors. The shares owned by or which Mr. Abramson directly
or indirectly exercises control or direction over represent 11.1% of
CryptoLogics outstanding common stock.
|   
|(7) |  | Other than Mr. Abramson, no directors or member of senior management of
the Company beneficially owns or exercises control or direction over more
than 1% of CryptoLogics outstanding common stock.                                                                                                                                                                                                               
|   
|(8) |  | Serguei Bourenkov joined CryptoLogic in 1996.                                                                                                                                                                                                                                                                                                                                                                      

Biographies of each of the directors and officers set out in the above
table and their respective positions held for the last five years are noted
below.

Lewis N. Rose (44), CA was appointed interim President and Chief Executive
Officer on July 15, 2002, and was appointed President and Chief Executive
Officer on March 7, 2003. Mr. Rose has two decades of experience in the
consumer products, entertainment and financial services sectors in leadership
roles at some of North Americas best-known companies. From March 2000 to July
2002, he was CEO of E-TV Interactive Technologies Inc., a private interactive
technology company. From September 1998 to January 2000 he was President and a
Director of Alliance Atlantis Communications Inc., one of the largest publicly
traded television and film entertainment companies in Canada, and President and
a Director of its predecessor, Atlantis Communications Inc., from September,
1997 to September, 1998. Mr. Rose was previously Chief Financial Officer and a
Director of Maple Leaf Foods Inc., the largest publicly traded food-processing
company in Canada, and President of Maple Leafs Grocery Products Division.

30



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##### Table of Contents



James A. Ryan (41), CA was appointed Chief Financial Officer on January
22, 2002. A Chartered Accountant with more than 17 years of operational and
financial management experience, Mr. Ryan brings experience in acquisitions,
divestitures, debt and equity financing, financial intermediation, corporate
restructuring and investor relations. Prior to joining CryptoLogic, he was
Chief Financial Officer and Secretary of Procuron Inc., an Internet
business-to-business marketplace company, from November 2000 to December 2002.
From September 1996 to November 2000, he was Chief Financial Officer, Secretary
and Director of Systems Xcellence Inc., a publicly traded software development
company in the healthcare transaction processing market. Mr. Ryan also was
previously Vice President of Business Development of MetCan Information
Technologies Inc., and Vice President and Chief Financial Officer of Epson
Canada Limited, the Canadian affiliate of global technology company, Seiko
Epson Corporation.

Robert H. Stikeman (58) was named Chairman of the Board in May 2003, and
has been a Director since 2002. He has been a partner for the past 16 years in
Stikeman, Graham, Keeley & Spiegel LLP, a law firm he was instrumental in
establishing. He currently acts as general counsel to the Corporation and
serves as its Secretary. Mr. Stikeman received both his MBA (1969) and LLB
(1972) from The University of Western Ontario. He is an officer and director of
several publicly traded companies. Mr. Stikeman is also Chairman of the
Companys Compliance and Nominating Committees.

Stephen H. Freedhoff (67), CA, CFP has been a self-employed consultant
since July 1999. Previously he was a partner of a national accounting firm for
30 years. Mr. Freedhoff is also Chairman of the Companys Audit Committee.

Edward L. Greenspan (59), Q.C., L.L.D., D.C.L., is the senior partner of
the Toronto law firm of Greenspan, White. He has been practicing in Toronto
since 1970 and received his Queens Counsel in 1982. He taught law at the
University of Toronto Law School for approximately 28 years. In 1999, he
received an honorary doctorate from the Law Society of Upper Canada, and in
2002 he received an honorary doctorate of civil law from the University of
Windsor. He has been involved in some of the most high profile cases in Canada.
Mr. Greenspan was a Director of Alliance Communications Corp. from June 1993
to September 1998. Mr. Greenspan is also Chairman of the Companys
Compensation Committee.

Lorne Abony (33) is Chief Executive Officer and co-founder of Columbia
Exchange Systems Ltd. (CES), a technology company focused on financial
transaction software, since July 2002. Prior to CES, Mr. Abony was a venture
partner at Elucid Technology Ventures, a private equity and venture capital
firm based in New York City, from 2000 to 2002. Before joining Elucid, Mr.
Abony was the founder and President of Petopia from 1998 to 2000, which was an
online pet food and supplies company that raised in excess of $100 million in
venture capital. Petopia was sold to Petco in November 2000. Mr. Abony is a
member of the Law Society of Upper Canada and formerly practiced corporate and
securities law at a large Toronto law firm. He holds a B.A. in philosophy from
McGill University, a LL.B/J.D. from the University of Windsor and an M.B.A.
from Columbia University.

Randall Abramson (37) is co-founder and Vice President of Strategic
Capital Partners Inc. and co-founder and Chief Executive Officer of its
affiliate, Strategic Advisors Corp., both Toronto-based portfolio management
firms for high net worth individuals and institutions. Prior to founding
Strategic Capital and Strategic Advisors, Abramson was a portfolio manager and
analyst at wealth management firm, Connor Clark & Company from 1996 to 1998,
and prior thereto, was a portfolio manager and analyst at institutional money
manager, Hodgson Roberton Laing Limited (now, Yield Management Group) from 1991
to 1996. Collectively, Strategic Capital and Strategic Advisors, on behalf of
their respective managed accounts, are significant shareholders of CryptoLogic.

31



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##### Table of Contents



Michael Starzynski (45) was appointed Chief Technology Officer on March
17, 2003, and has more than 20 years of global information technology
experience in both the telecommunication and financial services sectors at some
of North Americas largest companies as well as leading entrepreneurial
organizations. From 2000 to 2003, he was Chief Technology Officer of Financial
Models Company, a leading provider of investment management systems and
services. From 1998 to 2000, he was Chief Technology Officer of SRG Software
Inc., a software and consulting services company. Previous positions included
Chief Technology Architect at CGI Canada and a 13-year career at Bell Canada,
Canadas leading telecommunication service provider.

Serge Bourenkov (40) was appointed Vice President, Research & Systems
Architecture on January 14, 2003 and has more than a decade of software
development and technical expertise. He joined CryptoLogic in 1996 after
moving to Canada from Moscow, Russia, and was initially responsible for client
applications. Prior to his current position, Serge was Director of Product
Development at CryptoLogic. His career has spanned development of an equity
fund management system, medical 3D visualization software and computer games as
well as a currency trading system for Russias major bank. He also worked at
the Institute of Acoustics in Russia modeling long-range underwater sound
propagation, signal processing and 3D-graphics.

A.J. Slivinski (41) was appointed CryptoLogic on January 14, 2003 as Vice
President of Business Development, and brings more than 15 years of North
American and international experience in sales and marketing. From 1998 to
2002, he has held senior business development positions at Maple Leaf Foods
Inc., the largest publicly traded food-processing company in Canada. Most
recently, he was Director of Emerging Markets at Maple Leaf Consumer Foods. As
Vice President of International Sales and Marketing at Luiginos Inc., a U.S.
frozen food processing company, from 1996 to 1998, Mr. Slivinski managed a
multi-million dollar business unit and developed new international
opportunities.

Marilyn Shabot (48) was appointed Vice President, Human Resources on
January 14, 2003, having joined CryptoLogic in March 2002 as Director, Human
Resources. Ms. Shabot brings more than 15 years in human resources with
extensive experience in recruiting at all levels, department set-up, policy
development, group benefit design, training assessment and implementation, and
employee relations. From 2000 to 2002, she was Manager of Human Resources with
Documentum Canada (The Bulldog Group Inc.), a leading provider of content
management solutions. From 1997 to 2000, Ms. Shabot was Manager of Human
Resources with Simcoe Parts Service Inc., an affiliate of Honda Canada
Manufacturing.

John FitzGerald (34) was appointed General Counsel and Compliance Officer
on May 1, 2003. Prior to joining CryptoLogic, Mr. FitzGerald held the
positions of Chief Operating Officer and General Counsel at Ball Brewing
Company Limited from 2001 to 2002, where he led the acquisition of one of
Canadas largest microbrewers. In 1998, he began his legal career with the law
firm Fasken Campbell Godfrey, now Fasken Martineau, focusing primarily on
mergers and acquisitions and public finance. In 1998 while at Fasken
Martineau, Mr. FitzGerald was seconded as assistant to the General Counsel of
Securities Commission at the Ontario Securities Commission.

Compensation of Directors and Officers:

Executive Compensation

The following table sets forth all compensation paid in the year ended
December 31, 2002 in respect of the Chief Executive Officer and current
executive officers listed and described above.

32



---



##### Table of Contents



SUMMARY COMPENSATION TABLE
(in Canadian dollars)

|                                       |  |      |  |                     |  |                               |  |              |  |              |  |             |  |          |  |             
|-------------------------------------- |  | ---- |  | ------------------- |  | ----------------------------- |  | ------------ |  | ------------ |  | ----------- |  | -------- |  | ------------
|                                       |  |      |  | Annual Compensation |  | Long-Term Compensation Awards
|                                       |  |      |  |                     |  |                              
|                                       |  |      |  |                     |  |                               |  |              |  | Securities   |  | Restricted  |  |          |  |             
|                                       |  |      |  |                     |  |                               |  | Other        |  | Under        |  | Shares or   |  |          |  | All         
|                                       |  |      |  |                     |  |                               |  | Annual       |  | Options/SARs |  | Restricted  |  | LTIP     |  | Other       
|Name and Principal Position            |  | Year |  | Salary              |  | Bonus                         |  | Compensation |  | Granted      |  | Share Units |  | Pay-outs |  | Compensation
|                                       |  |      |  |                     |  |                               |  |              |  |              |  |             |  |          |  |             
|                                       |  |      |  | ($)                 |  | ($)                           |  | ($)          |  | (#)(8)       |  | ($)         |  | ($)      |  | ($)         
|                                      
|Lewis Rose(1)                          |  | 2002 |  | 132,794             |  | 150,000                       |  | 6,000        |  | 320,000      |  |            |  |         |  |            
|President & CEO                        |  |      |  |                     |  |                               |  |              |  |              |  |             |  |          |  |             
|                                      
|James Ryan(2)                          |  | 2002 |  | 202,427             |  | 90,000                        |  | 9,067        |  | 85,000       |  |            |  |         |  |            
|CFO                                    |  |      |  |                     |  |                               |  |              |  |              |  |             |  |          |  |             
|                                      
|Michael Starzynski(3)                  |  | 2002 |  |                    |  |                              |  |             |  |             |  |            |  |         |  |            
|Chief Technology Officer               |  |      |  |                     |  |                               |  |              |  |              |  |             |  |          |  |             
|                                      
|Serguei Bourenkov(4)                   |  | 2002 |  | 175,170             |  | 15,000                        |  |             |  | 15,000       |  |            |  |         |  |            
|VP, Research & System Architecture     |  |      |  |                     |  |                               |  |              |  |              |  |             |  |          |  |             
|                                      
|A.J. Slivinski(5)                      |  | 2002 |  |                    |  |                              |  |             |  |             |  |            |  |         |  |            
|VP, Business Development               |  |      |  |                     |  |                               |  |              |  |              |  |             |  |          |  |             
|                                      
|Marilyn Shabot(6)                      |  | 2002 |  | 69,231              |  | 10,000                        |  |             |  | 12,000       |  |            |  |         |  |            
|VP, Human Resources                    |  |      |  |                     |  |                               |  |              |  |              |  |             |  |          |  |             
|                                      
|John FitzGerald(7)                     |  | 2002 |  |                    |  |                              |  |             |  |             |  |            |  |         |  |            
|General Counsel and Compliance Officer |  |      |  |                     |  |                               |  |              |  |              |  |             |  |          |  |             
|                                      

Notes:



|(1) |  | Lewis Rose was appointed Interim President and CEO of the Company on July
15, 2002 and assumed the role of President and CEO on March 7, 2003.                                                                                      
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | James Ryan was appointed the Chief Financial Officer of the Company on
January 22, 2002. He received a signing bonus of $25,000, and for 2002 he
was awarded a cash bonus of $32,500 and a stock bonus of $32,500 in common
shares. 
|   
|(3) |  | Michael Starzynski was appointed to Chief Technology Officer on March 17,
2003.                                                                                                                                                     
|   
|(4) |  | Serguei Bourenkov was Director, Product Development in 2002. He was
appointed to Vice President, Research & System Architecture on January 14,
2003. In 2002, he was awarded a cash bonus of $7,500 and a stock bonus of
$7,500.    
|   
|(5) |  | A.J. Slivinski was appointed to Vice President, Business Development on
January 14, 2003.                                                                                                                                           
|   
|(6) |  | Marilyn Shabot joined CryptoLogic in March 2002 as Director, Human
Resources. She was appointed to Vice President, Human Resources on
January 14, 2003. In 2002, she was awarded a cash bonus of $5,000 and a
stock bonus of $5,000.
|   
|(7) |  | John FitzGerald was appointed to General Counsel and Compliance Officer
on March 6, 2003.                                                                                                                                           
|   
|(8) |  | Options granted under our company stock option plan.                                                                                                                                                                                

33



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##### Table of Contents



Employment Agreements

Lewis Rose, as President and Chief Executive Officer of the Company,
pursuant to an employment agreement, effective January 1, 2003, receives annual
compensation for services in the amount of no less than Cdn$400,000 per annum,
which amount is subject to annual review during the term of the agreement; is
eligible for payment of an annual bonus based on the net earnings of the
Company measured against certain milestones; is eligible for grants of stock
options pursuant to the Companys Stock Option Plan; receives an allowance for
automobile expense and is reimbursed for business related expenses. The
employment agreement continues until it is terminated in accordance with the
terms of the agreement. The employment agreement contains non-competition and
confidentiality provisions. The employment agreement may be terminated by
either the Company or Mr. Rose upon prior written notice as specified in the
agreement. The agreement provides for the payment of severance benefits in the
event that the agreement is terminated by the Company without cause, as such
term is defined in the agreement.

James Ryan, as Chief Financial Officer of the Company, pursuant to an
employment agreement, dated December 18, 2001, receives annual compensation for
services in the amount of no less than Cdn$220,000 per annum, which amount is
subject to annual review during the term of the agreement; is eligible for
payment of an annual bonus based on the performance of the Company measured
against certain milestones; is eligible for grants of stock options pursuant to
the Companys Stock Option Plan; and receives an allowance for automobile
expense and is reimbursed for business related expenses. The employment
agreement continues until it is terminated in accordance with the terms of the
agreement. The employment agreement contains non-competition and
confidentiality provisions. The agreement provides for the payment of
severance benefits in the event that the agreement is terminated by the Company
without cause, as such term is defined in the agreement.

Michael Starzynski, as Chief Technical Officer of the Company, pursuant to
an employment agreement, dated March 6, 2003, receives annual compensation for
services in the amount of no less than Cdn$215,000 per annum, which amount is
subject to annual review during the term of the agreement; is eligible for
payment of an annual bonus based on the performance of the Company measured
against certain milestones; is eligible for grants of stock options pursuant to
the Companys Stock Option Plan; receives an allowance for automobile expense
and is reimbursed for business related expenses. The employment agreement
continues until it is terminated in accordance with the terms of the agreement.
The employment agreement contains non-competition and confidentiality
provisions. The employment agreement may be terminated by either the Company
or Mr. Starzynski upon prior written notice as specified in the agreement. The
agreement provides for the payment of severance benefits in the event that the
agreement is terminated by the Company without cause, as such term is defined
in the agreement.

Bonus Plan

Under our bonus plan, an employee is eligible to receive a bonus if he
achieves both his personal objectives, as agreed with his supervisor, and the
corporate objectives, as established by the Chief Executive Officer, the Chief
Financial Officer and approved by the Board during the fiscal year. The Board
of Directors will determine and approve the amount of budgetary dollars to be
allocated to the bonus pool.

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##### Table of Contents



Stock Option Plan

In 2002, we adopted an Incentive Stock Option Plan to replace a stock
option plan in place since 1996. Pursuant to the plan, options covering an
aggregate of 3,000,000 shares of our common stock may be issued to directors,
officers and employees of the Company. The purpose of the plan is to provide
incentives to directors, officer and employees and to reward such individuals
in relation to the long-term growth and performance of the Company and the
return to the Companys shareholders.

Under the terms of the plan, all stock option grants are subject to the
approval of the Companys Board of Directors. The exercise price of options
granted under the plan is either the average of the high and low prices or the
closing price of our common stock as reported on the Toronto Stock Exchange on
the day of grant. Options issued under the plan may be exercised over a period
not exceeding five years from the date of grant. Options granted to directors
are exercisable immediately with respect to one-third of the shares covered by
the options and with respect to an additional one-third of the shares covered
by the options on each of the first two anniversaries of the grant. All other
options become exercisable in four equal annual installments beginning on the
first anniversary of the grant.

Compensation of Directors

By resolution of the Board, we paid each non-management director an annual
fee of Cdn$7,500 and a fee of Cdn$750 for each directors or committee meeting
attended in 2002. Management officers who are also directors do not receive
any directors fees.

During the year ended December 31, 2002, we paid non-management directors
who served during 2002 the following:



|1. |  | Aggregate annual fees of Cdn$29,375, either directly or to certain
companies controlled by the said directors.
|-- |  | --------------------------------------------------------------------------------------------------------------
|  
|2. |  | Aggregate per-meeting fees of Cdn$63,000.                                                                     
|  
|3. |  | A fee of Cdn$60,000 to the Chairman of the Board.                                                             

By resolution of the Board effective May 1, 2003, we will pay a fee of
Cdn$20,000 to the Chairman, and to each non-management director an annual fee
of Cdn$10,000 and a fee of Cdn$750 for each directors or committee meeting
attended.

In addition, the directors are eligible to receive stock options under our
stock option plan.

Board Practices

Board Approvals and Structure

The board responds to and, if it considers appropriate, approves with such
revisions as it may require, corporate objectives and recommended courses of
action that have been brought forward by management. The board retains plenary
power for those functions it has not specifically delegated to management. In
addition to maintaining the powers it must retain by
statute, significant business activities, actions and communications that
we propose to take or submit are subject to board approval.

35



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##### Table of Contents



All of the following are subject to board approval:



| |  | Annual capital and operating budgets and significant changes thereto;                                                             
|- |  | ----------------------------------------------------------------------------------------------------------------------------------
| 
| |  | the Annual Information Form;                                                                                                      
| 
| |  | annual and quarterly financial statements;                                                                                        
| 
| |  | the Management Information Circular;                                                                                              
| 
| |  | major changes in our organizational structure;                                                                                    
| 
| |  | major acquisition and disposition transactions involving the
repurchase of shares under normal course and substantial issuer bids;
| 
| |  | major financing transactions including the issuance of shares, debt
securities and the like;                                      
| 
| |  | dividends;                                                                                                                        
| 
| |  | appointments of officers; and                                                                                                     
| 
| |  | stock option plans and the issuance of stock options over 10,000.                                                                 

Directors are elected annually by our shareholders.

Board Committees  Size and Compensation

There are four board committees. During fiscal 2002 the committees
consisted of the following:



|1. |  | Audit Committee comprised of three members, all of whom were unrelated
directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Audit Committee has direct communication channels with internal
personnel responsible for financial-statement preparation and with our
external auditors. The Audit Committee monitors audit functions and the
preparation of financial statements, and meets with external auditors
independent of management. Additional responsibilities include the
review of any auditors reports to management, the review of internal
controls and the review of transactions between officers and the Company.
The Audit Committee met quarterly in 2002.
|  
|2. |  | Corporate Governance and Compliance Committee comprised of four members,
three of whom were unrelated directors.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | The Corporate Governance Committee reviews our corporate governance
practices and recommends changes to the board, taking into account, among
other things, the Toronto Stock Exchange Guidelines. The Corporate
Governance Committee is also responsible for assessing the effectiveness
of the board as a whole and its committees.                                                                                                                                                                                                                 
|  
|   |  | The Compliance Committee reviews our compliance practices relating to the
license and certification of its gaming software in regulated
jurisdictions. The Compliance Committee also assesses global legislative
developments as they may affect our business around the world.                                                                                                                                                                                                                                                                       

36



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##### Table of Contents





|3. |  | Compensation Committee comprised of three members, all of whom were
unrelated directors.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Compensation Committee establishes salary ranges and long-term
share-based incentives for the positions held by executive officers
following an annual review of the responsibilities of the officer, the
officers performance, experience and years of service and the salary
levels for similar positions in comparable companies, as well as
reviewing managements recommendations on stock option grants to
employees. The Compensation Committee meets as required to make
recommendations to the Board of Directors.
|  
|4. |  | Nominating Committee comprised of four members, three of whom were
unrelated directors.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | The Nominating Committee recommends the appointment of new directors to
our board, following interviews with candidates. The Nominating
Committee also assesses the effectiveness of the board as a whole, its
committees, and the contribution of individual directors.                                                                                                                                                                                                                                                        

We have a formal process of orientation and education for new members of
the board. When relevant, this process is supplemented informally by members
of the board.

The board has developed a position description for the Chief Executive
Officer. As it has plenary power, any responsibility that is not delegated to
management or a board committee remains with the board.

The board has not adopted a formal system that would enable an individual
director to engage an outside advisor at our expense in appropriate
circumstances; however, the chairmen of the Audit Committee and the Corporate
Governance and Compliance Committee have been authorized to retain advice in
matters relating to the affairs of the Audit Committee or the Corporate
Governance and Compliance Committee as the case may be.

Employees

The following table sets forth information detailing the number of
employees for the years ended December 31, 2002, 2001 and 2000.

|                                    |  |      |     |         |  |      |     |         |  |      |     |         |  |  |     |   |  |  |     |  |  |  |     |  
|----------------------------------- |  | ---- | --- | ------- |  | ---- | --- | ------- |  | ---- | --- | ------- |  |  | --- | - |  |  | --- |  |  |  | --- | -
|                                    |  | 2002 |     | % Total |  | 2001 |     | % Total |  | 2000 |     | % Total
|                                    |  |      |     |         |  |      |     |         |  |      |     |        
|Development & Compliance            |  |      | 78  |         |  |      | 56  | %       |  |      | 75  |         |  |  | 51  | % |  |  | 53  |  |  |  | 50  | %
|Sales, Marketing & Customer Support |  |      | 38  |         |  |      | 27  | %       |  |      | 46  |         |  |  | 30  | % |  |  | 31  |  |  |  | 30  | %
|Administrative & Finance            |  |      | 23  |         |  |      | 17  | %       |  |      | 28  |         |  |  | 19  | % |  |  | 21  |  |  |  | 20  | %
|Total                               |  |      | 139 |         |  |      | 100 | %       |  |      | 149 |         |  |  | 100 | % |  |  | 105 |  |  |  | 100 | %

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

The following table sets forth certain information regarding beneficial
ownership of our common stock as of May 1, 2003 by each person or organization
that is known to us to own beneficially or exercise control or direction over
shares carrying more than 5% of our outstanding common stock, other than Mr.
Randall Abramson (whose beneficial holdings of our common stock are described
in Item 6).

|                             |  |                      |  |                         
|---------------------------- |  | -------------------- |  | ------------------------
|                             |  | Amount and Nature of |  |                         
|Name                         |  | Beneficial Owner     |  | Percent of Common Shares
|                             |  |                      |  |                         
|Andrew Rivkin                |  | 1,775,000            |  | 14.5%                   
|Toronto, Canada              |  |                      |  |                         
|                            
|AWM Investment Company,
Inc. |  | 963,200              |  | 7.9%                    
|New York, U.S.A.             |  |                      |  |                         
|                            
|Royce & Associates, LLC      |  | 864,200              |  | 7.1%                    
|New York, U.S.A.             |  |                      |  |                         
|                            
|Mark Rivkin                  |  | 801,500              |  | 6.6%                    
|Toronto, Ontario             |  |                      |  |                         
|                            

The shares of CryptoLogic common stock held by the major shareholders
listed above have voting rights no different than the voting rights associated
with CryptoLogic common stock, generally.

As at May 1, 2003, there were five record owners of our common shares in
the United States, holding 1,800 common shares or less than 1% of the
outstanding common shares of CryptoLogic.

CryptoLogic is not directly or indirectly owned or controlled by another
corporation(s) or by any foreign government.

Related Party Transactions

A related transaction took place between CryptoLogic Inc., and Dennis
Wing, the Chairman of the Board in 2002. For the year ended December 31, 2002,
we paid an aggregate fee of Cdn$60,000 to a company, of which Mr. Wing is the
President, for consulting services relating to CryptoLogics capital market
initiatives in the North American and the U.K.

Stikeman, Graham, Keeley & Spiegel LLP, of which Robert Stikeman is a
partner, acts as our outside counsel. For the year ended December 31, 2002,
CryptoLogic and WagerLogic were charged an aggregate of Cdn$532,387 excluding
GST by Stikeman, Graham, Keeley & Spiegel LLP for legal services rendered.

We are not aware of any other transactions or proposed transactions in
respect of which we are or are to be a party, in which any director, executive
officer, nominee for election as a director, 5% security holder, member of the
immediate family of any of the previously named persons had a direct or
indirect interest in the transaction.

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ITEM 8. FINANCIAL INFORMATION

Consolidated Financial Statements and Other Financial Information

See Item 17  Financial Statements

Dividends

We have not ever declared or paid a cash dividend on our common stock.

Legal Proceedings

We are not engaged in any litigation the outcome of which in the aggregate
is expected to have a significant effect on our financial position or
profitability.

Significant Changes

Except as otherwise disclosed in this annual report, there has been no
material adverse change in our financial position since the date of the audited
consolidated financial statements.




ITEM 9. THE OFFER AND LISTING

The following table sets forth, for the periods indicated, the range of
the high and low prices of our common shares as reported by the Canadian Dealer
Network/Toronto Stock Exchange and Nasdaq National Market.

|                                    |                                 |  |                               |              |     |  |       |       |     |  |       |       |  |  |      |       | 
|----------------------------------- | ------------------------------- |  | ----------------------------- | ------------ | --- |  | ----- | ----- | --- |  | ----- | ----- |  |  | ---- | ----- | 
|                                    |                                 |  | Toronto Stock Exchange        |              |     |  |       |       |     |  |      
|                                    |                                 |  | Canadian Dealer Network(1)(2) | Nasdaq(3)(4)
|                                    |                                 |  |                               |              |    
|                                    |                                 |  | High                          |              | Low |  | High  |       | Low
|                                    |                                 |  |                               |              |     |  |       |       |    
|Fiscal Year Ended December 31, 1998 |                                 |  | 27.00                         |              |     |  | 5.00  |       |     |  | n/a   |       |  |  | n/a  |      
|Fiscal Year Ended December 31, 1999 |                                 |  | 28.50                         |              |     |  | 11.70 |       |     |  | n/a   |       |  |  | n/a  |      
|Fiscal Year Ended December 31, 2000 |                                 |  | 68.50                         |              |     |  | 11.05 |       |     |  | 42.00 |       |  |  | 7.00 |      
|Fiscal Year Ended December 31, 2001 |                                 |  |                               |              |     |  |       |       |     |  |       |       |  |  |      |      
|                                    | First Quarter                   |  |                               | 19.75        |     |  |       | 12.25 |     |  |       | 13.44 |  |  |      | 8.19  | 
|                                    | Second Quarter                  |  |                               | 42.50        |     |  |       | 17.50 |     |  |       | 27.86 |  |  |      | 11.19 | 
|                                    | Third Quarter                   |  |                               | 46.10        |     |  |       | 20.10 |     |  |       | 30.23 |  |  |      | 12.69 | 
|                                    | Fourth Quarter                  |  |                               | 36.67        |     |  |       | 17.31 |     |  |       | 23.20 |  |  |      | 10.61 | 
|Fiscal Year Ended December 31, 2002 |                                 |  |                               |              |     |  |       |       |     |  |       |       |  |  |      |      
|                                    | First Quarter                   |  |                               | 28.59        |     |  |       | 17.50 |     |  |       | 17.75 |  |  |      | 10.92 | 
|                                    | Second Quarter                  |  |                               | 23.75        |     |  |       | 10.80 |     |  |       | 14.90 |  |  |      | 7.05  | 
|                                    | Third Quarter                   |  |                               | 13.60        |     |  |       | 5.26  |     |  |       | 8.90  |  |  |      | 3.37  | 
|                                    | Fourth Quarter                  |  |                               | 9.30         |     |  |       | 4.96  |     |  |       | 5.90  |  |  |      | 3.12  | 
|Fiscal Year Ended December 31, 2003 |                                 |  |                               |              |     |  |       |       |     |  |       |       |  |  |      |      
|                                    | First Quarter                   |  |                               | 7.99         |     |  |       | 5.76  |     |  |       | 5.20  |  |  |      | 3.71  | 
|                                    | Second Quarter (to May 1, 2003) |  |                               | 10.16        |     |  |       | 5.90  |     |  |       | 7.37  |  |  |      | 4.00  | 

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Notes:



|(1) |  | Trading prices are in Canadian dollars.                                                                                                                                                                                                                                                                            
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Until September 30, 1998, CryptoLogic common stock was listed in Canada
on the Canadian Dealer Network, and price information for this period was
as reported on the Canadian Dealer Network reporting system. For all
subsequent periods, CryptoLogic common stock traded in Canada on the
Toronto Stock Exchange.
|   
|(3) |  | Trading prices are in U.S. dollars.                                                                                                                                                                                                                                                                                
|   
|(4) |  | CryptoLogics common stock commenced trading on Nasdaq on March 20, 2000.                                                                                                                                                                                                                                          




ITEM 10. ADDITIONAL INFORMATION

MEMORANDUM AND ARTICLES OF ASSOCIATION

The following statements are subject to the detailed provisions of our
articles of incorporation and by-laws. These statements do not purport to be
complete and, while we believe the descriptions of the material provisions of
the articles and by-laws contained in this report will be accurate statements
with respect to such material provisions, such statements are subject to the
detailed provisions in the articles of incorporation and by-laws to which
reference is hereby made for a full description of such provisions.

Capitalization

Our articles of incorporation provide that our authorized share capital is
an unlimited number of common shares at no par value. At the beginning of
2002, we had 13,134,503 common shares outstanding. As at the year-ended
December 31, 2002 and as at May 1, 2003, we had 12,205,868 and 12,234,598
common shares outstanding respectively.

As of May 1, 2003, we had options and warrants to purchase an aggregate of
2,481,648 common shares exercise of prices ranging from Cdn$5.40 to Cdn$44.34
per share.

Objects and Purpose

1.     CryptoLogic is incorporated under the Business Corporations Act
(Ontario) and has been assigned company number 1171140. Our registered office
is located at 220 Bay Street, 7th Floor, Toronto, Ontario, Canada, M5J 2W4, and
our principal executive offices are located at 1867 Yonge Street, 7th Floor,
Toronto, Ontario, Canada, M4S 1Y5.

Directors and Powers

2.     A director shall continue in office until his successor is elected at
the next shareholders meeting. Incumbent directors, if qualified, shall be
eligible for re-election. Subject to the articles, the by-laws or any
unanimous shareholders agreement, the board may fix the remuneration of the
directors. Such remuneration shall be in addition to any salary or
professional fees payable to a director who services the Corporation in any
other capacity. In addition, directors shall be paid sums in respect of their
out-of-pocket expenses incurred in attending board, committee or shareholders
meetings or otherwise in respect of the performance by them of their duties as
the board may from time to time determine.

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Every director of the company who is a party to a material contract or
proposed material contract with the company, or is a director or has a material
interest in any corporation which is party to a material contract or proposed
material contract with the company shall disclose in writing to the company or
request to have entered in the minutes of the meeting of directors the nature
and extent of his interest as required by section 132 of the Act.

Directors of the company do not have to retire under an age limit
requirement and are not required to own shares of the company in order to serve
as directors.

Rights and Privileges of Common Shares

3.     Our by-laws provide that every shareholder is entitled to one vote for
each share held on all matters submitted to shareholder meetings, including the
election and removal of directors. The Board may from time to time declare,
and the company may pay a dividend to shareholders on its outstanding shares
according to their respective rights in the company. All questions proposed
for the consideration of the shareholders at a meeting, including all elections
for directors, shall be decided by majority vote, except as otherwise required
by the Act.

4.     A special resolution (requiring a 2/3 majority or signature of all
shareholders entitled to vote) is required to amend our articles in such
circumstances as to change any maximum number of shares that we are authorized
to issue, to create new classes of shares, to change the designation of all or
any of our shares and add, change or remove any rights privileges, restrictions
and conditions including rights to accrued dividends, in respect of all or any
of our shares, whether issued or unissued.

5.     The conditions governing the manner in which annual general meetings
and special meetings of shareholders are convoked are contained in by-laws 6.01
to 6.19:

Annual Shareholders Meeting

The annual meeting of shareholders of the company shall be held at such
time and on such day each year as the board may from time to time determine,
for the purpose of receiving the reports and statements required by the Act to
be laid before the annual meeting, electing directors, appointing auditors and
fixing or authorizing the board to fix their remuneration, and for the
transaction of such other business as may properly be brought before the
meeting.

Special Shareholders Meeting

The board may at any time call a special meeting of shareholders for the
transaction of any business, which may properly be brought before such meeting
of shareholders.

All business transacted at an annual meeting of shareholders, except
consideration of financial statements, auditors report, election of directors
and reappointment of the incumbent auditor, is deemed to be special business.

Quorum

The holders of not less than twenty-five (25%) percent of the shares
entitled to vote at a meeting of shareholders present in person or by proxy
constitutes a quorum for the transaction of business at any meeting of
shareholders.

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Votes of Shareholders

At any meeting of shareholders, unless the articles otherwise provide,
each share of the company entitles the holder thereof to one vote at a meeting
of shareholders.

Proxies

Every shareholder entitled to vote at a meeting of shareholders may by
means of a proxy appoint a proxy holder or one or more alternate proxy holders
who are not required to be shareholders to attend and act at the meeting in the
manner and to the extent authorized by the proxy and with the authority
conferred by the proxy.

A proxy shall be in writing and executed by the shareholder or by his
attorney authorized in writing.

Notice of Meeting

Notice of the time and place of each meeting of shareholders shall be sent
not less than 10 days and not more than 50 days before the date of the meeting
to the auditor of the company (if any), to each director, and to each person
whose name appears on the records of the company at the close of business on
the day next preceding the giving of the notice as a shareholder entitled to
vote at the meeting.

Waiver of Notice

A meeting of shareholders may be held at any time and at any place
permitted by the Act or the articles or the by-laws without notice or on
shorter notice than that provided for herein and proceedings thereat shall not
thereby be invalidated:



| |  | if all the shareholders entitled to vote thereat are present
in person or represented by proxy or if those not so present or
represented by proxy have received notice or before or after the
meeting or the time prescribed for notice thereof, in writing waive
notice of or accept short notice of such meeting, and
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | if the auditors, if any, and the directors are present or if
those not present have received notice or, before or after the time
prescribed for notice thereof, in writing waive notice of or accept
notice of such meeting.                                                                                           

Exchange Controls

Not applicable.

Material Contracts

On April 9, 2003, we entered into a Letter of Intent with Canaccord
Capital (Europe) Limited to act as our Sponsor Broker in connection with our
listing on the London Stock Exchange. In consideration for its services, we
pay a Sponsor and Broker fee of £125,000 of which £25,000 was paid, and the
remainder due on the successful admission of the Company to the London Stock
Exchange. We will pay Canaccord a retainer of £50,000 per annum, payable in
half-yearly installments in advance, the first payment to be made on Listing.
We will also pay any reasonable direct expenses and fees and out-of-pocket
costs directly incurred by Canaccord in connection with the Listing.

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Also see Item 6  Directors, Senior Management and Employees -
Compensation of Directors and Officers

Taxation

Canadian Federal Income Tax Consequences

There are no Canadian income tax consequences by a U.S. Holder (as
hereinafter defined) with respect to the open market disposition of our common
shares.

U.S. Federal Income Tax Consequences

The following is a general discussion of certain possible U.S. federal
income tax consequences, under current law, generally applicable to a U.S.
Holder of common shares of the Company. This discussion is of a general nature
only and does not take into account the particular facts and circumstances,
with respect to U.S. federal income tax issues, of any particular U.S. Holder.
In addition, this discussion does not cover any state, local or foreign tax
consequences. (See Taxation  Canadian Federal Income Tax Consequences
above).

The following discussion is based upon the sections of the Internal
Revenue Code of 1986, as amended (the Code), Treasury Regulations, published
Internal Revenue Service (IRS) rulings, published administrative positions of
the IRS and court decisions that are currently applicable, any or all of which
could be materially and adversely changed, possibly on a retroactive basis, at
any time and which are subject to differing interpretations. This discussion
does not consider the potential effects, both adverse and beneficial, of any
proposed legislation, which, if enacted, could be applied, possibly on a
retroactive basis, at any time.

This discussion is for general information only and it is not intended to
be, nor should it be construed to be, legal or tax advice to any U.S. Holder or
prospective U.S. Holder of common shares of the Company, and no opinion or
representation with respect to the U.S. federal income tax consequences to any
such U.S. Holder or prospective U.S. Holder is made. Accordingly, U.S. Holders
and prospective U.S. Holders of common shares of the Company should consult
their own financial advisor, legal counsel or accountant regarding the U.S.
federal, state, local and foreign tax consequences of purchasing, owning and
disposing of common shares of the Company.

U.S. Holders

As used herein, a U.S. Holder means a holder of common shares of the
Company who is (i) a citizen or individual resident of the U.S., (ii) a
corporation created or organized in or under the laws of the U.S. or of any
political subdivision thereof, (iii) an estate whose income is taxable in the
U.S. irrespective of source or (iv) a trust subject to the primary supervision
of a court within the U.S. and control of a U.S. fiduciary as described Section
7701(a)(30) of the Code. If a partnership or other pass-through entity
treated as a partnership for U.S. federal income tax purposes holds common
shares of the Company, the U.S. federal income tax treatment of the partners or
owners of such partnership or other pass-through entity generally will depend
on the status of such partners or owners and the activities of such partnership
or pass-through entity.

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Persons Not Covered

This summary does not address the U.S. federal income tax consequences to
persons (including persons who are U.S. Holders) subject to special provisions
of U.S. federal income tax law, including (i) persons who are tax-exempt
organizations, qualified retirement plans, individual retirement accounts and
other tax-deferred accounts, financial institutions, insurance companies, real
estate investment trusts, regulated investment companies, or brokers, dealers
or traders in securities, (ii) persons who have a functional currency other
than the U.S. dollar, (iii) persons subject to the alternative minimum tax,
(xi) persons who own their common shares of the Company as part of a straddle,
hedging, conversion transaction, constructive sale or other arrangement
involving more than one position, (iv) persons who acquired their common shares
of the Company through the exercise of employee stock options or otherwise as
compensation for services, (v) persons that own an interest in an entity that
owns common shares of the Company, (vi) persons who own, exercise or dispose of
any options, warrants or other rights to acquire common shares of the Company,
(vii) persons who are partners or owners of partnerships or other pass-through
entities or (viii) persons who own their common shares of the Company other
than as a capital asset within the meaning of Section 1221 of the Code.

Distribution on Common Shares of the Company

U.S. Holders receiving distributions (including constructive distributions)
with respect to common shares of the Company are required to include in gross
income as a dividend for U.S. federal income tax purposes the gross amount of
such distributions (without reduction for any Canadian income tax withheld from
such distributions), equal to the U.S. dollar value of such distributions on
the date of receipt (based on the exchange rate on such date), to the extent
that the Company has current or accumulated earnings and profits. For taxable
years beginning after December 31, 2002 and before January 1, 2009, dividends
received by U.S. Holders that are individuals, estates or trusts from
qualified foreign corporations, as defined in Section 1(h)(11) of the Code,
generally are taxed at the same preferential tax rates applicable to long-term
capital gains. Although not free from doubt, it appears that the Company
constitutes a qualified foreign corporation, as defined in Section 1(h)(11)
of the Code. However, if the Company qualifies as a Foreign Personal Holding
Company, a Foreign Investment Company or a Passive Foreign Investment
Company, each as defined below, for its taxable year during which it pays a
dividend, or for its immediately preceding taxable year, the Company generally
will not be treated as a qualifying foreign corporation and dividends
received by U.S. Holders that are individuals, estates or trusts generally will
be subject to U.S. federal income tax at ordinary income tax rates (and not at
the preferential tax rates applicable to long-term capital gains). The
dividend rules are very complicated and U.S. Holders of common shares of the
Company should consult their own financial advisor, legal counsel or accountant
regarding the dividend rules and how these rules may impact their U.S. federal
income tax situation.To the extent that distributions from the Company exceed
current or accumulated earnings and profits of the Company, such distributions
will be treated first as a return of capital, to the extent of the U.S.
Holders adjusted basis in the common shares, and thereafter as gain from the
sale or exchange of the common shares of the Company. (See more detailed
discussion at Disposition of Common Shares of the Company below). Any
Canadian tax withheld from a distribution by the Company may be credited,
subject to certain limitations, against the U.S. Holders U.S. federal income
tax liability or, alternatively, may be deducted in computing the U.S. Holders
U.S. federal taxable income by those who itemize deductions. (See more
detailed discussion at Foreign Tax Credit below).

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In the case of foreign currency received as a distribution that is not
converted by the recipient into U.S. dollars on the date of receipt, a U.S.
Holder will have a tax basis in the foreign currency equal to its U.S. dollar
value on the date of receipt. Generally any gain or loss recognized upon a
subsequent sale or other disposition of the foreign currency, including the
exchange for U.S. dollars, will be ordinary income or loss. However, an
individual whose realized gain does not exceed $200 will not recognize that
gain, to the extent that there are no expenses associated with the transaction
that meet the requirements for deductibility as a trade or business expense
(other than travel expenses in connection with a business trip) or as an
expense for the production of income.

Dividends paid on the common shares of the Company generally will not be
eligible for the dividends received deduction allowed to corporate
shareholders receiving dividends from certain U.S. corporations. Under certain
circumstances, a U.S. Holder that is a corporation and that owns shares
representing at least 10% of the total voting power and the total value of the
Companys outstanding shares may be entitled to a 70% deduction of the U.S.
source portion of dividends received from the Company (unless the Company
qualifies as a Foreign Personal Holding Company or a Passive Foreign
Investment Company as defined below). The availability of the dividends
received deduction is subject to several complex limitations, which are beyond
the scope of this discussion, and U.S. Holders of common shares of the Company
should consult their own financial advisor, legal counsel or accountant
regarding the dividends received deduction.

Information Reporting; Backup Withholding

Certain information reporting and backup withholding rules may apply with
respect to certain payments related to the Companys common shares. In
particular, a payor or middleman within the U.S., or in certain cases outside
the U.S., will be required to withhold 28% (which rate is scheduled for
periodic adjustment) of any payments to a U.S. Holder of the Companys common
shares of dividends on, or proceeds from the sale of, such common shares within
the U.S., if a U.S. Holder fails to furnish its correct taxpayer identification
number (generally onForm W-9) or otherwise fails to comply with, or establish
an exemption from, the backup withholding tax requirements. Any amounts
withheld under the U.S. backup withholding tax rules will be allowed as a
refund or a credit against the U.S. Holders U.S. federal income tax liability,
provided the required information is furnished to the IRS. U.S. Holders should
consult their own financial advisor, legal counsel or accountant regarding the
information reporting and backup withholding rules applicable to the Companys
common shares.

Foreign Tax Credit

A U.S. Holder who pays (or has withheld from distributions) Canadian or
other foreign income tax with respect to the ownership of common shares of the
Company may be entitled, at the option of the U.S. Holder, to either receive a
deduction or a tax credit for U.S. federal income tax purposes with respect to
such foreign tax paid or withheld. Generally, it will be more advantageous to
claim a credit because a credit reduces U.S. federal income taxes on a
dollar-for-dollar basis, while a deduction merely reduces the taxpayers income
subject to U.S. federal income tax. This election is made on a year-by-year
basis and applies to all foreign taxes paid by (or withheld from distributions
to) the U.S. Holder during that year.

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There are significant and complex limitations that apply to the foreign
tax credit, among which is the general limitation that the credit cannot exceed
the proportionate share of the U.S. Holders U.S. income tax liability that the
U.S. Holders foreign source income bears to his or its worldwide taxable
income. In applying this limitation, the various items of income and deduction
must be classified as either foreign source or U.S. source. Complex rules
govern this classification process. In addition, this limitation is calculated
separately with respect to specific classes of income such as passive income,
high withholding tax interest, financial services income, shipping
income, and certain other classifications of income. Dividends distributed by
the Company will generally constitute foreign source income, and will be
classified as passive income or, in the case of certain U.S. Holders,
financial services income for these purposes.

In addition, U.S. Holders that are corporations and that own 10% or more
of the voting stock of the Company may be entitled to an indirect foreign tax
credit under Section 902 of the Code with respect to the payment of dividends
by the Company under certain circumstances and subject to complex rules and
limitations. The availability of the foreign tax credit and the application of
the limitations with respect to the foreign tax credit are fact specific, and
each U.S. Holder of common shares of the Company should consult their own
financial advisor, legal counsel or accountant regarding the foreign tax credit
rules.

Disposition of Common Shares of the Company

A U.S. Holder will recognize gain or loss upon the sale or other taxable
disposition of common shares of the Company equal to the difference, if any,
between (i) the amount of cash plus the fair market value of any property
received, and (ii) the shareholders tax basis in the common shares of the
Company. This gain or loss will be capital gain or loss if the common shares
are a capital asset in the hands of the U.S. Holder, which will be long-term
capital gain or loss if the common shares of the Company are held for more than
one year.

Preferential tax rates apply to long-term capital gains of U.S. Holders
that are individuals, estates or trusts. There are currently no preferential
tax rates for long-term capital gains for a U.S. Holder that is a corporation
(other than a corporation subject to Subchapter S of the Code). Deductions for
net capital losses are subject to significant limitations. For U.S. Holders
that are not corporations, any unused portion of such net capital loss may be
carried over to be used in later tax years until such net capital loss is
thereby exhausted. For U.S. Holders that are corporations (other than
corporations subject to Subchapter S of the Code), an unused net capital loss
may be carried back three years and carried forward five years from the loss
year to be offset against capital gains until such net capital loss is thereby
exhausted.

Other Considerations for U.S. Holders

In the following circumstances, the above sections of this discussion may
not describe the U.S. federal income tax consequences to U.S. Holders resulting
from the ownership and disposition of common shares of the Company:

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Foreign Personal Holding Company

If at any time during a taxable year (a) more than 50% of the total voting
power or the total value of the Companys outstanding shares is owned, directly
or indirectly, by five or fewer individuals who are citizens or residents of
the U.S. and (b) 60% (or 50% in certain cases) or more of the Companys gross
income for such year is foreign personal holding company income as defined in
Section 553 of the Code (e.g., dividends, interest, royalties, certain gains
from the sale of stock and securities, and certain gains from commodities
transactions), the Company may be treated as a Foreign Personal Holding
Company (FPHC) In that event, U.S. Holders of common shares of the Company
would be required to include in gross income for such year their allocable
portions of such foreign personal holding company income to the extent the
Company does not actually distribute such income.

The Company does not believe that it currently qualifies as a FPHC.
However, there can be no assurance that the Company will not be considered a
FPHC for the current or any future taxable year.

Foreign Investment Company

If (a) 50% or more of the total voting power or the total value of the
Companys outstanding shares is owned, directly or indirectly, by citizens or
residents of the U.S., U.S. partnerships or corporations, or U.S. estates or
trusts (as defined by the Code Section 7701(a)(30)), and (b) the Company is
found to be engaged primarily in the business of investing, reinvesting, or
trading in securities, commodities, or any interest therein, the Company may be
treated as a Foreign Investment Company (FIC) as defined in Section 1246 of
the Code, causing all or part of any gain realized by a U.S. Holder selling or
exchanging common shares of the Company to be treated as ordinary income rather
than capital gain.
The Company does not believe that it currently qualifies as a FIC.
However, there can be no assurance that the Company will not be considered a
FIC for the current or any future taxable year.

Controlled Foreign Corporation

If more than 50% of the total voting power or the total value of the
Companys outstanding shares is owned, directly or indirectly, by citizens or
residents of the U.S., U.S. partnerships or corporations, or U.S. estates or
trusts (as defined by the Code Section 7701(a)(30)), each of which own,
directly or indirectly, 10% or more of the total voting power of the Companys
outstanding shares (each a 10% Shareholder), the Company could be treated as
a Controlled Foreign Corporation (CFC) under Section 957 of the Code.

The classification of the Company as a CFC would effect many complex
results, including that 10% Shareholders of the Company would generally (i) be
treated as having received a current distribution of the Companys Subpart F
income and (ii) would also be subject to current U.S. federal income tax on
their pro rata shares of the Companys earnings invested in U.S. property.
The foreign tax credit may reduce the U.S. federal income tax on these amounts
for such 10% Shareholders (See more detailed discussion at Foreign Tax Credit
above). In addition, under Section 1248 of the Code, gain from the sale or
other taxable disposition of common shares of the Company by a U.S. Holder that
is or was a 10% Shareholder at any time during the five-year period ending with
the sale is treated as a dividend to the extent of earnings and profits of the
Company attributable to the common shares sold or exchanged.

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If the Company is classified as both a Passive Foreign Investment Company
as described below and a CFC, the Company generally will not be treated as a
Passive Foreign Investment Company with respect to 10% Shareholders. This rule
generally will be effective for taxable years of 10% Shareholders beginning
after 1997 and for taxable years of the Company ending with or within such
taxable years of 10% Shareholders.

The Company does not believe that it currently qualifies as a CFC.
However, there can be no assurance that the Company will not be considered a
CFC for the current or any future taxable year. The CFC rules are very
complicated, and U.S. Holders should consult their own financial advisor, legal
counsel or accountant regarding the CFC rules and how these rules may impact
their U.S. federal income tax situation.

Passive Foreign Investment Company

Certain U.S. income tax legislation contains rules governing Passive
Foreign Investment Companies (PFIC) which can have significant tax effects
on U.S. Holders of foreign corporations. Section 1297 of the Code defines a
PFIC as a corporation that is not formed in the U.S. and, for any taxable year,
either (a) 75% or more of its gross income is passive income or (b) the
average percentage, by fair market value (or, if the corporation is not
publicly traded and either is a controlled foreign corporation or makes an
election, by adjusted tax basis), of its assets that produce or are held for
the production of passive income is 50% or more. Passive income includes,
for example, dividends, interest, certain rents and royalties, certain gains
from the sale of stock and securities, and certain gains from commodities
transactions. However, gains resulting from commodities transactions are
generally excluded from the definition of passive income if substantially all
of a merchants, producers or handlers business is as an active merchant,
producer or handler of such commodities.

For purposes of the PFIC income test and the assets test, if a foreign
corporation owns (directly or indirectly) at least 25% by value of the stock of
another corporation, such foreign corporation shall be treated as if it (a)
held a proportionate share of the assets of such other corporation, and (b)
received directly its proportionate share of the income of such other
corporation. Also, for purposes of such PFIC tests, passive income does not
include any interest, dividends, rents or royalties that are received or
accrued from a related person to the extent such amount is properly allocable
to the income of such related person, which is not passive income. For these
purposes, a person is related with respect to a foreign corporation if such
person controls the foreign corporation or is controlled by the foreign
corporation or by the same persons that control the foreign corporation. For
these purposes, control means ownership, directly or indirectly, of stock
possessing more than 50% of the total voting power of all classes of stock
entitled to vote or of the total value of stock of a corporation.

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U.S. Holders owning common shares of a PFIC are subject to the highest
rate of tax on ordinary income in effect for the applicable taxable year and to
an interest charge based on the value of deferral of tax for the period during
which the common shares of the PFIC are owned with respect to certain excess
distributions on and dispositions of PFIC stock under Section 1291 of the
Code. However, if the U.S. Holder makes a timely election to treat a PFIC as a
qualified electing fund (QEF) with respect to such shareholders interest
therein, the above-described rules generally will not apply. Instead, the
electing U.S. Holder would include annually in his gross income his pro rata
share of the PFICs ordinary earnings and net capital gain regardless of
whether such income or gain was actually distributed. A U.S. Holder of a QEF
can, however, elect to defer the payment of U.S. federal income tax on such
income inclusions. In addition, subject to certain limitations, U.S. Holders
owning, actually or constructively, marketable (as specifically defined) stock
in a PFIC will be permitted to elect to mark that stock to market annually,
rather than be subject to the tax regime of Section 1291 of Code as described
above. Amounts included in or deducted from income under this alternative (and
actual gains and losses realized upon disposition, subject to certain
limitations) will be treated as ordinary gains or losses.

The Company believes that it did not qualify as a PFIC for its fiscal year
ended December 31, 2002. However, there can be no assurance that the Company
will not be considered a PFIC for the current or any future taxable year.
There can be no assurance that the Companys determination concerning its PFIC
status will not be challenged by the IRS, or that it will be able to satisfy
record keeping requirements that will be imposed on QEFs in the event that it
qualifies as a PFIC.

The PFIC rules are very complicated, and U.S. Holders should consult their
own financial advisor, legal counsel or accountant regarding the PFIC rules and
how these rules may impact their U.S. federal income tax situation.

Documents on Display

Any documents referred to in this Annual Report may be inspected at the
Companys principal executive offices located at, 1867 Yonge Street, 7th Floor,
Toronto, Ontario, Canada M4S 1Y5, during normal business hours.




ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We operate in a number of foreign jurisdictions, generate revenues and
incur expenses in the currencies of these jurisdictions (U.S. dollars, British
pound sterling, Euros, and Canadian dollars). Our financial results are
reported in U.S. currency, and as such we are subject to foreign currency
fluctuations related to the translation of assets and liabilities into U.S.
dollars, which could have a positive or negative effect on our reported
results. We utilize a hedging program to mitigate our currency risks.




ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

49



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PART II




ITEM 13. DEFAULTS, DIVIDEND ARRERAGES AND DELINQUENCIES

Not applicable.




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

Not applicable.




PART III




ITEM 15. CONTROLS AND PROCEDURES

Our chief executive officer and chief financial officer have reviewed the
Companys disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities and Exchange Act of 1934, as amended (the
Exchange Act)) within 90 days prior to the filing of this Annual Report on
Form 20-F. Based upon this review, these officers believe that the Companys
disclosure controls and procedures are effective in ensuring that material
information related to the Company is made known to these officers by others
within the Company and that the information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time period specified in
Securities and Exchange Commission rules and forms.

There were no significant changes in the Companys internal controls or in
other factors that could significantly effect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.




ITEM 16. AUDIT COMMITTEE FINANCIAL EXPERT/CODE OF EXPERTS

Reserved.

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ITEM 17. FINANCIAL STATEMENTS

The following financial statements and schedule, together with the reports
of KPMG thereon, are filed as part of this Annual Report:

|                                                                           |                                                            |  |      |      | 
|-------------------------------------------------------------------------- | ---------------------------------------------------------- |  | ---- | ---- | 
|Consolidated Financial Statements  Years Ended December 31, 2002 and 2001 |                                                            |  | F-1  |     
|                                                                           | Auditors Report to the Shareholders                       |  |      | F-2  | 
|                                                                           | Consolidated Balance Sheets                                |  |      | F-3  | 
|                                                                           | Consolidated Statements of Income                          |  |      | F-4  | 
|                                                                           | Consolidated Statements of Changes in Shareholders Equity |  |      | F-5  | 
|                                                                           | Consolidated Statements of Cash Flows                      |  |      | F-6  | 
|                                                                           | Notes to Consolidated Financial Statements                 |  |      | F-7  | 
|Consolidated Financial Statements  Years Ended December 31, 2001 and 2000 |                                                            |  | F-27 |     
|                                                                           | Auditors Report to the Shareholders                       |  |      | F-28 | 
|                                                                           | Consolidated Balance Sheets                                |  |      | F-29 | 
|                                                                           | Consolidated Statements of Income                          |  |      | F-30 | 
|                                                                           | Consolidated Statements of Changes in Shareholders Equity |  |      | F-31 | 
|                                                                           | Consolidated Statements of Cash Flows                      |  |      | F-32 | 
|                                                                           | Notes to Consolidated Financial Statements                 |  |      | F-33 | 

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ITEM 19. EXHIBITS

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

|     |  |                                                                                                                          |  | 
|---- |  | ------------------------------------------------------------------------------------------------------------------------ |  | 
|1.1  |  | Articles of Incorporation of CryptoLogic Inc.                                                                           
|1.2  |  | By-laws of CryptoLogic Inc.                                                                                             
|4.1  |  | CryptoLogic Stock Option Plan                                                                                           
|4.2  |  | Employment Agreement dated March 6, 2003 between CryptoLogic Inc. and Lewis Rose                                        
|4.3  |  | Employment Agreement dated December 18, 2001 between CryptoLogic Inc. and James Ryan                                    
|4.4  |  | Employment Agreement dated March 6, 2003 between CryptoLogic Inc. and Michael Starzynski                                
|4.5  |  | Letter of Intent dated April 9, 2003 between CryptoLogic Inc. and Canaccord Capital (Europe) Limited                    
|99.1 |  | Consent of KPMG LLP                                                                                                     
|99.2 |  | Certificate of the
President and Chief Executive Officer of CryptoLogic Inc. pursuant to
Section 906 of the             
|     |  | Sarbanes-Oxley Act of 2002                                                                                              
|99.3 |  | Certificate of the Chief Financial Officer of CryptoLogic Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | Consolidated Financial Statements
(Expressed in U.S. dollars)CRYPTOLOGIC INC.
Years ended December 31, 2002 and 2001

F-1



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|                                                                                                            |  |                                                            
|----------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------
|KPMGLLPChartered Accountants
Suite 3300 Commerce Court West
PO Box 31 Stn Commerce Court
Toronto ON M5L 1B2 |  | Telephone (416) 777-8500
Telefax (416) 777-8818
www.kpmg.ca

AUDITORS REPORT TO THE SHAREHOLDERS

We have audited the consolidated balance sheets of CryptoLogic Inc. as at
December 31, 2002 and 2001 and the consolidated statements of income, changes
in shareholders equity and cash flows for the years then ended. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally
accepted auditing standards. Those standards require that we plan and perform
an audit to obtain reasonable assurance 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.
In our opinion, these consolidated financial statements
present fairly, in all material respects, the financial position of the Company
as at December 31, 2002 and 2001 and the results of its operations and its cash
flows for the years then ended in accordance with Canadian generally accepted
accounting principles.

/s/ KPMG LLP

Chartered Accountants

Toronto, Canada

January 31, 2003

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CRYPTOLOGIC INC.

Consolidated Balance Sheets
(In thousands of U.S. dollars)
December 31, 2002 and 2001


|                                        |                                   |   |        |        |      |   |        |        | 
|--------------------------------------- | --------------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | 
|                                        |                                   |   | 2002   |        | 2001
|                                        |                                   |   |        |        |     
|Assets                                  |                                   |   |        |        |      |   |        |       
|Current assets:                         |                                   |   |        |        |      |   |        |       
|                                        | Cash and cash equivalents         |   | $      | 17,489 |      |   | $      | 42,822 | 
|                                        | Restricted cash (note 3)          |   |        | 15,740 |      |   |        | 16,800 | 
|                                        | Short-term investments            |   |        | 10,857 |      |   |        |       | 
|                                        | Reserves with processors (note 4) |   |        | 774    |      |   |        | 144    | 
|                                        | Accounts receivable               |   |        | 699    |      |   |        | 697    | 
|                                        | Income taxes recoverable          |   |        | 583    |      |   |        | 408    | 
|                                        | Prepaid expenses and other        |   |        | 1,104  |      |   |        | 768    | 
|                                        |                                   |   |        |        |      |   |        |        | 
|                                        |                                   |   | 47,246 |        |      |   | 61,639 |       
|Investments (note 5)                    |                                   |   | 680    |        |      |   | 2,480  |       
|Capital assets (note 6)                 |                                   |   | 2,713  |        |      |   | 2,949  |       
|Intangible assets (note 7)              |                                   |   | 226    |        |      |   | 337    |       
|Goodwill (note 2)                       |                                   |   | 1,665  |        |      |   | 1,040  |       
|                                        |                                   |   |        |        |      |   |        |        | 
|                                        |                                   | $ | 52,530 |        |      | $ | 68,445 |       
|                                        |                                   |   |        |        |      |   |        |        | 
|Liabilities and Shareholders Equity    |                                   |   |        |        |      |   |        |       
|Current liabilities:                    |                                   |   |        |        |      |   |        |       
|                                        | Accounts payable                  |   | $      | 5,116  |      |   | $      | 2,704  | 
|                                        | Accrued liabilities               |   |        | 2,489  |      |   |        | 1,389  | 
|                                        | Funds held on deposit             |   |        | 3,829  |      |   |        | 3,263  | 
|                                        |                                   |   |        |        |      |   |        |        | 
|                                        |                                   |   | 11,434 |        |      |   | 7,356  |       
|Shareholders equity:                   |                                   |   |        |        |      |   |        |       
|                                        | Capital stock (note 8)            |   |        | 10,720 |      |   |        | 8,720  | 
|                                        | Retained earnings                 |   |        | 30,376 |      |   |        | 52,369 | 
|                                        |                                   |   |        |        |      |   |        |        | 
|                                        |                                   |   | 41,096 |        |      |   | 61,089 |       
|Commitments and contingencies (note 10) |                                   |   |        |        |      |   |        |       
|                                        |                                   |   |        |        |      |   |        |        | 
|                                        |                                   | $ | 52,530 |        |      | $ | 68,445 |       
|                                        |                                   |   |        |        |      |   |        |        | 

See accompanying notes to consolidated financial statements.

On behalf of the Board:

__________________________________ Director
__________________________________ Director

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CRYPTOLOGIC INC.

Consolidated Statements of Income
(In thousands of U.S. dollars, except per share disclosure)


Years ended December 31, 2002 and 2001

|                                            |                                  |   |         |        |      |   |        |        | 
|------------------------------------------- | -------------------------------- | - | ------- | ------ | ---- | - | ------ | ------ | 
|                                            |                                  |   | 2002    |        | 2001
|                                            |                                  |   |         |        |     
|Revenue                                     |                                  | $ | 34,427  |        |      | $ | 43,550 |       
|Expenses:                                   |                                  |   |         |        |      |   |        |       
|                                            | Software development and support |   |         | 19,439 |      |   |        | 21,978 | 
|                                            | General and administrative       |   |         | 5,914  |      |   |        | 3,818  | 
|                                            | Finance                          |   |         | 465    |      |   |        | 332    | 
|                                            | Amortization                     |   |         | 986    |      |   |        | 353    | 
|                                            |                                  |   |         |        |      |   |        |       
|                                            |                                  |   | 26,804  |        |      |   | 26,481 |       
|                                            |                                  |   |         |        |      |   |        |       
|Income before undernoted                    |                                  |   | 7,623   |        |      |   | 17,069 |       
|Interest and other income                   |                                  |   | 672     |        |      |   | 2,215  |       
|Special charge (note 11)                    |                                  |   | (10,506 | )      |      |   |       |       
|                                            |                                  |   |         |        |      |   |        |       
|Income (loss) before income taxes           |                                  |   | (2,211  | )      |      |   | 19,284 |       
|Income taxes (recovery) (note 13)           |                                  |   | (82     | )      |      |   | 1,206  |       
|                                            |                                  |   |         |        |      |   |        |       
|Net income (loss)                           |                                  | $ | (2,129  | )      |      | $ | 18,078 |       
|                                            |                                  |   |         |        |      |   |        |       
|Earnings (loss) per common share (note 12): |                                  |   |         |        |      |   |        |       
|                                            | Basic                            |   | $       | (0.17  | )    |   | $      | 1.33   | 
|                                            | Diluted                          |   |         | (0.17  | )    |   |        | 1.21   | 
|                                            |                                  |   |         |        |      |   |        |       

See accompanying notes to consolidated financial statements.

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CRYPTOLOGIC INC.

Consolidated Statements of Changes in Shareholders Equity
(In thousands of U.S. dollars)


Years ended December 31, 2002 and 2001

|                                                                       |                                      |  |           |        |        |   |           |        |         |  |  |        |   |   |         |       |  
|---------------------------------------------------------------------- | ------------------------------------ |  | --------- | ------ | ------ | - | --------- | ------ | ------- |  |  | ------ | - | - | ------- | ----- | -
|                                                                       |                                      |  | 2002      |        | 2001  
|                                                                       |                                      |  |           |        |       
|                                                                       |                                      |  | Number of |        | Stated |   | Number of |        | Stated 
|                                                                       |                                      |  | shares    |        | value  |   | shares    |        | value  
|                                                                       |                                      |  |           |        |        |   |           |        |        
|                                                                       |                                      |  | (000's)   |        |        |   |           |        | (000's) |  |  |        |  
|Common shares:                                                         |                                      |  |           |        |        |   |           |        |         |  |  |        |   |   |         |      
|                                                                       | Balance, beginning of year           |  |           | 13,137 |        |   | $         | 8,448  |         |  |  | 14,079 |   |   | $       | 6,455 |  
|                                                                       | Repurchase of shares (note 8)        |  |           | (1,281 | )      |   |           | (401   | )       |  |  | (1,377 | ) |   |         | (444  | )
|                                                                       | Exercise of stock options            |  |           | 350    |        |   |           | 2,401  |         |  |  | 275    |   |   |         | 1,908 |  
|                                                                       | Exercise of Series C warrants        |  |           |       |        |   |           |       |         |  |  | 160    |   |   |         | 529   |  
|                                                                       |                                      |  |           |        |        |   |           |        |         |  |  |        |   |   |         |       |  
|                                                                       | Balance, end of year                 |  |           | 12,206 |        |   |           | 10,448 |         |  |  | 13,137 |   |   |         | 8,448 |  
|Series C warrants:                                                     |                                      |  |           |        |        |   |           |        |         |  |  |        |   |   |         |      
|                                                                       | Balance, beginning of year           |  |           |       |        |   |           |       |         |  |  | 160    |   |   |         | 22    |  
|                                                                       | Exercise of warrants                 |  |           |       |        |   |           |       |         |  |  | (160   | ) |   |         | (22   | )
|                                                                       |                                      |  |           |        |        |   |           |        |         |  |  |        |   |   |         |       |  
|                                                                       | Balance, end of year                 |  |           |       |        |   |           |       |         |  |  |       |   |   |         |      |  
|Series F warrants:                                                     |                                      |  |           |        |        |   |           |        |         |  |  |        |   |   |         |      
|                                                                       | Balance, beginning of year           |  |           | 30     |        |   |           | 272    |         |  |  |       |   |   |         |      |  
|                                                                       | Issuance of warrants (notes 2 and 8) |  |           |       |        |   |           |       |         |  |  | 30     |   |   |         | 272   |  
|                                                                       |                                      |  |           |        |        |   |           |        |         |  |  |        |   |   |         |       |  
|                                                                       | Balance, end of year                 |  |           | 30     |        |   |           | 272    |         |  |  | 30     |   |   |         | 272   |  
|                                                                       |                                      |  |           |        |        |   |           |        |         |  |  |        |   |   |         |       |  
|Total capital stock                                                    |                                      |  |           |        |        |   | 10,720    |        |         |  |  |        |   |   | 8,720   |      
|                                                                       |                                      |  |           |        |        |   |           |        |         |  |  |        |   |   |         |       |  
|Retained earnings, beginning of year                                   |                                      |  |           |        |        |   | 52,369    |        |         |  |  |        |   |   | 51,133  |      
|Net income (loss)                                                      |                                      |  |           |        |        |   | (2,129    | )      |         |  |  |        |   |   | 18,078  |      
|Excess of repurchase price of common
shares over stated value (note 8) |                                      |  |           |        |        |   | (19,864   | )      |         |  |  |        |   |   | (16,842 | )    
|                                                                       |                                      |  |           |        |        |   |           |        |         |  |  |        |   |   |         |       |  
|Retained earnings, end of year                                         |                                      |  |           |        |        |   | 30,376    |        |         |  |  |        |   |   | 52,369  |      
|                                                                       |                                      |  |           |        |        |   |           |        |         |  |  |        |   |   |         |       |  
|Total shareholders equity                                             |                                      |  |           |        |        | $ | 41,096    |        |         |  |  |        |   | $ | 61,089  |      
|                                                                       |                                      |  |           |        |        |   |           |        |         |  |  |        |   |   |         |       |  

See accompanying notes to consolidated financial statements.

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CRYPTOLOGIC INC.
Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)

Years ended December 31, 2002 and 2001

|                                                                        |                                                                                            |                            |         |         |       |      |         |         |        |  
|----------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | -------------------------- | ------- | ------- | ----- | ---- | ------- | ------- | ------ | -
|                                                                        |                                                                                            |                            |         | 2002    |       | 2001
|                                                                        |                                                                                            |                            |         |         |       |     
|Cash flows from (used in) operating activities:                         |                                                                                            |                            |         |         |       |      |         |        
|                                                                        | Net income (loss)                                                                          |                            | $       | (2,129  | )     |      | $       | 18,078  |       
|                                                                        | Adjustments to reconcile income (loss) to cash
provided by (used in) operating activities: |                            |         |         |       |      |         |         |       
|                                                                        |                                                                                            | Amortization               |         |         | 986   |      |         |         | 353    |  
|                                                                        |                                                                                            | Write-down of investments  |         |         | 7,145 |      |         |         |       |  
|                                                                        | Change in operating assets and liabilities:                                                |                            |         |         |       |      |         |         |       
|                                                                        |                                                                                            | Restricted cash            |         |         | 1,060 |      |         |         | (2,800 | )
|                                                                        |                                                                                            | Reserves with processors   |         |         | (630  | )    |         |         | 1,073  |  
|                                                                        |                                                                                            | Accounts receivable        |         |         | (2    | )    |         |         | 813    |  
|                                                                        |                                                                                            | Income taxes recoverable   |         |         | (175  | )    |         |         | (477   | )
|                                                                        |                                                                                            | Prepaid expenses and other |         |         | (336  | )    |         |         | 71     |  
|                                                                        |                                                                                            | Accounts payable           |         |         | 2,412 |      |         |         | 499    |  
|                                                                        |                                                                                            | Accrued liabilities        |         |         | 1,100 |      |         |         | 513    |  
|                                                                        |                                                                                            | Funds held on deposit      |         |         | 566   |      |         |         | 1,449  |  
|                                                                        |                                                                                            |                            |         |         |       |      |         |         |       
|                                                                        |                                                                                            |                            | 9,997   |         |       |      | 19,572  |        
|Cash flows from (used in) financing activities:                         |                                                                                            |                            |         |         |       |      |         |        
|                                                                        | Issue of capital stock for cash                                                            |                            |         | 2,401   |       |      |         | 2,415   |       
|                                                                        | Repurchase of common shares                                                                |                            |         | (20,265 | )     |      |         | (17,286 | )     
|                                                                        |                                                                                            |                            |         |         |       |      |         |         |       
|                                                                        |                                                                                            |                            | (17,864 | )       |       |      | (14,871 | )      
|Cash flows from (used in) investing activities:                         |                                                                                            |                            |         |         |       |      |         |        
|                                                                        | Purchase of domain names                                                                   |                            |         | (3      | )     |      |         | (20     | )     
|                                                                        | Purchase of capital assets, net of disposals                                               |                            |         | (636    | )     |      |         | (2,420  | )     
|                                                                        | Acquisition, net of cash acquired of $181 (note 2)                                         |                            |         | (625    | )     |      |         | (1,085  | )     
|                                                                        | Short-term investments                                                                     |                            |         | (10,857 | )     |      |         |        |       
|                                                                        | Investments                                                                                |                            |         | (6,401  | )     |      |         | (1,050  | )     
|                                                                        | Sale of investment                                                                         |                            |         | 1,056   |       |      |         |        |       
|                                                                        |                                                                                            |                            |         |         |       |      |         |         |       
|                                                                        |                                                                                            |                            | (17,466 | )       |       |      | (4,575  | )      
|                                                                        |                                                                                            |                            |         |         |       |      |         |         |       
|Increase (decrease) in cash and cash equivalents                        |                                                                                            |                            | (25,333 | )       |       |      | 126     |        
|Cash and cash equivalents, beginning of year                            |                                                                                            |                            | 42,822  |         |       |      | 42,696  |        
|                                                                        |                                                                                            |                            |         |         |       |      |         |         |       
|Cash and cash equivalents, end of year                                  |                                                                                            | $                          | 17,489  |         |       | $    | 42,822  |        
|                                                                        |                                                                                            |                            |         |         |       |      |         |         |       
|Supplemental cash flow information:                                     |                                                                                            |                            |         |         |       |      |         |        
|                                                                        | Income taxes paid                                                                          |                            | $       | 340     |       |      | $       | 1,616   |       
|                                                                        | Interest received                                                                          |                            |         | 671     |       |      |         | 2,331   |       
|Supplemental disclosure relating to financing
and investing activities: |                                                                                            |                            |         |         |       |      |         |        
|                                                                        | Issuance of warrants on business acquisition (note 2)                                      |                            |         |        |       |      |         | 272     |       
|                                                                        |                                                                                            |                            |         |         |       |      |         |         |       

See accompanying notes to consolidated financial statements.

F-6



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##### Table of Contents



CRYPTOLOGIC INC.

Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share disclosure and where indicated otherwise)


Years ended December 31, 2002 and 2001

CryptoLogic Inc. (the Company) is a software development company with leading
proprietary commerce-enabling technology, permitting secure, reliable,
high-speed and private financial transactions over the Internet. The Companys
software is currently being used for electronic commerce and on-line gaming.
Substantially all of the Companys revenue is earned in U.S. dollars from
licensing fees and support services from licensees located outside of North
America. During the fiscal year, 44% (2001  71%) of the Companys revenue was
earned from licensees that form a group. The Company reports its results in
U.S. dollars.



|1. |  | Significant accounting policies:                                                                                                                                                                                                                                                                                                
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The consolidated financial statements are prepared in accordance with Canadian generally
accepted accounting principles, and except as described in note 15, conform in all material
respects with accounting principles generally accepted in the United States. A summary of
significant accounting policies is set out below:



| | (a) |  | Basis of presentation:                                                                                                                                                                                                                                                                                                                                   
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany balances and transactions have
been eliminated.                                                                                                                                                                
|
| | (b) |  | Revenue recognition:                                                                                                                                                                                                                                                                                                                                     
|
| |     |  | Revenue from providing software and support services to licensees is recognized on a
daily basis based on the agreements with the licensees. Revenue from the customization
of the software graphics, sound and texts to the specifications of the licensees is
recognized on a straight-line basis over the term of the software and support agreements.
|
| | (c) |  | Cash and cash equivalents:                                                                                                                                                                                                                                                                                                                               
|
| |     |  | Cash and cash equivalents include highly liquid investments with original maturity dates of
90 days or less, and are stated at cost, which approximates market value.                                                                                                                                                                                    
|
| | (d) |  | Short-term investments:                                                                                                                                                                                                                                                                                                                                  
|
| |     |  | Short-term investments include highly liquid investments with original maturity dates of
12 months or less, and are stated at cost, which approximates market value.                                                                                                                                                                                     

F-7



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##### Table of Contents



CRYPTOLOGIC INC.

Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except per share disclosure and where indicated otherwise)


Years ended December 31, 2002 and 2001



|1. |  | Significant accounting policies (continued):
|-- |  | --------------------------------------------



| | (e) |  | Investments:                                                                                                                                                                               
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Investments are stated at cost. If there is a loss in value of an investment that is other than
a temporary decline, the investment will be written down to its estimated realizable value.
|
| | (f) |  | Capital assets:                                                                                                                                                                            
|
| |     |  | Capital assets are stated at cost less accumulated amortization. Amortization, based on
the estimated useful lives of the assets, is provided using the following methods and annual
rates:

|                               |  |                     |  |               |     |  |  | 
|------------------------------ |  | ------------------- |  | ------------- | --- |  |  | 
|Asset                          |  | Basis               |  | Rate         
|                               |  |                     |  |              
|Computer equipment             |  | Diminishing balance |  |               | 30% | 
|Office furniture and equipment |  | Diminishing balance |  |               | 20% | 
|Computer software              |  | Straight line       |  | 3 years      
|Leasehold improvements         |  | Straight line       |  | Term of lease



| | (g) |  | Research and development:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Research costs are expensed as incurred. Costs related to the development of software
are expensed as incurred unless such costs meet the criteria for deferral and amortization
under Canadian generally accepted accounting principles.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | (h) |  | Income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |     |  | The Company uses the asset and liability method of accounting for income taxes. Future
tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss carryforwards. Future tax
assets and liabilities are measured using enacted or substantively enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on future tax assets and liabilities of a
change in tax rates is recognized in income in the year that includes the enactment or
substantive enactment date.

F-8



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##### Table of Contents



CRYPTOLOGIC INC.

Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)


Years ended December 31, 2002 and 2001



|1. |  | Significant accounting policies (continued):
|-- |  | --------------------------------------------



| | (i) |  | Stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Company has a stock option plan for directors, officers and other key employees, as
described in note 9. Effective January 1, 2002, the Company adopted the new
recommendations of The Canadian Institute of Chartered Accountants with respect to
accounting for stock-based compensation and other stock-based payments. The new
recommendations are applied prospectively to all stock-based payments to non-employees, and to employee awards that are direct awards of stock, call for settlement in
cash or other assets, or are stock appreciation rights that call for settlement by the
issuance of equity instruments, granted on or after January 1, 2002 using the fair value-based method. No compensation cost is recorded for all other stock-based employee
compensation awards. Consideration paid by employees on the exercise of stock options
is recorded as share capital. The Company discloses the pro forma effect of accounting for
these awards under the fair value-based method.
|
| |     |  | Under the fair value-based method, stock-based payments to non-employees are
measured at the fair value of the consideration received, or the fair value of the equity
instruments issued, or liabilities incurred, whichever is more reliably measurable. The fair
value of stock-based payments to non-employees is periodically re-measured until
counterparty performance is complete, and any change therein is recognized over the
period and in the same manner as if the Company had paid cash instead of paying with or
using equity instruments. The cost of stock-based payments to non-employees that are
fully vested and non-forfeitable at the grant date is measured and recognized at that date.
The Company has not issued any stock-based payments to non-employees on or after
January 1, 2002.                                                                                                                                                                                             
|
| |     |  | Under the fair value-based method, compensation cost attributable to awards to employees
that are direct awards of stock appreciation rights that call for settlement by the issuance of
equity instruments is measured at fair value at the grant date and recognized over the
vesting period. Compensation cost attributable to awards to employees that call for
settlement in cash or other assets is measured at the intrinsic value and recognized over
the vesting period. Changes in intrinsic value between the grant date and the
measurement date result in a change in the measure of compensation cost.                                                                                                                                                                                                                                                                                                                                                                                            

F-9



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##### Table of Contents



CRYPTOLOGIC INC.

Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)


Years ended December 31, 2002 and 2001



|1. |  | Significant accounting policies (continued):
|-- |  | --------------------------------------------



| | (j) |  | Foreign currency translation:                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Monetary items denominated in other than U.S. dollars are translated into U.S. dollars at
exchange rates in effect at the balance sheet dates, and non-monetary items are translated
at rates of exchange in effect when the assets were acquired or obligations incurred.
Revenue and expenses are translated at rates in effect at the time of the transactions.
Foreign exchange gains and losses are included in net income.
|
| | (k) |  | Intangible assets:                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |     |  | Intangible assets consist of the following:                                                                                                                                                                                                                                                                                                                                                                                     
|

| |  | (i)  |  | Customer list represents a database of registered subscribers to the WinnerOnLine
web site acquired in the purchase of ALI Online Inc. (ALI). Amortization is provided
for on a straight-line basis over three years.
| |  | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | (ii) |  | Domain names are amortized on a straight-line basis over five years.                                                                                                                                                   
|

| | (l) |  | Goodwill:                                                                                                                                                                                                                                                                                                                                                                                         
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Goodwill is the residual amount that results when the purchase price of an acquired
business exceeds the sum of the amounts allocated to the assets acquired, less liabilities
assumed, based on their fair values. Goodwill is allocated as of the date of the business
combination to the Companys reporting units that are expected to benefit from the
synergies of the business combination.

F-10



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##### Table of Contents



CRYPTOLOGIC INC.

Notes to Consolidated Financial Statements (continued)


(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)


Years ended December 31, 2002 and 2001



|1. |  | Significant accounting policies (continued):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Goodwill is not amortized and is tested for impairment annually, or more frequently, if
events or changes in circumstances indicate that the asset might be impaired. The
impairment test is carried out in two steps. In the first step, the carrying amount of the
reporting unit is compared with its fair value. When the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired
and the second step of the impairment test is unnecessary. The second step is carried out
when the carrying amount of a reporting unit exceeds its fair value, in which case, the
implied fair value of the reporting units goodwill is compared with its carrying amount to
measure the amount of the impairment loss, if any. The implied fair value of goodwill is
determined in the same manner as the value of goodwill is determined in a business
combination described in the preceding paragraph, using the fair value of the reporting unit
as if it was the purchase price. When the carrying amount of reporting unit goodwill
exceeds the implied fair value of the goodwill, an impairment loss is recognized in an
amount equal to the excess and is presented as a separate line item in the statements of
income.
|  
|   |  | For the year ended December 31, 2002, the Company assessed impairment of goodwill
and has determined that there was no impairment in value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



| | (m) |  | Earnings per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | On January 1, 2001, the Company adopted the new recommendations issued by The
Canadian Institute of Chartered Accountants with respect to earnings per share. The new
recommendations require the use of the treasury stock method in computing diluted
earnings per share, replacing the imputed interest method. The treasury stock method is a
method of recognizing the use of proceeds that could be obtained upon the exercise of
options and warrants in computing diluted earnings per share. It assumes that any
proceeds would be used to purchase its common shares at the average market price
during the year being reported on. In accordance with these new recommendations, all
prior period comparative earnings per share information have been restated with no
significant difference.

F-11



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##### Table of Contents



CRYPTOLOGIC INC.

Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)


Years ended December 31, 2002 and 2001



|1. |  | Significant accounting policies (continued):
|-- |  | --------------------------------------------



| | (n) |  | Use of estimates:                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and expenses
during the year. Actual amounts could differ from those estimates.



|2. |  | Acquisition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On October 1, 2001, the Company entered into an agreement to acquire 100% of the shares of
ALI, a gaming content provider operating the WinnerOnLine web site, for cash of up to
$2,250,000, of which $1,250,000 was paid on October 1, 2001, as well as the issuance of
warrants to acquire 30,000 common shares of the Company valued at $272,000, using an
option pricing model. The exercise price of the warrants is Cdn. $23.00 per share. On
October 1, 2002, the Company paid an additional $625,000 in proceeds related to this
acquisition. The remaining purchase price of $375,000 will be payable on October 1, 2003 and
is subject to an adjustment based on net income targets. This consideration will be recorded
when the amounts are due and payable.
|  
|   |  | The acquisition has been accounted for by the purchase method with the fair value of the
consideration paid being allocated to the fair value of the identifiable assets and liabilities
acquired on October 1, 2001. On October 1, 2002, the purchase proceeds were increased for
contingent consideration paid of $625,000, which increased the allocation to goodwill. The
following is a summary of the net assets acquired at fair values:                                                                                                                                                                                                                                                                                                                         

|                              |  |   |       |  
|----------------------------- |  | - | ----- | -
|Current assets                |  | $ | 256   |  
|Capital assets                |  |   | 15    |  
|Customer list                 |  |   | 315   |  
|Domain names and other rights |  |   | 30    |  
|Goodwill                      |  |   | 1,665 |  
|                              |  |   |       |  
|                              |  |   | 2,281 |  
|Liabilities assumed           |  |   | (118  | )
|                              |  |   |       |  
|Net assets acquired           |  | $ | 2,163 |  
|                              |  |   |       |  

F-12



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##### Table of Contents



CRYPTOLOGIC INC.

Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)


Years ended December 31, 2002 and 2001



|2. |  | Acquisition (continued):
|-- |  | ------------------------

|                        |                                         |   |       |       | 
|----------------------- | --------------------------------------- | - | ----- | ----- | 
|Purchase consideration: |                                         |   |       |      
|                        | Cash, including October 1, 2002 payment |   | $     | 1,875 | 
|                        | Acquisition costs                       |   |       | 16    | 
|                        | Series F warrants                       |   |       | 272   | 
|                        |                                         |   |       |      
|                        |                                         | $ | 2,163 |      
|                        |                                         |   |       |      



|3. |  | Restricted cash:                                                                                                                                                                  
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Restricted cash is held by the Companys bank as security for letters of credit of equivalent
amounts granted to payment processors.                                              
|  
|4. |  | Reserves with processors:                                                                                                                                                         
|  
|   |  | The terms of the agreement with payment providers require the Company to maintain U.S.
dollar-denominated funds for reserves in non-interest bearing accounts with the processors.
|  
|5. |  | Investments:                                                                                                                                                                      

|                      |  |      |     |      |  |   |       | 
|--------------------- |  | ---- | --- | ---- |  | - | ----- | 
|                      |  | 2002 |     | 2001
|                      |  |      |     |     
|HIP Interactive Corp. |  | $    | 680 |      |  | $ | 680   | 
|Other                 |  |      |    |      |  |   | 1,800 | 
|                      |  |      |     |      |  |   |       | 
|                      |  | $    | 680 |      |  | $ | 2,480 | 
|                      |  |      |     |      |  |   |       | 

The investment in publicly listed HIP Interactive Corp. (HIP) arose on the
sale of Gamesmania Inc. during fiscal 1999. The investment in HIP is
comprised of 1,000,000 common shares and 250,000 warrants. The warrants
which entitled the Company to purchase one common share of HIP for Cdn. $1.00
expired on December 9, 2002. During fiscal 2002, all shares held in an
escrow account were released. HIP is primarily in the e-commerce business
selling video games and consumer PC software.

F-13



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##### Table of Contents



CRYPTOLOGIC INC.

Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)


Years ended December 31, 2002 and 2001



|5. |  | Investments (continued):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Other investments held as at December 31, 2001 include:                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | iPayment Technologies, Inc., which is in the business of credit card transaction processing,
primarily focused on internet-based merchants. This investment was written down during fiscal
2002 due to a decline in the value of the investment that was other than temporary.                                                                                                                                                                                                                                                   
|  
|   |  | On November 3, 2000, the Company acquired common shares in Forty-Ninth Parallel Inc. in
settlement of $350,000 owed to the Company by Forty-Ninth Parallel Inc. Forty-Ninth Parallel
Inc. is in the business of advising on mergers and acquisitions. This investment was written
down during fiscal 2002 due to a decline in the value of the investment that was other than
temporary.                                                                                                                                         
|  
|   |  | In March 2001, the Company acquired 1,055,700 common shares for $921,000, representing a
9.9% interest in publicly listed Dot Com Entertainment Group Inc., a provider of Java-based
bingo and casino software. This investment was sold during fiscal 2002 for total proceeds of
$1,056,000, resulting in a gain of $135,000.                                                                                                                                                                                                   
|  
|   |  | In April 2001, the Company entered into a debenture agreement with
LasVegasFromHome.com Entertainment Inc., a poker licensee of WagerLogic Limited (a
wholly owned subsidiary of Cryptologic Inc.), whereby the Company is entitled to full repayment
of the principal sum of Cdn. $200,000, plus interest at a rate of 9% per annum. The principal
was due on April 26, 2002 and the interest was due monthly. This investment was written
down during fiscal 2002 as collectibility of the debenture is substantially in doubt.
|  
|6. |  | Capital assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                               |  |      |       |      |  |   |       | 
|------------------------------ |  | ---- | ----- | ---- |  | - | ----- | 
|                               |  | 2002 |       | 2001
|                               |  |      |       |     
|Computer equipment             |  | $    | 3,152 |      |  | $ | 2,703 | 
|Office furniture and equipment |  |      | 459   |      |  |   | 404   | 
|Computer software              |  |      | 775   |      |  |   | 701   | 
|Leasehold improvements         |  |      | 390   |      |  |   | 332   | 
|                               |  |      |       |      |  |   |       | 
|                               |  |      | 4,776 |      |  |   | 4,140 | 
|Less accumulated amortization  |  |      | 2,063 |      |  |   | 1,191 | 
|                               |  |      |       |      |  |   |       | 
|Net book value                 |  | $    | 2,713 |      |  | $ | 2,949 | 
|                               |  |      |       |      |  |   |       | 

F-14



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##### Table of Contents





|CRYPTOLOGIC INC.                                                                                                                                
|------------------------------------------------------------------------------------------------------------------------------------------------
|Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)
|                                                                                                                                                
|Years ended December 31, 2002 and 2001                                                                                                          
|                                                                                                                                                

|7. |  | Intangible assets:
|-- |  | ------------------

|                              |  |      |     |      |  |   |     | 
|----------------------------- |  | ---- | --- | ---- |  | - | --- | 
|                              |  | 2002 |     | 2001
|                              |  |      |     |     
|Customer list                 |  | $    | 315 |      |  | $ | 315 | 
|Domain names                  |  |      | 53  |      |  |   | 50  | 
|                              |  |      |     |      |  |  
|                              |  |      | 368 |      |  |   | 365 | 
|Less accumulated amortization |  |      | 142 |      |  |   | 28  | 
|                              |  |      |     |      |  |  
|Net book value                |  | $    | 226 |      |  | $ | 337 | 
|                              |  |      |     |      |  |  



|8. |  | Capital stock:
|-- |  | --------------



| | (a) |  | Authorized:
| | --- |  | -----------
|

| |  |      |  | Unlimited common shares                                                                                                                                                                                                                                                                                                       
| |  | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | (i)  |  | Series C warrants:                                                                                                                                                                                                                                                                                                            
|
| |  |      |  | Each warrant entitled the holder to purchase one common share at a price of
Cdn. $5.00 per share and expired on February 10, 2002. During fiscal 2001, 160,000
common shares were issued under the terms of the warrants. As at December 31,
2002, no Series C warrants were outstanding.                                     
|
| |  | (ii) |  | Series F warrants:                                                                                                                                                                                                                                                                                                            
|
| |  |      |  | During fiscal 2001, the Company issued Series F warrants to acquire 30,000 common
shares of the Company for Cdn. $23.00 per share pursuant to the acquisition of ALI
(note 2). The warrants vest in equal amounts over a four-year period and expire in
October 2005. As at December 31, 2002, no warrants had been exercised.

F-15



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##### Table of Contents



CRYPTOLOGIC INC.

Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)


Years ended December 31, 2002 and 2001



|8. |  | Capital stock (continued):
|-- |  | --------------------------



| | (b) |  | Substantial issuer bid:
| | --- |  | -----------------------
|

| |  | (i)  |  | Issuer bid completed during fiscal 2002:                                                                                                                                                                                                 
| |  | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |      |  | In January 2002, the Company repurchased and cancelled 1,004,934 common shares
for a total cost of $17,763,000, of which $17,448,000, representing the excess of
purchase price over stated value, has been charged to retained earnings.
|
| |  | (ii) |  | Issuer bid completed during fiscal 2001:                                                                                                                                                                                                 
|
| |  |      |  | In April 2001, the Company repurchased and cancelled 977,103 common shares for a
total cost of $12,107,000, of which $11,793,000, representing the excess of purchase
price over stated value, has been charged to retained earnings.    
|

| | (c) |  | Normal course issuer bid:                                                                                                                                                                                                                    
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | During fiscal 2002, 2001 and 2000 under the normal course issuer bids, the Board of
Directors approved the repurchase and cancellation of up to the following number of
shares representing 5% of the outstanding common shares at that time:

|                            |  |            |         |      |  |                                  |         |            |  |  |         |       |  |  |         | 
|--------------------------- |  | ---------- | ------- | ---- |  | -------------------------------- | ------- | ---------- |  |  | ------- | ----- |  |  | ------- | 
|                            |  |            |         |      |  | Repurchased and cancelled shares
|                            |  |            |         |      |  |                                 
|                            |  | Authorized |         |      |  |                                  |         |            |  |  |         | Total
|Normal course issuer bid    |  | shares     |         | 2002 |  | 2001                             |         | under plan
|                            |  |            |         |      |  |                                  |         |           
|May 20, 2002  May 19, 2003 |  |            | 603,421 |      |  |                                  | 110,000 |            |  |  |        |       |  |  | 110,000 | 
|May 18, 2001  May 17, 2002 |  |            | 656,000 |      |  |                                  | 165,500 |            |  |  | 275,000 |       |  |  | 440,500 | 
|May 17, 2000  May 16, 2001 |  |            | 561,000 |      |  |                                  |        |            |  |  | 125,500 |       |  |  | 470,300 | 
|                            |  |            |         |      |  |                                  |         |            |  |  |         |       |  |  |        

Under the May 20, 2002 to May 19, 2003 plan, the Company repurchased and
cancelled 110,000 common shares during 2002 for a total cost of $469,000,
of which $434,000, representing the excess of purchase price over stated
value, has been charged to retained earnings.

F-16



---



##### Table of Contents



CRYPTOLOGIC INC.

Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)


Years ended December 31, 2002 and 2001



|8. |  | Capital stock (continued):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | During fiscal 2002 under the May 18, 2001 to May 17, 2002 plan, the Company
repurchased and cancelled 165,500 common shares (2001  275,000) for a total cost of
$2,033,000 (2001  $3,896,000), of which $1,982,000 (2001  $3,808,000), representing
the excess of purchase price over stated value, has been charged to retained earnings.                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | Under the May 17, 2000 to May 16, 2001 plan, the Company repurchased and cancelled
125,500 common shares during fiscal 2001 for a total cost of $1,283,000, of which
$1,241,000, representing the excess of purchase price over stated value, has been
charged to retained earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|9. |  | Stock option plan:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | Under the stock option plan, the Company can grant options to directors, officers and other key
employees to purchase common shares. The plan, which was amended on May 30, 2002,
provides that a maximum of 3,000,000 common shares may be issued. The exercise price of
the options may not be less than the fair market value of the underlying common shares on the
date of grant. As at December 31, 2002, the Company had not granted stock options with an
exercise price below the fair market value at the date of grant. There are 528,552 common
shares available to be issued under the stock option plan as at December 31, 2002. Options
typically vest over a period of three or four years and the term of the options may not exceed
five years.

F-17



---



##### Table of Contents



CRYPTOLOGIC INC.

Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)


Years ended December 31, 2002 and 2001



|9. |  | Stock option plan (continued):                      
|-- |  | ----------------------------------------------------
|  
|   |  | Details of stock option transactions are as follows:

|                                       |  |         |           |          |  |          |       |          |  |  |           |          |  |   |       | 
|-------------------------------------- |  | ------- | --------- | -------- |  | -------- | ----- | -------- |  |  | --------- | -------- |  | - | ----- | 
|                                       |  | 2002    |           | 2001    
|                                       |  |         |           |         
|                                       |  |         |           |          |  | Weighted |       |          |  |  |           | Weighted
|                                       |  |         |           |          |  | average  |       |          |  |  |           | average 
|                                       |  | Number  |           | exercise |  | Number   |       | exercise
|                                       |  | of      |           | price of |  | of       |       | price of
|                                       |  | options |           | options  |  | options  |       | options 
|                                       |  |         |           |          |  |          |       |         
|                                       |  |         |           |          |  | (Cdn. $) |       |          |  |  |           | (Cdn. $)
|Options outstanding,
beginning of year |  |         | 2,397,589 |          |  | $        | 17.24 |          |  |  | 2,509,175 |          |  | $ | 16.06 | 
|Granted                                |  |         | 752,250   |          |  |          | 9.78  |          |  |  | 438,700   |          |  |   | 25.30 | 
|Exercised                              |  |         | (349,657  | )        |  |          | 10.64 |          |  |  | (275,336  | )        |  |   | 10.66 | 
|Forfeited                              |  |         | (560,734  | )        |  |          | 19.10 |          |  |  | (274,950  | )        |  |   | 25.93 | 
|                                       |  |         |           |          |  |          |       |          |  |  |           |          |  |   |       | 
|Options outstanding, end of year       |  |         | 2,239,448 |          |  |          | 15.19 |          |  |  | 2,397,589 |          |  |   | 17.24 | 
|                                       |  |         |           |          |  |          |       |          |  |  |           |          |  |   |       | 
|Options exercisable, end of year       |  |         | 1,274,626 |          |  | $        | 16.50 |          |  |  | 992,972   |          |  | $ | 15.03 | 
|                                       |  |         |           |          |  |          |       |          |  |  |           |          |  |   |       | 

|                        |  |                      |           |                      |  |             |      |          |  |  |           |          |  |          |       | 
|----------------------- |  | -------------------- | --------- | -------------------- |  | ----------- | ---- | -------- |  |  | --------- | -------- |  | -------- | ----- | 
|                        |  | Options outstanding, |           | Options exercisable,
|                        |  | 2002                 |           | 2002                
|                        |  |                      |           |                     
|                        |  |                      |           |                      |  | Weighted    |      |          |  |  |           | Weighted
|                        |  |                      |           |                      |  | average     |      |          |  |  |           | average 
|                        |  | Number               |           | remaining            |  | Number      |      | exercise
|Range of exercise price |  | outstanding          |           | life (years)         |  | exercisable |      | price   
|                        |  |                      |           |                      |  |             |      |         
|(Cdn.
$)                |  |                      |           |                      |  |             |      |          |  |  |           |          |  | (Cdn. $)
|$5.00  $10.00          |  |                      | 682,250   |                      |  |             | 4.60 |          |  |  |          |          |  | $        | 8.19  | 
|$10.01  $15.00         |  |                      | 980,118   |                      |  |             | 2.55 |          |  |  | 928,906   |          |  |          | 12.90 | 
|$15.01  $20.00         |  |                      | 146,430   |                      |  |             | 0.52 |          |  |  | 135,764   |          |  |          | 16.47 | 
|$20.01  $25.00         |  |                      | 105,000   |                      |  |             | 2.30 |          |  |  | 55,000    |          |  |          | 21.91 | 
|$25.01  $30.00         |  |                      | 95,800    |                      |  |             | 3.43 |          |  |  | 16,450    |          |  |          | 26.83 | 
|$30.01  $35.00         |  |                      | 89,400    |                      |  |             | 1.96 |          |  |  | 52,101    |          |  |          | 31.81 | 
|$35.01  $40.00         |  |                      | 31,350    |                      |  |             | 1.77 |          |  |  | 17,838    |          |  |          | 39.03 | 
|$40.01  $45.00         |  |                      | 109,100   |                      |  |             | 1.37 |          |  |  | 68,567    |          |  |          | 40.58 | 
|                        |  |                      |           |                      |  |             |      |          |  |  |           |          |  |          |       | 
|                        |  |                      | 2,239,448 |                      |  |             | 2.98 |          |  |  | 1,274,626 |          |  |          | 16.50 | 
|                        |  |                      |           |                      |  |             |      |          |  |  |           |          |  |          |       | 

F-18



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##### Table of Contents



CRYPTOLOGIC INC.

Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)


Years ended December 31, 2002 and 2001



|9. |  | Stock option plan (continued):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In accordance with the new recommendations, the Company will continue its existing policy
that no compensation cost is recorded on the grant of stock options to employees.
Consideration paid by employees on the exercise of stock options is recorded as share capital.
However, under the new recommendations, the Company is required to provide additional pro
forma disclosures for options granted to employees as if the fair value-based accounting
method had been used to account for the stock options.
|  
|   |  | The fair value of options granted was determined using the Black-Scholes option pricing model,
using a dividend yield of 0% and the following weighted assumptions:                                                                                                                                                                                                                                                                                                                                                 

|                                  |  |      |       |  
|--------------------------------- |  | ---- | ----- | -
|                                  |  | 2002
|                                  |  |     
|Risk-free interest rate           |  |      | 2.0   | %
|Expected volatility               |  |      | 100.0 | %
|Expected life of options in years |  |      | 5.0   |  
|                                  |  |      |       |  

Had compensation expense been determined based on the fair value of the
employee stock option awards at the grant dates in accordance with the new
recommendations, the Companys loss for the year and loss per share would
have been changed to the following pro forma amounts:

|                       |         |   |             |       |           |   |        |       |  
|---------------------- | ------- | - | ----------- | ----- | --------- | - | ------ | ----- | -
|                       |         |   | 2002       
|                       |         |   |            
|                       |         |   | As reported |       | Pro forma
|                       |         |   |             |       |          
|Loss for the year      |         | $ | (2,129      | )     |           | $ | (2,520 | )    
|                       |         |   |             |       |           |   |        |      
|Loss per common share: |         |   |             |       |           |   |        |      
|                       | Basic   |   | $           | (0.17 | )         |   | $      | (0.21 | )
|                       | Diluted |   |             | (0.17 | )         |   |        | (0.21 | )
|                       |         |   |             |       |           |   |        |      

F-19



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##### Table of Contents



CRYPTOLOGIC INC.

Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)


Years ended December 31, 2002 and 2001



|10. |  | Commitments and contingencies:
|--- |  | ------------------------------



| | (a) |  | The Company has entered into lease agreements for premises expiring at various periods
up to April 2007. The future minimum annual rental payments on the operating leases are
as follows:
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|     |  |   |     | 
|---- |  | - | --- | 
|2003 |  | $ | 735 | 
|2004 |  |   | 415 | 
|2005 |  |   | 288 | 
|2006 |  |   | 237 | 
|2007 |  |   | 28  | 
|     |  |   |     | 



| | (b) |  | The Company and its subsidiaries are involved in certain litigation arising out of the
ordinary course and conduct of business. Although such matters cannot be predicted with
certainty, management believes the claims are without merit and does not consider the
Companys exposure to such litigation to have a material impact on these financial
statements.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|11. |  | Special charge:                                                                                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | During the second quarter of fiscal 2002, the Company took a non-recurring special charge of
$10.5 million. The charge was comprised of the following:

|                          |  |   |        | 
|------------------------- |  | - | ------ | 
|Write-down of investments |  | $ | 7,145  | 
|Reorganization costs      |  |   | 1,480  | 
|Other costs               |  |   | 1,881  | 
|                          |  |   |        | 
|                          |  | $ | 10,506 | 
|                          |  |   |        | 

F-20



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##### Table of Contents



CRYPTOLOGIC INC.

Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)


Years ended December 31, 2002 and 2001



|11. |  | Special charge (continued):
|--- |  | ---------------------------



| | (a) |  | Write-down of investments:                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Management has reviewed the Companys investments and other assets, and determined
the value of the investments held had incurred a decline in value that was other than
temporary. Included in the write-down is a $6.1 million investment, which was made during
fiscal 2002, in SCG Enterprises Ltd., a wholly owned subsidiary of
Sports.com Limited. Sports.com Limited was placed into bankruptcy protection in the U.K. in late May 2002 and
has since ceased operation.
|
| |     |  | Also included in the write-down of investments is a net gain of $135,000 recognized on the
sale of 100% of the Companys investment in Dot Com Entertainment Group Inc.,
representing 1,055,700 common shares for total proceeds of $1,056,000.                                                                                                                                                                                                                                
|
| | (b) |  | Reorganization costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |     |  | Reorganization costs are mainly associated with the consolidation in the United Kingdom of
the players support operations and severance costs associated with executive
management reorganization.                                                                                                                                                                                                                                                                            
|
| | (c) |  | Other costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |     |  | Other costs consist of estimated costs involved with current disputes and legal costs to
defend current litigation.                                                                                                                                                                                                                                                                                                                                                            

F-21



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##### Table of Contents



CRYPTOLOGIC INC.

Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)


Years ended December 31, 2002 and 2001



|12. |  | Earnings (loss) per common share:                                                                                                                 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Basic and diluted earnings (loss) per share were calculated using the weighted average
common shares and weighted average potential common shares.

|                                                               |  |         |        |      |  |  |        | 
|-------------------------------------------------------------- |  | ------- | ------ | ---- |  |  | ------ | 
|                                                               |  | 2002    |        | 2001
|                                                               |  |         |        |     
|                                                               |  | (000's)
|Weighted average number of common
shares outstanding           |  |         | 12,257 |      |  |  | 13,567 | 
|Weighted average number of common
shares outstanding  diluted |  |         | 12,879 |      |  |  | 14,944 | 
|                                                               |  |         |        |      |  |  |        | 



The computations for basic and diluted earnings (loss) per share are as
follows:

|                                      |                                             |         |        |      |       |   |        |   |      | 
|------------------------------------- | ------------------------------------------- | ------- | ------ | ---- | ----- | - | ------ | - | ---- | 
|(In thousands, except per share data) |                                             | 2002    |        | 2001
|                                      |                                             |         |        |     
|Net income before special charge      |                                             | $       | 7,728  |      |       | $ | 18,078 |  
|Special charge, net of income taxes   |                                             |         | (9,857 | )    |       |   |       |  
|                                      |                                             |         |        |      |       |   |        |  
|Net income (loss)                     |                                             | $       | (2,129 | )    |       | $ | 18,078 |  
|                                      |                                             |         |        |      |       |   |        |  
|Earnings (loss) per common share:     |                                             |         |        |      |       |   |        |  
|                                      | Before special charge, net of income taxes: |         |        |      |       |   |        |   |     
|                                      |                                             | Basic   |        | $    | 0.63  |   |        | $ | 1.33 | 
|                                      |                                             | Diluted |        |      | 0.60  |   |        |   | 1.21 | 
|                                      | After special charge, net of tax:           |         |        |      |       |   |        |   |     
|                                      |                                             | Basic   |        |      | (0.17 | ) |        |   | 1.33 | 
|                                      |                                             | Diluted |        |      | (0.17 | ) |        |   | 1.21 | 
|                                      |                                             |         |        |      |       |   |        |  

Options to purchase 447,000 common shares (2001  360,000) were excluded from
the computation of diluted earnings (loss) per share as the exercise price
exceeded the average market price of common shares for the reporting year.

F-22



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##### Table of Contents



CRYPTOLOGIC INC.

Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)


Years ended December 31, 2002 and 2001



|13. |  | Income taxes:                                                                                                                                                                                                       
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The income tax provision (recovery) differs from amounts which would be obtained by applying
the Canadian statutory income tax rate to the income before income taxes. The following
explains the major differences:

|                                                                 |                                                            |   |        |        |      |   |        |        |  
|---------------------------------------------------------------- | ---------------------------------------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | -
|                                                                 |                                                            |   | 2002   |        | 2001
|                                                                 |                                                            |   |        |        |     
|Income before income taxes                                       |                                                            | $ | (2,211 | )      |      | $ | 19,284 |       
|                                                                 |                                                            |   |        |        |      |   |        |       
|Income taxes based on a statutory rate of 38.62%
(2001  42.12%) |                                                            | $ | (854   | )      |      | $ | 8,122  |       
|Increase (decrease) in income taxes resulting from:              |                                                            |   |        |        |      |   |        |       
|                                                                 | Difference in statutory tax rates in foreign jurisdictions |   |        | (2,797 | )    |   |        | (6,913 | )
|                                                                 | Non-deductible capital losses                              |   |        | 2,778  |      |   |        |       |  
|                                                                 | Non-recognition of tax benefit of losses                   |   |        | 94     |      |   |        | 88     |  
|                                                                 | Non-recognition of other temporary difference              |   |        | 177    |      |   |        |       |  
|                                                                 | Other                                                      |   |        | 520    |      |   |        | (91    | )
|                                                                 |                                                            |   |        |        |      |   |        |       
|                                                                 | Actual income tax expense (recovery)                       |   | $      | (82    | )    |   | $      | 1,206  |  
|                                                                 |                                                            |   |        |        |      |   |        |       

F-23



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##### Table of Contents



CRYPTOLOGIC INC.

Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)


Years ended December 31, 2002 and 2001



|13. |  | Income taxes (continued):                                                                                                                                                        
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The tax effects of temporary differences that give rise to significant portions of the future tax
assets and future tax liabilities at December 31, 2002 and 2001 are as follows:

|                         |                                          |   |      |      |      |   |     |     |  
|------------------------ | ---------------------------------------- | - | ---- | ---- | ---- | - | --- | --- | -
|                         |                                          |   | 2002 |      | 2001
|                         |                                          |   |      |      |     
|Future tax assets:       |                                          |   |      |      |      |   |     |    
|                         | Non-capital tax losses carried forward   |   | $    | 281  |      |   | $   | 471 |  
|                         | Deferred financing charges               |   |      | 44   |      |   |     | 68  |  
|                         | Capital assets                           |   |      | 261  |      |   |     | (19 | )
|                         | Reserves not deductible for income taxes |   |      | 280  |      |   |     |    |  
|                         |                                          |   |      |      |      |   |     |     |  
|                         |                                          |   | 866  |      |      |   | 520 |    
|Future tax liabilities:  |                                          |   |      |      |      |   |     |    
|                         | Unrealized foreign exchange gains        |   |      | (231 | )    |   |     |    |  
|                         |                                          |   |      |      |      |   |     |     |  
|                         |                                          |   | 635  |      |      |   | 520 |    
|Less valuation allowance |                                          |   | 635  |      |      |   | 520 |    
|                         |                                          |   |      |      |      |   |     |     |  
|Net future tax assets    |                                          | $ |     |      |      | $ |    |    
|                         |                                          |   |      |      |      |   |     |     |  



|    |  | There are approximately $969 of losses carried forward available to offset future taxable
income and expire between 2005 and 2040.                                                                                                                                                                                                 
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|14. |  | Fair values of financial instruments:                                                                                                                                                                                                                                                                                              
|   
|    |  | The carrying values of financial instruments, which consist of cash and cash equivalents,
restricted cash, short-term investments, reserves with processors, accounts receivable,
accounts payable, accrued liabilities and funds held on deposit, approximate their fair values
due to the short-term nature of these instruments.
|   
|    |  | The fair value of long-term investment in HIP approximates its carrying value.                                                                                                                                                                                                                                                     

F-24



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##### Table of Contents



CRYPTOLOGIC INC.

Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)


Years ended December 31, 2002 and 2001



|15. |  | Differences between Canadian and United States generally accepted accounting
principles (GAAP):                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Companys consolidated balance sheets and consolidated statements of income and
changes in shareholders equity and cash flows have been prepared in accordance with
Canadian generally accepted accounting principles (Canadian GAAP) which conform, in all
material aspects applicable to the Company, with generally accepted accounting principles in
the United States (U.S. GAAP) during the years presented. Additional disclosures required
under U.S. GAAP are as follows:



| | (a) |  | Comprehensive income:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130,
Reporting Comprehensive Income (SFAS 130). SFAS 130 establishes standards for the
reporting and disclosure of comprehensive income and its components in financial
statements. Components of comprehensive income or loss include net income or loss and
all other changes in other non-owner changes in equity, such as the change in the
cumulative translation adjustment and the unrealized gain or loss for the year on available-
for-sale securities. For all periods presented, comprehensive income is the same as net
income.                                                         
|
| | (b) |  | Recent accounting pronouncements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |     |  | In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities (SFAS 146), which is effective for exit or disposal activities that are
initiated after December 31, 2002. SFAS 146 requires that a liability be recognized for exit
or disposal costs only when the liability is incurred, rather than when a company commits to
an exit plan, and that the liability be initially measured at fair value. The Company does not
believe that the adoption of SFAS 146 will have a material impact on its consolidated
financial statements.                                                                                              
|
| |     |  | In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45), which requires certain disclosures to be made by a guarantor in its
interim and annual financial statements for periods ending after December 15, 2002 about
its obligations under guarantees. FIN 45 also requires the recognition of a liability by a
guarantor at the inception of certain guarantees entered into or modified after
December 31, 2002. The Company does not believe that the adoption of FIN 45 will have
a material impact on its consolidated financial statements.

F-25



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##### Table of Contents



CRYPTOLOGIC INC.

Notes to Consolidated Financial Statements (continued)
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)


Years ended December 31, 2002 and 2001



|15. |  | Differences between Canadian and United States generally accepted accounting
principles (GAAP) (continued):
|--- |  | -------------------------------------------------------------------------------------------------------------
|   
|    |  | FASB has also recently issued the following pronouncements with varying effective dates
starting in 2003:    



| |  | (i)   |  | SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13 and Technical Corrections (SFAS 145), relating to gains and
losses from extinguishments of debt;
| |  | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | (ii)  |  | SFAS No. 147, Acquisitions of Certain Financial Institutions, an Amendment of FASB
Statement No. 72 and 144 and FASB Interpretation No. 9;                                                         
|
| |  | (iii) |  | SFAS No. 148, Accounting for Stock-based Compensation  Transition and Disclosure,
an Amendment of FASB Statement No. 123;                                                                         
|
| |  | (iv)  |  | SFAS No. 149, Accounting for Certain Financial Instruments with Characteristics of
Liabilities and Equity; and                                                                                     
|
| |  | (v)   |  | Interpretation No. 46, Consolidation of Variable Interest Entities.                                                                                                                                
|

| |  | The Company does not believe that the adoption of the above-mentioned pronouncements
will have a material impact on its consolidated financial statements.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

F-26



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##### Table of Contents



Consolidated Financial Statements
(Expressed in U.S. dollars)

CRYPTOLOGIC INC.

Years ended December 31, 2001 and 2000

F-27



---



##### Table of Contents



|                                                                                                      |  |                                                            
|----------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------
|KPMGLLPChartered Accountants
Yonge Corporate Centre
4120 Yonge Street Suite 500
North York ON M2P 2B8 |  | Telephone (416) 228-7000
Telefax (416) 228-7123
www.kpmg.ca

AUDITORS REPORT TO THE SHAREHOLDERS

We have audited the consolidated balance sheets of CryptoLogic Inc. as at
December 31, 2001 and 2000 and the consolidated statements of income, changes
in shareholders equity and cash flows for the years then ended. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
2001 and 2000 and the results of its operations and its cash flows for the
years then ended in accordance with Canadian generally accepted accounting
principles.

/s/ KPMG LLP

Chartered Accountants

Toronto, Canada

January 25, 2002

F-28



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##### Table of Contents



CRYPTOLOGIC INC.
Consolidated Balance Sheets
(In thousands of U.S. dollars)

December 31, 2001 and 2000

|                                        |                                               |   |        |        |      |   |        |        | 
|--------------------------------------- | --------------------------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | 
|                                        |                                               |   | 2001   |        | 2000
|                                        |                                               |   |        |        |     
|Assets                                  |                                               |   |        |        |      |   |        |       
|Current assets:                         |                                               |   |        |        |      |   |        |       
|                                        | Cash and cash equivalents                     |   | $      | 42,822 |      |   | $      | 42,696 | 
|                                        | Restricted cash (note 3)                      |   |        | 16,800 |      |   |        | 14,000 | 
|                                        | Reserve with a credit card processor (note 4) |   |        | 144    |      |   |        | 1,217  | 
|                                        | Accounts receivable                           |   |        | 697    |      |   |        | 1,435  | 
|                                        | Income taxes recoverable                      |   |        | 408    |      |   |        |       | 
|                                        | Prepaid expenses and other                    |   |        | 768    |      |   |        | 839    | 
|                                        |                                               |   |        |        |      |   |        |        | 
|                                        |                                               |   | 61,639 |        |      |   | 60,187 |       
|Investments (note 5)                    |                                               |   | 2,480  |        |      |   | 1,430  |       
|Capital assets (note 6)                 |                                               |   | 2,949  |        |      |   | 839    |       
|Intangible assets (note 7)              |                                               |   | 337    |        |      |   |       |       
|Goodwill (note 2)                       |                                               |   | 1,040  |        |      |   |       |       
|                                        |                                               |   |        |        |      |   |        |        | 
|                                        |                                               | $ | 68,445 |        |      | $ | 62,456 |       
|                                        |                                               |   |        |        |      |   |        |        | 
|Liabilities and Shareholders Equity    |                                               |   |        |        |      |   |        |       
|Current liabilities:                    |                                               |   |        |        |      |   |        |       
|                                        | Accounts payable                              |   | $      | 2,704  |      |   | $      | 2,154  | 
|                                        | Accrued liabilities                           |   |        | 1,389  |      |   |        | 876    | 
|                                        | Income taxes payable                          |   |        |       |      |   |        | 2      | 
|                                        | Funds held on deposit                         |   |        | 3,263  |      |   |        | 1,814  | 
|                                        |                                               |   |        |        |      |   |        |        | 
|                                        |                                               |   | 7,356  |        |      |   | 4,846  |       
|Shareholders equity:                   |                                               |   |        |        |      |   |        |       
|                                        | Capital stock (note 8)                        |   |        | 8,720  |      |   |        | 6,477  | 
|                                        | Retained earnings                             |   |        | 52,369 |      |   |        | 51,133 | 
|                                        |                                               |   |        |        |      |   |        |        | 
|                                        |                                               |   | 61,089 |        |      |   | 57,610 |       
|Commitments and contingencies (note 10) |                                               |   |        |        |      |   |        |       
|                                        |                                               |   |        |        |      |   |        |        | 
|                                        |                                               | $ | 68,445 |        |      | $ | 62,456 |       
|                                        |                                               |   |        |        |      |   |        |        | 

See accompanying notes to consolidated financial statements.

On behalf of the Board:

_______________________________ Director

_______________________________ Director

F-29



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##### Table of Contents



CRYPTOLOGIC INC.
Consolidated Statements of Income
(In thousands of U.S. dollars, except per share disclosure)

Years ended December 31, 2001 and 2000

|                                   |                                  |   |        |        |      |   |        |        | 
|---------------------------------- | -------------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | 
|                                   |                                  |   | 2001   |        | 2000
|                                   |                                  |   |        |        |     
|Revenue                            |                                  | $ | 43,550 |        |      | $ | 34,390 |       
|                                   |                                  |   |        |        |      |   |        |       
|Expenses:                          |                                  |   |        |        |      |   |        |       
|                                   | Software development and support |   |        | 21,978 |      |   |        | 16,367 | 
|                                   | General and administrative       |   |        | 3,818  |      |   |        | 3,024  | 
|                                   | Finance                          |   |        | 332    |      |   |        | 201    | 
|                                   | Amortization                     |   |        | 353    |      |   |        | 227    | 
|                                   |                                  |   |        |        |      |   |        |       
|                                   |                                  |   | 26,481 |        |      |   | 19,819 |       
|                                   |                                  |   |        |        |      |   |        |       
|Income before the undernoted       |                                  |   | 17,069 |        |      |   | 14,571 |       
|Interest income                    |                                  |   | 2,215  |        |      |   | 3,254  |       
|                                   |                                  |   |        |        |      |   |        |       
|Income before income taxes         |                                  |   | 19,284 |        |      |   | 17,825 |       
|Income taxes (note 12)             |                                  |   | 1,206  |        |      |   | 2,340  |       
|                                   |                                  |   |        |        |      |   |        |       
|Net income                         |                                  | $ | 18,078 |        |      | $ | 15,485 |       
|                                   |                                  |   |        |        |      |   |        |       
|Income per common share (note 11): |                                  |   |        |        |      |   |        |       
|                                   | Basic                            |   | $      | 1.33   |      |   | $      | 1.18   | 
|                                   | Diluted                          |   |        | 1.21   |      |   |        | 1.03   | 
|                                   |                                  |   |        |        |      |   |        |       

See accompanying notes to consolidated financial statements.

F-30



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##### Table of Contents



CRYPTOLOGIC INC.
Consolidated Statements of Changes in Shareholders Equity
(In thousands of U.S. dollars)

Years ended December 31, 2001 and 2000

|                                                                       |                                        |  |           |        |        |   |           |       |         |  |        |       |   |   |        |       |  
|---------------------------------------------------------------------- | -------------------------------------- |  | --------- | ------ | ------ | - | --------- | ----- | ------- |  | ------ | ----- | - | - | ------ | ----- | -
|                                                                       |                                        |  | 2001      |        | 2000  
|                                                                       |                                        |  |           |        |       
|                                                                       |                                        |  | Number of |        | Stated |   | Number of |       | Stated 
|                                                                       |                                        |  | shares    |        | value  |   | shares    |       | value  
|                                                                       |                                        |  |           |        |        |   |           |       |        
|                                                                       |                                        |  | (000's)   |        |        |   |           |       | (000's) |  |        |       |  
|Common shares:                                                         |                                        |  |           |        |        |   |           |       |         |  |        |       |   |   |        |      
|                                                                       | Balance, beginning of year             |  |           | 14,079 |        |   | $         | 6,455 |         |  |        | 8,974 |   |   | $      | 3,643 |  
|                                                                       | Repurchase of shares (note 8)          |  |           | (1,377 | )      |   |           | (444  | )       |  |        | (490  | ) |   |        | (162  | )
|                                                                       | Exercise of stock options              |  |           | 275    |        |   |           | 1,908 |         |  |        | 195   |   |   |        | 1,143 |  
|                                                                       | Exercise of Class A purchase warrant   |  |           |       |        |   |           |      |         |  |        | 5,400 |   |   |        | 1,831 |  
|                                                                       | Exercise of Class C purchase warrant   |  |           | 160    |        |   |           | 529   |         |  |        |      |   |   |        |      |  
|                                                                       |                                        |  |           |        |        |   |           |       |         |  |        |       |   |   |        |       |  
|                                                                       |                                        |  | 13,137    |        |        |   | 8,448     |       |         |  | 14,079 |       |   |   | 6,455  |      
|                                                                       |                                        |  |           |        |        |   |           |       |         |  |        |       |   |   |        |       |  
|Series C warrants:                                                     |                                        |  |           |        |        |   |           |       |         |  |        |       |   |   |        |      
|                                                                       | Balance, beginning of year             |  |           | 160    |        |   |           | 22    |         |  |        | 160   |   |   |        | 22    |  
|                                                                       | Exercise of warrants                   |  |           | (160   | )      |   |           | (22   | )       |  |        |      |   |   |        |      |  
|                                                                       |                                        |  |           |        |        |   |           |       |         |  |        |       |   |   |        |       |  
|                                                                       | Balance, end of year                   |  |           |       |        |   |           |      |         |  |        | 160   |   |   |        | 22    |  
|                                                                       |                                        |  |           |        |        |   |           |       |         |  |        |       |   |   |        |       |  
|Series F warrants:                                                     |                                        |  |           |        |        |   |           |       |         |  |        |       |   |   |        |      
|                                                                       | Issued during the year (notes 2 and 8) |  |           | 30     |        |   |           | 272   |         |  |        |      |   |   |        |      |  
|                                                                       |                                        |  |           |        |        |   |           |       |         |  |        |       |   |   |        |       |  
|Total capital stock                                                    |                                        |  |           |        |        |   | 8,720     |       |         |  |        |       |   |   | 6,477  |      
|                                                                       |                                        |  |           |        |        |   |           |       |         |  |        |       |   |   |        |       |  
|Retained earnings, beginning of year                                   |                                        |  |           |        |        |   | 51,133    |       |         |  |        |       |   |   | 42,175 |      
|Net income                                                             |                                        |  |           |        |        |   | 18,078    |       |         |  |        |       |   |   | 15,485 |      
|Excess of repurchase price of common
shares over stated value (note 8) |                                        |  |           |        |        |   | (16,842   | )     |         |  |        |       |   |   | (6,527 | )    
|                                                                       |                                        |  |           |        |        |   |           |       |         |  |        |       |   |   |        |       |  
|Retained earnings, end of year                                         |                                        |  |           |        |        |   | 52,369    |       |         |  |        |       |   |   | 51,133 |      
|                                                                       |                                        |  |           |        |        |   |           |       |         |  |        |       |   |   |        |       |  
|Total shareholders equity                                             |                                        |  |           |        |        | $ | 61,089    |       |         |  |        |       |   | $ | 57,610 |      
|                                                                       |                                        |  |           |        |        |   |           |       |         |  |        |       |   |   |        |       |  

See accompanying notes to consolidated financial statements.

F-31



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##### Table of Contents



CRYPTOLOGIC INC.
Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)

Years ended December 31, 2001 and 2000

|                                                                        |                                                       |                                      |         |         |        |      |        |        |        |  
|----------------------------------------------------------------------- | ----------------------------------------------------- | ------------------------------------ | ------- | ------- | ------ | ---- | ------ | ------ | ------ | -
|                                                                        |                                                       |                                      |         | 2001    |        | 2000
|                                                                        |                                                       |                                      |         |         |        |     
|Cash flows from (used in) operating activities:                         |                                                       |                                      |         |         |        |      |        |       
|                                                                        | Net income                                            |                                      | $       | 18,078  |        |      | $      | 15,485 |       
|                                                                        | Amortization which does not involve cash              |                                      |         | 353     |        |      |        | 227    |       
|                                                                        | Change in operating assets and liabilities:           |                                      |         |         |        |      |        |        |       
|                                                                        |                                                       | Restricted cash                      |         |         | (2,800 | )    |        |        | (8,960 | )
|                                                                        |                                                       | Reserve with a credit card processor |         |         | 1,073  |      |        |        | (586   | )
|                                                                        |                                                       | Accounts receivable                  |         |         | 813    |      |        |        | (1,487 | )
|                                                                        |                                                       | Income taxes                         |         |         | (477   | )    |        |        | (775   | )
|                                                                        |                                                       | Prepaid expenses and other           |         |         | 71     |      |        |        | 181    |  
|                                                                        |                                                       | Accounts payable                     |         |         | 499    |      |        |        | 591    |  
|                                                                        |                                                       | Accrued liabilities                  |         |         | 513    |      |        |        | 587    |  
|                                                                        |                                                       | Funds held on deposit                |         |         | 1,449  |      |        |        | 722    |  
|                                                                        |                                                       |                                      |         |         |        |      |        |        |       
|                                                                        |                                                       |                                      | 19,572  |         |        |      | 5,985  |       
|Cash flows from (used in) financing activities:                         |                                                       |                                      |         |         |        |      |        |       
|                                                                        | Issue of capital stock                                |                                      |         | 2,415   |        |      |        | 2,974  |       
|                                                                        | Repurchase of common shares                           |                                      |         | (17,286 | )      |      |        | (6,689 | )     
|                                                                        |                                                       |                                      |         |         |        |      |        |        |       
|                                                                        |                                                       |                                      | (14,871 | )       |        |      | (3,715 | )     
|                                                                        |                                                       |                                      |         |         |        |      |        |        |       
|Cash flows from (used in) investing activities:                         |                                                       |                                      |         |         |        |      |        |       
|                                                                        | Purchase of domain names                              |                                      |         | (20     | )      |      |        |       |       
|                                                                        | Purchase of capital assets                            |                                      |         | (2,420  | )      |      |        | (551   | )     
|                                                                        | Acquisition, net of cash acquired of $181 (note 2)    |                                      |         | (1,085  | )      |      |        |       |       
|                                                                        | Investments                                           |                                      |         | (1,050  | )      |      |        |       |       
|                                                                        |                                                       |                                      |         |         |        |      |        |        |       
|                                                                        |                                                       |                                      | (4,575  | )       |        |      | (551   | )     
|                                                                        |                                                       |                                      |         |         |        |      |        |        |       
|Increase in cash and cash equivalents                                   |                                                       |                                      | 126     |         |        |      | 1,719  |       
|Cash and cash equivalents, beginning of year                            |                                                       |                                      | 42,696  |         |        |      | 40,977 |       
|                                                                        |                                                       |                                      |         |         |        |      |        |        |       
|Cash and cash equivalents, end of year                                  |                                                       | $                                    | 42,822  |         |        | $    | 42,696 |       
|                                                                        |                                                       |                                      |         |         |        |      |        |        |       
|Supplemental cash flow information:                                     |                                                       |                                      |         |         |        |      |        |       
|                                                                        | Income taxes paid                                     |                                      | $       | 1,616   |        |      | $      | 3,115  |       
|                                                                        | Interest received                                     |                                      |         | 2,331   |        |      |        | 3,641  |       
|                                                                        |                                                       |                                      |         |         |        |      |        |        |       
|Supplemental disclosure relating to financing
and investing activities: |                                                       |                                      |         |         |        |      |        |       
|                                                                        | Acquisition of investments                            |                                      | $       |        |        |      | $      | 350    |       
|                                                                        | Issuance of warrants on business acquisition (note 2) |                                      |         | 272     |        |      |        |       |       
|                                                                        |                                                       |                                      |         |         |        |      |        |        |       

See accompanying notes to consolidated financial statements.

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##### Table of Contents



CRYPTOLOGIC INC.
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share disclosure and where indicated otherwise)

Years ended December 31, 2001 and 2000

CryptoLogic Inc. (the Company) is a software development company with leading
proprietary commerce-enabling technology, permitting secure, reliable,
high-speed and private financial transactions over the Internet. The Companys
software is currently being used for electronic commerce and on-line gaming.
Substantially all of the Companys revenue is earned in U.S. dollars from
licensing fees and support services from licensees located outside of North
America. During the year, 71% (2000  74%) of the Companys revenue was earned
from licensees that form a related group. The Company reports its results in
U.S. dollars.



|1. |  | Significant accounting policies:                                                                                                                                                       
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles. A summary of
significant accounting policies is set out below:



| | (a) |  | Basis of presentation:                                                                                                                                                                                                                                                                                                                                   
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant
inter-company balances and transactions have been eliminated.                                                                                                                                                               
|
| | (b) |  | Revenue recognition:                                                                                                                                                                                                                                                                                                                                     
|
| |     |  | Revenue from providing software and support services to licensees is
recognized on a daily basis based on the agreements with the licensees.
Revenue from the customization of the software graphics, sound and
texts to the specifications of the licensees is recognized on a
straight-line basis over the term of the software and support
agreements.
|
| | (c) |  | Cash and cash equivalents:                                                                                                                                                                                                                                                                                                                               
|
| |     |  | Cash and cash equivalents include highly liquid investments with
original maturity dates of 90 days or less, and are stated at cost,
which approximates market value.                                                                                                                                                                                    
|
| | (d) |  | Investments:                                                                                                                                                                                                                                                                                                                                             
|
| |     |  | Investments are stated at cost. If there is a loss in value of an
investment that is other than a temporary decline, the investment will
be written down to recognize the loss.                                                                                                                                                                          

F-33



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##### Table of Contents



CRYPTOLOGIC INC.
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share disclosure and where indicated otherwise)

Years ended December 31, 2001 and 2000



|1. |  | Significant accounting policies (continued):
|-- |  | --------------------------------------------



| | (e) |  | Capital assets:                                                                                                                                                                            
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Capital assets are stated at cost less accumulated amortization.
Amortization, based on the estimated useful lives of the assets, is
provided using the following methods and annual rates:

|                               |  |                     |  |               |     |   |  | 
|------------------------------ |  | ------------------- |  | ------------- | --- | - |  | 
|Asset                          |  | Basis               |  | Rate         
|                               |  |                     |  |              
|Computer equipment             |  | Diminishing balance |  |               | 30  | %
|Office furniture and equipment |  | Diminishing balance |  |               | 20  | %
|Computer software              |  | Straight line       |  |               | 100 | %
|Leasehold improvements         |  | Straight line       |  | Term of lease



| | (f) |  | Research and development:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Research costs are expensed as incurred. Costs related to the
development of software are expensed as incurred unless such costs meet
the criteria for deferral and amortization under generally accepted
accounting principles. To December 31, 2001, the Company has not
deferred any software development costs.                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (g) |  | Income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |     |  | The Company uses the asset and liability method of accounting for
income taxes. Future tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss carryforwards.
Future tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on future tax assets and liabilities of a change in tax rates is
recognized in income in the year that includes the enactment date.

F-34



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##### Table of Contents



CRYPTOLOGIC INC.
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share disclosure and where indicated otherwise)

Years ended December 31, 2001 and 2000



|1. |  | Significant accounting policies (continued):
|-- |  | --------------------------------------------



| | (h)  |  | Stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |      |  | The Company has a stock option plan for directors, officers, other key
employees and consultants that is described in note 9. The Company
follows the intrinsic value method of accounting for stock options.
Under this method, compensation expense is recognized over the vesting
period of stock options that are granted with an exercise price below
the fair market value of the underlying common shares at the date of
grant. Consideration received by the Company on the exercise of stock
options is recorded as share capital.
|
| | (i)  |  | Use of estimates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |      |  | The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the year. Actual amounts could differ from those
estimates.                                                                                                       
|
| | (j)  |  | Foreign currency translation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |      |  | Monetary items denominated in other than U.S. dollars are translated
into U.S. dollars at exchange rates in effect at the balance sheet
dates, and non-monetary items are translated at rates of exchange in
effect when the assets were acquired or obligations incurred. Revenue
and expenses are translated at rates in effect at the time of the
transactions. Foreign exchange gains and losses are included in net
income.                                                                                                           
|
| | (k)  |  | Intangible assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |      |  | Intangible assets consists of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | (i)  |  | Customer list represents a database of registered
subscribers to the WinnerOnLine website acquired in the purchase
of ALI Online Inc. (ALI). Amortization is provided for on a
straight-line basis over three years.                                                                                                                                                                                                                                                                                                                     
|
| | (ii) |  | Domain names are amortized on a straight-line basis over
five years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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##### Table of Contents



CRYPTOLOGIC INC.
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share disclosure and where indicated otherwise)

Years ended December 31, 2001 and 2000



|1. |  | Significant accounting policies (continued):
|-- |  | --------------------------------------------



| | (l) |  | Goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | In August 2001, the Accounting Standards Board of the CICA issued
Handbook Section 1581, Business Combinations, and Section 3062,
Goodwill and Other Intangible Assets. Under Section 1581, the
purchase method should be used to account for all business combinations
initiated on or after July 1, 2001. Under Section 1581, intangible
assets acquired in a business combination should be identified and
recognized apart from goodwill when they arise from either contractual
or other legal rights or they can be separated from the acquired
enterprise and sold, transferred, licensed, rented or exchanged, either
individually or with a group of related assets or liabilities.
|
| |     |  | For business combinations consummated on or after July 1, 2001
accounted for by the purchase method, goodwill and intangible assets
with indefinite lives are not amortized, and intangible assets with a
finite life are amortized over their useful life. Until Section 3062
is adopted in its entirety, these assets must be tested for impairment
using the same impairment tests as those applied to previously
recognized goodwill and intangible assets.                                                                                                                                                                                                                                 
|
| |     |  | Goodwill and other intangible assets acquired prior to July 1, 2001,
continue to be amortized and tested for impairment in accordance with
Section 1580, Business Combinations, and Section 3060, Capital Assets,
until adoption of Section 3062. Upon adoption of Section 3062, the
Company will perform transitional impairment tests on goodwill.                                                                                                                                                                                                                                                                                                                                            
|
| |     |  | The provisions of Section 1581 have been applied to the acquisition of
ALI described in note 2. Goodwill represents the excess of the cost of
an acquired business over the net of the amounts assigned to assets
acquired and liabilities assumed. For the period ended December 31,
2001, the Company assessed impairment of goodwill using undiscounted
cash flows provided by the operations of the acquired business and has
determined that there was no impairment in value.                                                                                                                                                                                                             

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##### Table of Contents



CRYPTOLOGIC INC.
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share disclosure and where indicated otherwise)

Years ended December 31, 2001 and 2000



|1. |  | Significant accounting policies (continued):
|-- |  | --------------------------------------------



| | (m) |  | Earnings per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | On January 1, 2001, the Company adopted the new recommendations issued
by The Canadian Institute of Chartered Accountants with respect to
earnings per share. The new recommendations require the use of the
treasury stock method in computing diluted earnings per share,
replacing the imputed interest method. The treasury stock method is a
method of recognizing the use of proceeds that could be obtained upon
the exercise of options and warrants in computing diluted earnings per
share. It assumes that any proceeds would be used to purchase its
common shares at the average market price during the year being
reported on. In accordance with these new recommendations, all prior
period comparative earnings per share information has been restated and
had no significant impact.
|
| | (n) |  | Comparative figures:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |     |  | Interest income has been reclassified to reflect the Companys current
basis of presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



|2. |  | Acquisition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On October 1, 2001, the Company entered into an agreement to acquire 100%
of the shares of ALI, a gaming content provider operating the WinnerOnLine
web site, for cash of up to $2.25 million, of which $1.25 million was paid
on October 1, 2001, as well as the issuance of warrants to acquire 30,000
common shares of the Company valued at $272,000 using an option pricing
model. The exercise price of the warrants is Cdn. $23.00 per share. The
remaining purchase price will be payable over two years ($0.6 million on
October 1, 2002; $0.4 million on October 1, 2003) and is subject to
adjustment based on net income targets. This consideration will be
recorded when the amounts are due and payable.

F-37



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##### Table of Contents



CRYPTOLOGIC INC.
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share disclosure and where indicated otherwise)

Years ended December 31, 2001 and 2000



|2. |  | Acquisition (continued):                                                                                                                                                                                                                                                                   
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The acquisition has been accounted for by the purchase method with the
fair value of the consideration paid being allocated to the fair value of
the identifiable assets and liabilities acquired on October 1, 2001. The
following is a summary of the net assets acquired at fair values:

|                              |                   |   |       |       | 
|----------------------------- | ----------------- | - | ----- | ----- | 
|Current assets                |                   | $ | 256   |      
|Capital assets                |                   |   | 15    |      
|Customer list                 |                   |   | 315   |      
|Domain names and other rights |                   |   | 30    |      
|Goodwill                      |                   |   | 1,040 |      
|                              |                   |   |       |      
|                              |                   |   | 1,656 |      
|Liabilities assumed           |                   |   | (118  | )    
|                              |                   |   |       |      
|Net assets acquired           |                   | $ | 1,538 |      
|                              |                   |   |       |      
|Purchase consideration:       |                   |   |       |      
|                              | Cash              |   | $     | 1,250 | 
|                              | Acquisition costs |   |       | 16    | 
|                              | Series F warrants |   |       | 272   | 
|                              |                   |   |       |      
|                              |                   | $ | 1,538 |      
|                              |                   |   |       |      



|3. |  | Restricted cash:                                                                                                                                                                        
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Restricted cash is held by the Companys bank as security for letters of
credit of equivalent amounts granted to foreign banks that process credit
card transactions.                   
|  
|4. |  | Reserve with a credit card processor:                                                                                                                                                   
|  
|   |  | The terms of the agreement with a credit card processor require the
Company to maintain U.S. dollar-denominated funds for reserves in
non-interest bearing accounts with this processor.

F-38



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##### Table of Contents



CRYPTOLOGIC INC.
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share disclosure and where indicated otherwise)

Years ended December 31, 2001 and 2000



|5. |  | Investments:
|-- |  | ------------

|                                                       |  |      |       |      |  |   |       | 
|------------------------------------------------------ |  | ---- | ----- | ---- |  | - | ----- | 
|                                                       |  | 2001 |       | 2000
|                                                       |  |      |       |     
|iPayment Technologies, Inc. (formerly Creditcards.com) |  | $    | 400   |      |  | $ | 400   | 
|HIP Interactive Corp.                                  |  |      | 680   |      |  |   | 680   | 
|Forty-Ninth Parallel Inc.                              |  |      | 350   |      |  |   | 350   | 
|Dot Com Entertainment Group Inc.                       |  |      | 921   |      |  |   |      | 
|LasVegasFromHome.com Entertainment Inc.                |  |      | 129   |      |  |   |      | 
|                                                       |  |      |       |      |  |   |       | 
|                                                       |  | $    | 2,480 |      |  | $ | 1,430 | 
|                                                       |  |      |       |      |  |   |       | 



| |  | iPayment Technologies, Inc. is in the business of credit card transaction
processing, primarily focused on internet-based merchants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The investment in publicly listed HIP Interactive Corp. (HIP) arose on
the sale of Gamesmania Inc. (Gamesmania) during 1999. The investment in
HIP is comprised of 1,000,000 common shares and 250,000 warrants. Under
the terms of the agreement, the 848,300 escrowed shares at December 31,
2001 will be released from escrow as follows: 282,733 common shares on
March 10, 2002; 282,733 common shares on March 10, 2003; and 282,834
common shares on March 10, 2004. Each warrant entitles the Company to
purchase one common share of HIP for Cdn. $1.00 and expires on December 9,
2002. HIP is primarily in the e-commerce business selling video games and
consumer PC software.
|
| |  | On November 3, 2000, the Company acquired common shares in Forty-Ninth
Parallel Inc. in settlement of $350,000 owed to the Company by Forty-Ninth
Parallel Inc. Forty-Ninth Parallel Inc. is in the business of advising on
mergers and acquisitions.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | In March 2001, the Company acquired, 1,055,700 common shares for $921,000
representing a 9.9% interest in publicly listed Dot Com Entertainment
Group Inc. (DCEG), a provider of Java-based bingo and casino software.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | In April 2001, the Company entered into a debenture agreement with
LasVegasHome.com Entertainment Inc., a poker licensee of WagerLogic Inc.
(a wholly owned subsidiary of Cryptologic Inc.), whereby the Company is
entitled to full repayment of the principal sum of Cdn. $0.2 million, plus
interest at a rate of 9% per annum. The principal is due April 26, 2002
and the interest is due monthly.                                                                                                                                                                                                                                                                                        

F-39



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##### Table of Contents



CRYPTOLOGIC INC.
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share disclosure and where indicated otherwise)

Years ended December 31, 2001 and 2000



|6. |  | Capital assets:
|-- |  | ---------------

|                               |  |      |       |              |  |             |       |          |  |   |       | 
|------------------------------ |  | ---- | ----- | ------------ |  | ----------- | ----- | -------- |  | - | ----- | 
|                               |  |      |       |              |  | Accumulated |       | Net book
|2001                           |  | Cost |       | amortization |  | value      
|                               |  |      |       |              |  |            
|Computer equipment             |  | $    | 2,703 |              |  | $           | 543   |          |  | $ | 2,160 | 
|Office furniture and equipment |  |      | 404   |              |  |             | 103   |          |  |   | 301   | 
|Computer software              |  |      | 701   |              |  |             | 389   |          |  |   | 312   | 
|Leasehold improvements         |  |      | 332   |              |  |             | 156   |          |  |   | 176   | 
|                               |  |      |       |              |  |             |       |          |  |   |       | 
|                               |  | $    | 4,140 |              |  | $           | 1,191 |          |  | $ | 2,949 | 
|                               |  |      |       |              |  |             |       |          |  |   |       | 

|                               |  |      |       |              |  |             |     |          |  |   |     | 
|------------------------------ |  | ---- | ----- | ------------ |  | ----------- | --- | -------- |  | - | --- | 
|                               |  |      |       |              |  | Accumulated |     | Net book
|2000                           |  | Cost |       | amortization |  | value      
|                               |  |      |       |              |  |            
|Computer equipment             |  | $    | 851   |              |  | $           | 348 |          |  | $ | 503 | 
|Office furniture and equipment |  |      | 242   |              |  |             | 54  |          |  |   | 188 | 
|Computer software              |  |      | 389   |              |  |             | 389 |          |  |   |    | 
|Leasehold improvements         |  |      | 223   |              |  |             | 75  |          |  |   | 148 | 
|                               |  |      |       |              |  |             |     |          |  |   |     | 
|                               |  | $    | 1,705 |              |  | $           | 866 |          |  | $ | 839 | 
|                               |  |      |       |              |  |             |     |          |  |   |     | 



|7. |  | Intangible assets:
|-- |  | ------------------

|              |  |      |     |              |  |             |    |          |  |   |     | 
|------------- |  | ---- | --- | ------------ |  | ----------- | -- | -------- |  | - | --- | 
|              |  |      |     |              |  | Accumulated |    | Net book
|2001          |  | Cost |     | amortization |  | value      
|              |  |      |     |              |  |            
|Customer list |  | $    | 315 |              |  | $           | 26 |          |  | $ | 289 | 
|Domain names  |  |      | 50  |              |  |             | 2  |          |  |   | 48  | 
|              |  |      |     |              |  |             |    |          |  |   |     | 
|              |  | $    | 365 |              |  | $           | 28 |          |  | $ | 337 | 
|              |  |      |     |              |  |             |    |          |  |   |     | 

F-40



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##### Table of Contents



CRYPTOLOGIC INC.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars, except per share disclosure and where indicated otherwise)

Years ended December 31, 2001 and 2000



|8. |  | Capital stock:
|-- |  | --------------



| | (a) |  | Authorized:
          Unlimited common shares
| | --- |  | ---------------------------------------------
|



| | (i)   |  | Class A common share purchase warrants:                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |       |  | The holders of the Class A common share purchase warrants were
entitled to purchase up to 5,800,000 common shares at a price of
Cdn. $0.50 per share. These warrants were exercisable, in whole or
in part, at any time and from time to time, on or before January 2,
2001. During 2000, 5,400,000 (1999  400,000) common shares were
issued under the terms of the warrants. As at December 31, 2001 and
2000, no Class A common share purchase warrants were outstanding.
|
| | (ii)  |  | Series C warrants:                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |       |  | Each warrant entitles the holder to purchase one common share at a
price of Cdn. $5.00 per share and expires on February 10, 2002.
During the year, 160,000 (2000  nil) common shares were issued
under the terms of the warrants. As at December 31, 2001, there
were no Series C warrants outstanding.                                                                                                                                                                    
|
| | (iii) |  | Series F warrants:                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |       |  | During 2001, the Company issued Series F warrants to acquire 30,000
common shares of the Company for Cdn. $23.00 per share pursuant to
the acquisition of ALI (note 2). The warrants vest in equal amounts
over a four-year period and expire in October 2005. As at December
31, 2001, none of the warrants had been exercised.                                                                                                                                             
|



| | (b) |  | Substantial issuer bid:
| | --- |  | -----------------------
|



| | (i) |  | Issuer bid completed during 2001:                                                                                                                                                                                                  
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | In April 2001, the Company repurchased and cancelled 977,103 common
shares for a total cost of $12,107,000, of which $11,793,000
representing the excess of purchase price over stated value has been
charged to retained earnings.

F-41



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##### Table of Contents



CRYPTOLOGIC INC.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars, except per share disclosure and where indicated otherwise)

Years ended December 31, 2001 and 2000



|8. |  | Capital stock (continued):
|-- |  | --------------------------



| | (ii) |  | Issuer bid completed subsequent to December 31, 2001:                                                                                                                                                                                                                                                                                                              
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |      |  | On November 12, 2001, the Company offered to repurchase for cash up
to 1,000,000 of its outstanding common shares. The offer was to
have expired December 21, 2001, however, the Company extended the
offer to expire on January 11, 2002. On January 11, 2002, the
Company purchased approximately 1,000,000 shares for a total cost of
approximately $17,500,000.
|



| | (c) |  | Normal course issuer bid:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | In May 1999, the Board of Directors approved the repurchase and
cancellation of up to 425,000 of the Companys outstanding common
shares for the period commencing May 13, 1999 and ending on May 12,
2000. During 2000, the Company repurchased and cancelled 145,500
common shares for a total cost of $2,752,000, of which $2,703,000,
representing the excess of purchase price over stated value, has been
charged to retained earnings.                                                                                                                                  
|
| |     |  | In May 2000, the Board of Directors approved the repurchase and
cancellation of up to 561,000 of the Companys outstanding common
shares for the period commencing May 17, 2000 and ending on May 16,
2001. During 2001, the Company repurchased and cancelled 125,500 (2000
 344,800) common shares for a total cost of $1,283,000 (2000

$3,937,000), of which $1,241,000 (2000  $3,824,000), representing the
excess of purchase price over stated value, has been charged to
retained earnings.                                                                         
|
| |     |  | In May 2001, the Board of Directors approved the repurchase and
cancellation of up to 656,000 of the Companys outstanding common
shares for the period commencing May 18, 2001 and ending on May 17,
2002. During 2001, the Company repurchased and cancelled 275,000
common shares for a total cost of $3,896,000, of which $3,808,000,
representing the excess of purchase price over stated value, has been
charged to retained earnings. Subsequent to December 31, 2001, the
Company has purchased 30,000 common shares to January 25, 2002 for a
total cost of $403,000.

F-42



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##### Table of Contents



CRYPTOLOGIC INC.
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars, except per share disclosure and where indicated otherwise)

Years ended December 31, 2001 and 2000



|9. |  | Stock option plan:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Under the stock option plan, the Company can grant options to directors,
officers, other key employees and consultants to purchase common shares.
The plan, which was amended May 30, 2001, provides that a maximum of
3,115,000 common shares may be issued. The exercise price of the options
may not be less than the fair market value of the underlying common shares
on the date of grant. As at December 31, 2001, the Company had not granted
stock options with an exercise price below the fair market value at the
date of grant. There are 94,000 common shares available to be issued under
the stock option plan as at December 31, 2001. Options typically vest over
a period of three or four years and the term of the options may not exceed
five years.
|  
|   |  | Details of stock option transactions are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                       |  |         |           |           |  |          |       |           |  |  |           |          |  |   |       | 
|-------------------------------------- |  | ------- | --------- | --------- |  | -------- | ----- | --------- |  |  | --------- | -------- |  | - | ----- | 
|                                       |  | 2001    |           | 2000     
|                                       |  |         |           |          
|                                       |  |         |           |           |  | Weighted |       |           |  |  |           | Weighted
|                                       |  |         |           |           |  | average  |       |           |  |  |           | average 
|                                       |  | Number  |           | exercise  |  | Number   |       | exercise 
|                                       |  | of      |           | prices of |  | of       |       | prices of
|                                       |  | options |           | options   |  | options  |       | options  
|                                       |  |         |           |           |  |          |       |          
|                                       |  |         |           |           |  | (Cdn. $) |       |           |  |  |           | (Cdn. $)
|Options outstanding,
beginning of year |  |         | 2,509,175 |           |  | $        | 16.06 |           |  |  | 1,070,950 |          |  | $ | 11.88 | 
|Granted                                |  |         | 438,700   |           |  |          | 25.30 |           |  |  | 1,661,475 |          |  |   | 18.02 | 
|Exercised                              |  |         | (275,336  | )         |  |          | 10.66 |           |  |  | (195,350  | )        |  |   | 8.62  | 
|Forfeited                              |  |         | (274,950  | )         |  |          | 25.93 |           |  |  | (27,900   | )        |  |   | 23.37 | 
|                                       |  |         |           |           |  |          |       |           |  |  |           |          |  |   |       | 
|Options outstanding, end of year       |  |         | 2,397,589 |           |  |          | 17.24 |           |  |  | 2,509,175 |          |  |   | 16.06 | 
|                                       |  |         |           |           |  |          |       |           |  |  |           |          |  |   |       | 
|Options exercisable, end of year       |  |         | 992,972   |           |  | $        | 15.03 |           |  |  | 447,968   |          |  | $ | 11.62 | 
|                                       |  |         |           |           |  |          |       |           |  |  |           |          |  |   |       | 

F-43



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##### Table of Contents



CRYPTOLOGIC INC.
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)

Years ended December 31, 2001 and 2000



|9. |  | Stock option plan (continued):
|-- |  | ------------------------------

|                        |  |                      |           |                      |  |             |     |          |  |  |         |          |  |          |       | 
|----------------------- |  | -------------------- | --------- | -------------------- |  | ----------- | --- | -------- |  |  | ------- | -------- |  | -------- | ----- | 
|                        |  | Options outstanding, |           | Options exercisable,
|                        |  | December 31, 2001    |           | December 31, 2001   
|                        |  |                      |           |                     
|                        |  |                      |           |                      |  | Weighted    |     |          |  |  |         | Weighted
|                        |  |                      |           |                      |  | average     |     |          |  |  |         | average 
|                        |  | Number               |           | remaining            |  | Number      |     | exercise
|Range of exercise price |  | outstanding          |           | life (years)         |  | exercisable |     | price   
|                        |  |                      |           |                      |  |             |     |         
|(Cdn. $)                |  |                      |           |                      |  |             |     |          |  |  |         |          |  | (Cdn. $)
|$  5.00
 $10.00        |  |                      | 251,500   |                      |  |             | 0.5 |          |  |  | 251,500 |          |  | $        | 8.01  | 
|$10.01
 $15.00         |  |                      | 1,370,209 |                      |  |             | 3.4 |          |  |  | 441,526 |          |  |          | 12.86 | 
|$15.01
 $20.00         |  |                      | 244,430   |                      |  |             | 1.0 |          |  |  | 181,930 |          |  |          | 16.97 | 
|$20.01
 $25.00         |  |                      | 158,300   |                      |  |             | 3.5 |          |  |  | 18,300  |          |  |          | 21.41 | 
|$25.01
 $30.00         |  |                      | 42,800    |                      |  |             | 3.3 |          |  |  | 8,333   |          |  |          | 27.92 | 
|$30.01
 $35.00         |  |                      | 148,300   |                      |  |             | 2.8 |          |  |  | 38,200  |          |  |          | 32.02 | 
|$35.01
 $40.00         |  |                      | 38,000    |                      |  |             | 3.0 |          |  |  | 8,500   |          |  |          | 39.86 | 
|$40.01
 $45.00         |  |                      | 123,050   |                      |  |             | 2.3 |          |  |  | 37,683  |          |  |          | 40.20 | 
|$60.00
 $65.00         |  |                      | 21,000    |                      |  |             | 2.2 |          |  |  | 7,000   |          |  |          | 64.30 | 
|                        |  |                      |           |                      |  |             |     |          |  |  |         |          |  |          |       | 
|                        |  |                      | 2,397,589 |                      |  |             | 2.7 |          |  |  | 992,972 |          |  |          | 15.03 | 
|                        |  |                      |           |                      |  |             |     |          |  |  |         |          |  |          |       | 



|10. |  | Commitments and contingencies:
|--- |  | ------------------------------



| | (a) |  | The Company has entered into lease agreements for premises expiring at various periods
up to June 2006. The future minimum annual rental payments on the operating leases are
as follows:
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|     |  |   |     | 
|---- |  | - | --- | 
|2002 |  | $ | 479 | 
|2003 |  |   | 436 | 
|2004 |  |   | 200 | 
|2005 |  |   | 81  | 
|2006 |  |   | 36  | 
|     |  |   |     | 

F-44



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##### Table of Contents



CRYPTOLOGIC INC.
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)

Years ended December 31, 2001 and 2000



|10. |  | Commitments and contingencies (continued):
|--- |  | ------------------------------------------



| | (b) |  | The Company and its subsidiaries are involved in certain litigation arising out of the
ordinary course and conduct of business. Although such matters cannot be predicted with
certainty, management believes the claims are without merit and does not consider the
Companys exposure to such litigation to have an impact on these financial statements.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|11. |  | Income per common share:                                                                                                                
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Basic and diluted income per share was calculated using the weighted average common
shares and weighted average potential common shares.

|                                                               |  |         |        |      |  |  |        | 
|-------------------------------------------------------------- |  | ------- | ------ | ---- |  |  | ------ | 
|                                                               |  | 2001    |        | 2000
|                                                               |  |         |        |     
|                                                               |  | (000's)
|Weighted average number of common
shares outstanding           |  |         | 13,567 |      |  |  | 13,103 | 
|Weighted average number of common
shares outstanding  diluted |  |         | 14,944 |      |  |  | 15,070 | 
|                                                               |  |         |        |      |  |  |        | 



| |  | Options to purchase 360,000 common shares (2000  298,000) were excluded from
the computation of diluted income per share as the exercise price exceeded
the average market price of common shares in the year ended December 31,
2001.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-45



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##### Table of Contents



CRYPTOLOGIC INC.
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)

Years ended December 31, 2001 and 2000



|12. |  | Income taxes:                                                                                                                                                                                            
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The income tax provision differs from amounts which would be obtained by applying the
Canadian statutory income tax rate to the income before income taxes. The following explains
the major differences:

|                                                                 |                                                          |   |        |        |      |   |        |        |  
|---------------------------------------------------------------- | -------------------------------------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | -
|                                                                 |                                                          |   | 2001   |        | 2000
|                                                                 |                                                          |   |        |        |     
|Income before income taxes                                       |                                                          | $ | 19,284 |        |      | $ | 17,825 |       
|                                                                 |                                                          |   |        |        |      |   |        |       
|Income taxes based on a statutory
rate of 42.12% (2000  43.94%) |                                                          | $ | 8,122  |        |      | $ | 7,833  |       
|Increase (decrease) in income taxes
resulting from:              |                                                          |   |        |        |      |   |        |       
|                                                                 | Lower effective income tax rates of
foreign subsidiaries |   |        | (6,913 | )    |   |        | (6,322 | )
|                                                                 | Non-recognition of tax benefit of losses                 |   |        | 88     |      |   |        | 404    |  
|                                                                 | Other                                                    |   |        | (91    | )    |   |        | 425    |  
|                                                                 |                                                          |   |        |        |      |   |        |       
|Actual income tax expense                                        |                                                          | $ | 1,206  |        |      | $ | 2,340  |       
|                                                                 |                                                          |   |        |        |      |   |        |       



| |  | The tax effects of temporary differences that give rise to significant
portions of the future tax assets and future tax liabilities at December 31,
2001 and 2000 are as follows:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                   |                                          |  |      |     |      |  |     |     |  
|------------------ | ---------------------------------------- |  | ---- | --- | ---- |  | --- | --- | -
|                   |                                          |  | 2001 |     | 2000
|                   |                                          |  |      |     |     
|Future tax assets: |                                          |  |      |     |      |  |     |    
|                   | Non-capital tax losses carried forward   |  | $    | 471 |      |  | $   | 440 |  
|                   | Deferred financing charges               |  |      | 68  |      |  |     | 63  |  
|                   | Capital assets                           |  |      | (19 | )    |  |     | (16 | )
|                   | Reserves not deductible for income taxes |  |      |    |      |  |     | 50  |  
|                   |                                          |  |      |     |      |  |     |     |  
|                   |                                          |  | 520  |     |      |  | 537 |    
|                   | Less valuation allowance                 |  |      | 520 |      |  |     | 537 |  
|                   |                                          |  |      |     |      |  |     |     |  
|                   | Net future tax assets                    |  | $    |    |      |  | $   |    |  
|                   |                                          |  |      |     |      |  |     |     |  



| |  | There are approximately $1,150 of losses carried forward available to offset
future taxable income and expire between 2005 and 2040.
| |  | ------------------------------------------------------------------------------------------------------------------------------------

F-46



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##### Table of Contents



CRYPTOLOGIC INC.
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)

Years ended December 31, 2001 and 2000



|13. |  | Fair values of financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The carrying values of financial instruments, which consist of cash and cash equivalents,
restricted cash, reserve with a credit card processor, accounts receivable, accounts payable,
accrued liabilities and funds held on deposit, approximate their fair values due to the short-term
nature of these instruments.                                                                                                                                                                    
|   
|    |  | The fair value of long-term
investments in HIP and DCEG approximates their carrying value. The fair value of remaining long-term investments is not determinable as the companies are
privately held.                                                                                                                                                                                                                                                                                      
|   
|14. |  | Differences between Canadian and United States generally accepted accounting
principles (GAAP):                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | The Companys consolidated balance sheets and consolidated statements of income and
changes in shareholders equity and cash flows have been prepared in accordance with
Canadian generally accepted accounting principles (Canadian GAAP) which conform, in all
material aspects applicable to the Company, with generally accepted accounting principles in
the United States (U.S. GAAP) during the years presented. Additional disclosures required
under U.S. GAAP are as follows:



| | (a) |  | Stock options expense:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Under U.S. GAAP, there are alternative methods available for accounting for employee
stock options, Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), and Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123). The Company has elected to
follow APB 25 and related interpretations in accounting for its employee stock options. The
determination of compensation expense using the intrinsic value method as specified under
APB 25 is not materially different from the compensation expense determined under
Canadian GAAP.

F-47



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##### Table of Contents



CRYPTOLOGIC INC.
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)

Years ended December 31, 2001 and 2000



|14. |  | Differences between Canadian and United States generally accepted accounting
principles (GAAP) (continued):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | SFAS 123 requires the disclosure of pro forma net income and income per share had the
Company adopted the fair value method as of the beginning of its 1996 fiscal year. Under
SFAS 123, the fair value of stock-based awards to employees is calculated through the use
of option pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Companys stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected time to exercise,
which greatly affect the calculated values.
|   
|    |  | The Companys calculations for options granted were made using the Black-Scholes option
pricing model using a dividend yield of 0% and the following weighted average
assumptions:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                                  |  |      |       |      |  |  |       |  
|--------------------------------- |  | ---- | ----- | ---- |  |  | ----- | -
|                                  |  | 2001 |       | 2000
|                                  |  |      |       |     
|Risk-free interest rate           |  |      | 3.0   | %    |  |  | 6.0   | %
|Expected volatility               |  |      | 100.0 | %    |  |  | 100.0 | %
|Expected life of options in years |  |      | 3.5   |      |  |  | 3.0   |  
|                                  |  |      |       |      |  |  |       |  



| |  | Had compensation expense been determined based on the fair value of the
awards at the grant dates in accordance with the methodology prescribed in
SFAS 123, the Companys net income and earnings per share under U.S. GAAP
for fiscal 2001 and 2000 would have been changed to the following pro
forma amounts:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  |         |   |          |      |       |   |          |      |       |   |        |      |  |   |        |      | 
|--------------------------------- | ------- | - | -------- | ---- | ----- | - | -------- | ---- | ----- | - | ------ | ---- |  | - | ------ | ---- | 
|                                  |         |   | 2001     |      | 2000 
|                                  |         |   |          |      |      
|                                  |         |   | As       |      | Pro   |   | As       |      | Pro  
|                                  |         |   | reported |      | forma |   | reported |      | forma
|                                  |         |   |          |      |       |   |          |      |      
|Net income  U.S. GAAP            |         | $ | 18,078   |      |       | $ | 12,805   |      |       | $ | 15,485 |      |  | $ | 12,521 |     
|                                  |         |   |          |      |       |   |          |      |       |   |        |      |  |   |        |      | 
|Net
income per share 
U.S. GAAP: |         |   |          |      |       |   |          |      |       |   |        |      |  |   |        |     
|                                  | Basic   |   | $        | 1.33 |       |   | $        | 0.94 |       |   | $      | 1.18 |  |   | $      | 0.95 | 
|                                  | Diluted |   |          | 1.21 |       |   |          | 0.86 |       |   |        | 1.03 |  |   |        | 0.83 | 
|                                  |         |   |          |      |       |   |          |      |       |   |        |      |  |   |        |      | 



| |  | The effects on pro forma disclosure of applying SFAS 123 are not likely to
be representative of the effects on pro forma disclosure in future years.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

F-48



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##### Table of Contents



CRYPTOLOGIC INC.
Notes to Consolidated Financial Statements
(In thousands of U.S. dollars, except per share disclosure and where indicated
otherwise)

Years ended December 31, 2001 and 2000



|14. |  | Differences between Canadian and United States generally accepted accounting
principles (GAAP) (continued):
|--- |  | -------------------------------------------------------------------------------------------------------------



| | (b) |  | Comprehensive income:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130,
Reporting Comprehensive Income (SFAS 130). SFAS 130 establishes standards for
the reporting and disclosure of comprehensive income and its components in financial
statements. Components of comprehensive income or loss include net income or loss and
all other changes in other non-owner changes in equity, such as the change in the
cumulative translation adjustment and the unrealized gain or loss for the year on available-for-sale securities. For all periods presented, comprehensive income is the same as net
income.                                                                                                                                                        
|
| | (c) |  | Recent accounting pronouncements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |     |  | In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS 143). This statement addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and for the
associated asset retirement costs. SFAS 143 is effective for the Companys fiscal year
beginning January 1, 2002. The Company does not believe that the adoption of SFAS 143
will have a material impact on its consolidated financial statements.                                                                                                                                                                                                                                                                        
|
| |     |  | In October 2001, the FASB issued SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144). SFAS 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of (SFAS 121) and related literature and establishes a
single accounting model, based on the framework established in SFAS 121, for long-lived
assets to be disposed of by sale. The Company is required to adopt SFAS 144 for its fiscal
year beginning January 1, 2002. The Company does not believe that the adoption of
SFAS 144 will have a material impact on its consolidated financial statements.
|
| |     |  | During April 2001, the Emerging Issues Task Force of the FASB updated EITF 00-25
Vendor Income Statement Characterization of Consideration Paid to a Reseller of the
Vendors Products (EITF 00-25). The Company is required to adopt EITF 00-25 for its
fiscal periods beginning January 1, 2002. The Company is evaluating the impact of EITF
00-25 and has not determined the effect, if any, that adoption of this standard will have on
its consolidated financial statements.                                                                                                                                                                                                                                                                                                  

F-49



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##### Table of Contents



SIGNATURES

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

| |                  |                                                 
| | ---------------- | ------------------------------------------------
| | CRYPTOLOGIC INC.
|
|
| | By               | /s/ Lewis Rose                                  
| |                  |                                                 
| |                  | Lewis Rose
President and Chief Executive Officer

Date: June 13, 2003

53



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##### Table of Contents



CERTIFICATIONS

I, Lewis Rose, President and Chief Executive Officer of CryptoLogic Inc.,
certify that:

1.     I have reviewed this annual report on Form 20-F of CryptoLogic Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary 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;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, 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;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



| | a) | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| | a) | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

| |                                                                
| | ---------------------------------------------------------------
| | /s/ Lewis Rose
Lewis Rose
President and Chief Executive Officer

Date: June 13, 2003

54



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##### Table of Contents



CERTIFICATIONS

I, James Ryan, Chief Financial Officer of CryptoLogic Inc., certify that:

1.     I have reviewed this annual report on Form 20-F of CryptoLogic Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary 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;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, 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;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



| | a) | designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| | a) | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) | any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

| |                                                  
| | -------------------------------------------------
| | /s/ James Ryan
James Ryan
Chief Financial Officer

Date: June 13, 2003

55