O

**UNITED        STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM        20-F**

 

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

         

**OR**

         

**x  ANNUAL REPORT        PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended December 31, 2007**

         

**OR**

         

| **o ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                    SECURITIES EXCHANGE ACT OF 1934** |
|-------------|-----------------------------------------------------------------------------------------------------------------|

         

**OR**

         

| **o ** | **SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                    SECURITIES EXCHANGE ACT OF 1934** |
|-------------|--------------------------------------------------------------------------------------------------------------------|

 

Commission file number: 000-30224

 

**CRYPTOLOGIC LIMITED**

(Exact        name of Registrant as specified in its charter)

 

**Guernsey, Channel Islands**

(Jurisdiction of incorporation or organization)

 

**Alexandra House, The Sweepstakes**

**Ballsbridge, Dublin 4**

**Ireland**

(Address        of principal executive offices)

 

**Stephen Taylor**

**Alexandra House, The Sweepstakes**

**Ballsbridge, Dublin 4**

**Ireland**

**Tel:        +353 1 664 1683 Fax: +353 1 631 9001**

 

(Name,        telephone, e-mail and/or facsimile number and address of contact person)

 

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

 

| Title of each class: |   | Name of each exchangeon which registered:                                  |
|----------------------|--------|----------------------------------------------------------------------------|
| Common Shares        |   | NASDAQ Global Select Market

Toronto Stock Exchange

London 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

 

Indicate        the number of outstanding shares of each of the issuer’s classes of capital or common        stock as of December 31, 2007:   **13,928,231 Common Shares (including 1,114,494        Exchangeable Shares)**

 

Indicate by        check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the        Securities Act:       YesoNox

 

If this        report is an annual or transition report, indicate by check mark if the registrant is not        required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of        1934.      YesoNox

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

| Yesx | Noo |
|------|-----|

 

Indicate by        check mark whether the registrant is a large accelerated filer, an accelerated filer, or a        non-accelerated filer. See definition of “accelerated filer and large accelerated        filer” in Rule 12b-2 of the Exchange Act:

 

| Large accelerated filero | Accelerated filerx | Non-Accelerated Filero |
|--------------------------|--------------------|------------------------|

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

 

| Item 17x | Item 18o |
|----------|----------|

 

Indicate by        check mark which basis of accounting the registrant has used to prepare the financial        statements included in this filing:

 

| oU.S. GAAP | oInternational Financial Reporting Standards as                issued by the International Accounting Standards Board | xOther |
|------------|-----------------------------------------------------------------------------------------------------------------------|--------|

If        “Other” has been checked in response to the previous question, indicate by        check mark which financial statement item the registrant has elected to follow.

| Item 17x | Item 18o |
|----------|----------|

 

If this is        an annual report, indicate by check mark whether the registrant is a shell company (as        defined in Rule 12b-2 of the Exchange Act).

| Yeso | Nox |
|------|-----|

 

 

 

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**Table        of Contents**

 

| PART I                                                                                                   | 1                                                  |   |
|----------------------------------------------------------------------------------------------------------|----------------------------------------------------|--------|
| ITEM 1. IDENTITY OF DIRECTORS, SENIOR                    MANAGEMENT AND ADVISERS                         | 2                                                  |   |
| ITEM 2. OFFER STATISTICS AND EXPECTED                    TIMETABLE                                       | 2                                                  |   |
| ITEM 3. KEY INFORMATION                                                                                  | 2                                                  |   |
| SELECTED FINANCIAL                    DATA                                                               | 2                                                  |   |
| RISK FACTORS                                                                                             | 4                                                  |   |
| ITEM 4. INFORMATION ON THE                    COMPANY                                                    | 14                                                 |   |
| A. HISTORY AND DEVELOPMENT OF THE                    COMPANY                                             | 14                                                 |   |
| B. BUSINESS                    OVERVIEW                                                                  | 17                                                 |   |
| C. ORGANIZATIONAL                    STRUCTURE                                                           | 25                                                 |   |
| D. PROPERTY, PLANTS AND                    EQUIPMENT                                                     | 26                                                 |   |
| ITEM 4A. UNRESOLVED STAFF                    COMMENTS                                                    | 26                                                 |   |
| ITEM 5. OPERATING AND FINANCIAL REVIEW AND                    PROSPECTS                                  | 26                                                 |   |
| A. OPERATING RESULTS                                                                                     | 26                                                 |   |
| B. LIQUIDITY AND CAPITAL                    RESOURCES                                                    | 32                                                 |   |
| C. RESEARCH AND DEVELOPMENT                                                                              | 37                                                 |   |
| D. TREND INFORMATION                                                                                     | 37                                                 |   |
| E. OFF-BALANCE SHEET                    ARRANGEMENTS                                                     | 38                                                 |   |
| F. CONTRACTUAL                    OBLIGATIONS                                                            | 38                                                 |   |
| G. SAFE HARBOR                                                                                           | 38                                                 |   |
| ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND                    EMPLOYEES                                    | 38                                                 |   |
| A.                                                                                                       | DIRECTORS AND SENIOR                    MANAGEMENT | 38     |   |
| B.                                                                                                       | COMPENSATION                                       | 41     |   |
| C.                                                                                                       | BOARD PRACTICES                                    | 46     |   |
| D.                                                                                                       | EMPLOYEES                                          | 47     |   |
| E.                                                                                                       | SHARE OWNERSHIP                                    | 47     |   |
| ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY                    TRANSACTIONS                             | 49                                                 |   |
| A. MAJOR SHAREHOLDERS                                                                                    | 49                                                 |   |
| B. RELATED PARTY                    TRANSACTIONS                                                         | 50                                                 |   |
| ITEM 8. FINANCIAL INFORMATION                                                                            | 51                                                 |   |
| A. CONSOLIDATED STATEMENTS AND OTHER                    FINANCIAL INFORMATION                            | 51                                                 |   |
| ITEM 9. THE OFFER AND LISTING                                                                            | 52                                                 |   |
| ITEM 10. ADDITIONAL INFORMATION                                                                          | 53                                                 |   |
| A. SHARE CAPITAL                                                                                         | 53                                                 |   |
| B. MEMORANDUM AND ARTICLES OF                    ASSOCIATION                                             | 53                                                 |   |
| C. MATERIAL CONTRACTS                                                                                    | 55                                                 |   |
| D. EXCHANGE CONTROLS                                                                                     | 56                                                 |   |
| E. TAXATION                                                                                              | 56                                                 |   |
| F. DIVIDENDS AND PAYING                    AGENTS                                                        | 66                                                 |   |
| G. STATEMENT BY EXPERTS                                                                                  | 66                                                 |   |
| H. DOCUMENTS ON DISPLAY                                                                                  | 66                                                 |   |
| I. SUBSIDIARY INFORMATION                                                                                | 66                                                 |   |
| ITEM 11. QUANTITATIVE AND QUALITATIVE                    DISCLOSURES ABOUT MARKET RISK                   | 66                                                 |   |
| ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN                    EQUITY SECURITIES                       | 67                                                 |   |
| PART II                                                                                                  | 67                                                 |   |
| ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND                    DELINQUENCIES                              | 67                                                 |   |
| ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS                    OF SECURITY HOLDERS AND USE OF PROCEEDS | 67                                                 |   |
| PART III                                                                                                 | 68                                                 |   |
| ITEM 15. CONTROLS AND                    PROCEDURES                                                      | 68                                                 |   |
| ITEM 16A. AUDIT COMMITTEE FINANCIAL                    EXPERT                                            | 70                                                 |   |
| ITEM 16B. CODE OF ETHICS                                                                                 | 70                                                 |   |
| ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND                    SERVICES                                      | 71                                                 |   |
| ITEM 16D. EXEMPTIONS FROM THE LISTING                    STANDARDS FOR AUDIT COMMITTEES                  | 72                                                 |   |
| ITEM 16E. PURCHASES OF EQUITY SECURITIES BY                    THE ISSUER AND AFFILIATED PURCHASERS      | 72                                                 |   |
| ITEM 17. FINANCIAL STATEMENTS                                                                            | 72                                                 |   |
| ITEM 18. FINANCIAL STATEMENTS                                                                            | 72                                                 |   |
| ITEM 19. EXHIBITS                                                                                        | 73                                                 |   |
| SCHEDULE II – VALUATION AND QUALIFYING                    ACCOUNTS                                 | 74                                                 |   |
|                                                                                                          |                                                    |        |  |  |

 

 

i

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**PART I**

 

Introduction

 

This annual report on Form 20-F relates to the common shares of CryptoLogic        Limited, a company incorporated under the laws of Guernsey with its corporate headquarters        in Dublin, Ireland where it operates and is resident for tax purposes.

 

In this annual report, except as otherwise indicated or as the context        otherwise requires, the “Company”, “we”, “us” and        “our” refers to CryptoLogic Limited and its operating subsidiaries.

         

Pursuant to a business reorganization implemented by way of an Ontario,        Canada Superior Court of Justice court approved plan of arrangement (the        “Arrangement”) and approved by the shareholders on May 24, 2007, CryptoLogic        Limited acquired control over all of the issued and outstanding common shares of        CryptoLogic Inc., an Ontario company, which through the Arrangement became an indirect        subsidiary of CryptoLogic Limited. As part of the Arrangement, the Company issued either an        equivalent amount of CryptoLogic Limited common shares (“Common Shares”) or, in        the case of taxable Canadian residents, exchangeable shares (“Exchangeable        Shares”) of CryptoLogic Exchange Corporation (“CEC”), an indirect        subsidiary of CryptoLogic Limited. The Exchangeable Shares are, as nearly as practicable,        the economic equivalent of the Common Shares. The holders of Exchangeable Shares and Common        Shares participate equally in voting and dividends. No additional shares of CEC have been        or will be issued. CryptoLogic Limited’s Common Shares trade on the NASDAQ Global        Select Market (symbol: CRYP), Toronto Stock Exchange (symbol: CRY), and the London Stock        Exchange’s Main Market (symbol: CRP). CEC Exchangeable Shares trade on the Toronto        Stock Exchange (symbol: CXY). Further information regarding the Arrangement is contained in        the Management Information Circular dated April 23, 2007, which is incorporated herein by        reference to Exhibit 4.1 to Form 6-K filed by the Company with the SEC on April 30,        2007.

         

For accounting purposes, the Arrangement has been accounted for using the        continuity of interest method, which recognizes the Company as the successor entity to        CryptoLogic Inc. Accordingly, financial information presented in the annual report reflects        the financial position, results of operations and cash flows as if the Company has always        carried on the business formerly carried on by CryptoLogic Inc., with all assets and        liabilities recorded at the carrying values of CryptoLogic Inc. The interest held by CEC        shareholders has been presented as a minority interest in the consolidated financial        statements, as required under generally accepted accounting principles        (“GAAP”).

 

In this annual report, all currency refers to U.S. Dollars (US$), and all        information is as of December 31, 2007, unless indicated otherwise.

 

Accounting Periods and Principles

 

We have prepared our audited annual consolidated financial statements as of        December 31, 2007 and for the five years then ended in U.S. dollars in accordance with        Canadian generally accepted accounting principles (“Canadian GAAP”). The        significant measurement differences between Canadian GAAP and generally accepted accounting        principles in the United States (“U.S. GAAP”) for the years ended December 31,        2007, 2006 and 2005 are disclosed in Note 19 to our audited consolidated financial        statements. 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.

 

1

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Industry        and Market Data

 

Certain general information contained in this annual report concerning the        industry in which the Company operates has been obtained from publicly available        information from third party sources. The Company has not verified the accuracy or        completeness of any information contained in such publicly available information. In        addition, the Company has not determined if there has been any omission by any such third        party to disclose any facts, information or events which may have occurred prior to or        subsequent to the date as of which any such information contained in such publicly        available information has been furnished or which may affect the significance or accuracy        of any information contained in any such information and summarized herein.

 

Cautionary Statement Regarding Forward-Looking Information

 

Certain statements contained in this annual report constitute        forward-looking statements within the meaning of applicable securities laws.        Forward-looking statements may include estimates, plans, expectations, opinions, forecasts,        projections, guidance or other statements that are not statements of fact including,        without limitation, statements regarding the growth of the online gaming industry and        future governmental, legislative and legal developments. When used in this document, the        words “may,” “would,” “could,” “should,”        “will,” “intend,” “plan,” “anticipate,”        “believe,” “estimate,” “expect” and similar        expressions, as they relate to the Company or our management, are intended to identify        forward-looking statements. Such statements reflect the Company’s current views with        respect to future events and are subject to certain risks, uncertainties and assumptions.        Many important factors (including without limitation those set forth in this Form 20-F)        could cause the Company’s actual results, performance or achievements that may be        expressed or implied by such forward-looking statements to vary from those made in this        Form 20-F annual report, or that are otherwise made by or on behalf of the Company. Should        one or more of these risks or uncertainties materialize, or should assumptions underlying        forward-looking statements prove incorrect, actual results may vary materially from those        described herein as intended, planned, anticipated, believed, estimated or expected. The        Company does not intend, and does not assume any obligation, to update these        forward-looking statements.

 

**ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND        ADVISERS**

 

Not Applicable.

 

**ITEM 2. OFFER STATISTICS AND EXPECTED        TIMETABLE**

 

Not Applicable.

 

**ITEM 3. KEY INFORMATION**

 

| **SELECTED FINANCIAL                    DATA** |
|------------------------------------------------|

 

The following financial information of our Company, expressed in U.S.        dollars unless otherwise indicated, 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

|   | 2 |
|--------|---|

 

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for each of        the years ended December 31, 2007, 2006, 2005, 2004 and 2003 have been derived from our        consolidated financial statements.

         

Our audited annual consolidated financial statements as of December 31, 2007        and 2006 and for each of the years ended December 31, 2007, 2006 and 2005 are included in        this annual report.

 

| **For the Years Ended December 31,**          |   | **2007** | **2006** | **2005** | **2004** | **2003** |
|-----------------------------------------------|--------|----------|----------|----------|----------|----------|
|                                          |   |     |     |     |     |     |
| *(In thousands, except per share disclosure)* |
| Revenue                                       |   | 73,659   | 104,022  | 86,307   | 63,714   | 44,211   |
| Net earnings                                  |   | 5,528    | 24,812   | 20,530   | 13,668   | 9,441    |
| Basic earnings per share                      |   | 0.47     | 1.83     | 1.51     | 1.05     | 0.77     |
| Diluted earnings per share                    |   | 0.47     | 1.81     | 1.46     | 1.01     | 0.75     |
| Basic weighted average number of shares       |   | 13,891   | 13,558   | 13,588   | 12,971   | 12,245   |
| Diluted weighted average number of shares     |   | 13,907   | 13,731   | 14,067   | 13,586   | 12,604   |
| EBITDA(1)                                     |   | 7,841    | 27,176   | 22,303   | 17,337   | 11,496   |
| Net cash(2)                                   |   | 77,504   | 128,440  | 99,134   | 85,964   | 67,307   |
| Working capital(3)                            |   | 68,199   | 93,787   | 73,569   | 62,818   | 44,733   |
| Total assets                                  |   | 170,633  | 184,520  | 154,398  | 124,222  | 86,066   |
| Shareholders' equity                          |   | 109,306  | 111,584  | 87,225   | 72,087   | 50,546   |
| Share capital                                 |   | 33,407   | 29,096   | 25,171   | 20,380   | 11,350   |
| Dividends per share/quarter(4)                |   | $0.12    | $0.12    | $0.07    | $0.05    | $0.03    |

 

| (1) | Management believes EBITDA (earnings before interest, taxes,                    amortization and minority interest) is a useful supplemental measure of                    performance. However, because EBITDA is not a recognized measure under GAAP and                    does not have a standardized meaning, it may not be comparable across different                    companies. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| CryptoLogic reconciles EBITDA to earnings as follows: |     |     |     |     |     |
|-------------------------------------------------------|----------|----------|----------|----------|----------|
|                                                  | **2007** | **2006** | **2005** | **2004** | **2003** |
| Net earnings                                          | 5,528    | 24,812   | 20,530   | 13,668   | 9,441    |
| Minority interest                                     | 971      | -        | -        | -        | -        |
| Income taxes                                          | 993      | 4,679    | 1,506    | 2,873    | 1,213    |
| Interest                                              | (6,217)  | (7,092)  | (3,627)  | (1,293)  | (691)    |
| Amortization                                          | 6,566    | 4,777    | 3,894    | 2,089    | 1,533    |
| EBITDA                                                | 7,841    | 27,176   | 22,303   | 17,337   | 11,496   |

         

         

| (2) | Net cash is a non-GAAP measure defined by the Company as                    including cash and cash equivalents, short-term investments, restricted cash                    and security deposits. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| (3) | Working capital is calculated by subtracting current liabilities                    from current assets. |
|-----|----------------------------------------------------------------------------------------------------------|

| (4) | On September 10, 2003, the Board of Directors declared the                    Company’s first quarterly dividend of $0.03 per Common Share (annual rate                    of $0.12), paid on November 24, 2003. On November 4, 2004, the Board approved                    an increase in our quarterly dividend to $0.05 per Common Share (annual rate of                    $0.20). On November 1, 2005, the quarterly rate was increased to $0.07 per                    Common Share (annual rate of $0.28). On May 9, 2006, the Company announced a                    subsequent increase to $0.12 per Common Share per quarter (annual rate of                    $0.48). On February 14, 2007, a quarterly dividend of $0.12 per Common Share                    was announced, the same rate as the prior four quarters and for the remaining                    quarters of 2007. The holders of Exchangeable Shares and Common Shares                    participate equally in voting and dividends. Each future dividend will be                    subject to Board approval based on the Company’s financial                    results. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3 |
|--------|---|

 

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Our financial statements have been prepared in accordance with Canadian        GAAP. The significant measurement differences between Canadian GAAP and U.S. GAAP are        described in the Notes to consolidated financial statements during the years        presented.

         

If the Company had followed U.S. GAAP, certain items in the consolidated        financial statements would have been reported as follows:

 

| **For the Years Ended December 31,** |   | **2007** | **2006** | **2005** | **2004** | **2003** |
|--------------------------------------|--------|----------|----------|----------|----------|----------|
| *(In thousands)*                     |
| Net earnings                         |   | 5,640    | 25,636   | 20,530   | 13,668   | 8,751    |
| Basic earnings per share             |   | 0.48     | 1.89     | 1.51     | 1.05     | 0.71     |
| Diluted earnings per share           |   | 0.48     | 1.87     | 1.46     | 1.01     | 0.69     |

 

| **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 has been and may continue to be materially affected by changes to, or        interpretation of, government regulation around the world that may apply to online        gaming.

 

The Company and our licensees are subject to        applicable laws in the jurisdictions in which they operate.Our licensees hold government licenses to operate Internet gaming sites in        Malta. 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 have adopted or are in the process of considering legislation to regulate        Internet gaming.

         

While the United Kingdom (“U.K.”) and other European countries        such as Malta and Gibraltar are adopting a regulated online gaming approach, opposing views        are developing in Europe. Some European countries, including Italy, Germany and France        where there are state-owned monopolies, are taking action aimed at banning foreign online        gaming operators to protect their monopolies. Such actions by these European Union        (“EU”) member states are in conflict with a decision of the European Court of        Justice that challenges the monopolies and have prompted the European Commission        (“EC”) to look at creating new legislation that could harmonize online gaming        within the EU, which is in line with the EC’s goal to encourage a free and open        cross-border market. There is no indication that any such directives will be introduced in        the near term. In the meantime, however, the EC has initiated infringement proceedings        against some EU member states in relation to alleged breaches of Articles 43 and 49 of the        EC Treaty (which articles enshrine the principles of freedom of establishment and movement        of services).

         

|   | 4 |
|--------|---|

 

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As companies and consumers involved in Internet gaming are located around        the globe, including our licensees and their players, there is uncertainty regarding which        government has authority to regulate or legislate the industry. On October 13, 2006,        legislation designed to prohibit Internet gaming was enacted in the United States        (“U.S.”), and similar legislation may be adopted in other        jurisdictions.

         

Future government actions may have a material impact on our operations and        financial results. There is a risk that governmental authorities may view us or our        licensees as having violated the local law of their end users, despite the Company’s        requirement that each licensee is licensed to operate an Internet gaming business by the        governmental authority of the country in which the gaming servers associated with the        licensees’ gaming operations are located. Therefore, there is a risk that civil and        criminal 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, advertisers and others involved in the Internet gaming        industry and could involve substantial litigation expense, penalties, fines, injunctions or        other remedies or restrictions being imposed upon us or our licensees or others while        diverting the attention of our key executives. Such proceedings could have a material        adverse effect on our business, revenues, operating results and financial        condition.

         

There can be no assurance that legislation prohibiting Internet gaming or        regulating various aspects of Internet gaming or the Internet gaming industry will not be        proposed and passed in potentially relevant jurisdictions. The burden of compliance with        any such legislation may have a material adverse effect on our business, financial        condition and results of operations.

         

There have recently been a number of legal developments associated with the        manner in which the business of gaming, and in particular, Internet gaming, is treated in        the U.K. and Continental Europe. Some of these developments could have a material adverse        effect on our business, revenues, operating results and financial condition. A brief        summary of the regulatory situation as it relates to our Company in the U.K. and        Continental Europe follows:

         

*United Kingdom*

 

In September 2007, the U.K. Gambling Act, which regulates online gaming for        the first time in that jurisdiction, became effective. Most of the underlying codes in        relation to entities established in the U.K., or marketing into the U.K. have now been        enacted. However, there is no assurance that the U.K. regulatory regime as interpreted by        the Gambling Commission, the Gambling Act’s regulator, will provide a        commercially-viable market and may create restrictions that would have a material adverse        effect on the Company’s customers, business, revenues, operating results and/or        financial condition.

 

*Continental Europe*

 

*France        and Germany*

France and Germany in particular appear to be moving towards imposing        greater restrictions on Internet gaming operators, both by virtue of proposed changes to        legislation and through heightened enforcement measures. It is possible that adverse legal        developments in these two countries could have a material adverse impact on the Company        and/or its licensees.

 

*Italy*

Recent willingness by the Italian government to regulate certain forms of        Internet gaming could be perceived as indicative of a liberalization of the Internet gaming        industry as a whole in that country. However, the regulation has failed to create        attractive market conditions for many operators. As such, notwithstanding the fact that        this market may appear to be liberalizing, in practice, the Italian government

|   | 5 |
|--------|---|

 

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has not        liberalized in a manner, or to a degree, that is helpful to the Company or its licensees.        The Company and its licensees remain at risk that Italy may take enforcement action against        parties whose operations are not licensed pursuant to the regulatory regimes established by        this country.

 

*Spain*

Madrid’s regional government has recently implemented new legislation        to regulate Internet gaming but it only permits services to be supplied by the licensed        entity to Madrid residents. Therefore obtaining a license may be of little commercial value        to any operator. Other regions may follow suit. Spain historically has taken little or no        enforcement action against operators of Internet gaming which are based outside the        jurisdiction. There is no guarantee however that this position will remain the same if the        system of regulation becomes more widespread (so as to create a value in obtaining a        license).

 

*Holland*

In April 2008, a narrow vote by Dutch parliamentarians prevented Holland        Casino, the state-sponsored casino operator and a licensee of the Company, to establish an        Internet gaming site for the Dutch market. While this decision is not expected to have a        material effect on the Company’s business, certain of the Company’s other        licensees presently operate in the Dutch market and the Dutch government has consistently        taken steps to support and protect Holland Casino’s monopoly including by taking        legal action against Internet gaming operators. In the event that the Dutch government        seeks to take further steps to protect Holland Casino by discouraging other operators from        operating in the Dutch marketplace, either through changes in legislation or enforcement        measures, the Company’s licensees (and the Company accordingly) could be adversely        impacted.

 

*Scandinavia*

Governments in most Scandinavian countries have attempted to discourage        their citizens from gambling with online operators by taxing their citizens’        winnings. Generally speaking, winnings realized through a state sponsored operator are not        taxable, but winnings from other sources can be subject to inconsistent application of        taxation law in relation to domestic and non-domestic products in the EU. Until such time        as the tax authorities in the various countries make an official pronouncement on the        manner in which these tax laws will be applied, it is unclear as to what impact these tax        policies will have on the business of the Company’s licensees.

 

*United States*

 

Since the enactment of the Unlawful Internet Gambling Enforcement Act        (“UIGEA”) in October 2006, the Company has prevented its licensees from taking        any wagers from the U.S. The UIGEA made it illegal to accept any funds connected with        unlawful Internet gaming, although some U.S. enforcement agencies claimed that previous        existing legislation similarly outlawed both the supply and related payments. Although the        Company historically derived a majority of its revenues from sources outside of the U.S.,        given that the Company had previously derived licensing revenue and provided payment        processing solutions (through its e-cash services) on behalf of some licensees who took        wagers from the U.S., there is no guarantee that the U.S. Department of Justice will not        seek to prosecute the Company, its officers or directors for alleged historic        transgressions or similarly prosecute its licensees or their directors or shareholders.        Such proceedings could result in criminal penalties, substantial fines, damages and        sequestration of assets. They also could damage the reputation of the Company, divert the        time of the Company’s key executives and have a material adverse effect on the        business, revenues, operating results and/or financial condition of the Company.

 

|   | 6 |
|--------|---|

 

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U.S.        banks have ceased to accept online gaming transactions. This has inhibited the growth of        the industry and our business.

         

With the enactment of the UIGEA in October 2006, financial institutions in        the U.S. ceased to accept online gaming transactions. This event has had a negative impact        on the Internet gaming industry as a whole, on our licensees, and on the Company, as        evidenced by our lower revenues and earnings in 2007. There can be no assurance that other        financial institutions or credit card issuers outside the U.S. will not enact additional        restrictions. Any such developments could have a material adverse effect on our business,        revenues, operating results and financial condition. The loss of a major payment option        could have a material adverse effect on our business.

         

There can be no assurance that our systems and measures in place will or can        guarantee protection against fraudulent activities and unauthorized access from minors,        which could have a material adverse effect on our reputation, business, revenue, operating        results and financial condition. We attempt to mitigate these concerns with systematic        controls and a dedicated fraud team. There is an audit trail for every transaction contrary        to land-based gaming activities that are primarily cash processors. As well, we establish        relationships with financial institutions that are subject to stringent banking regulations        in their respective jurisdictions.

         

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. 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. As well, current laws, which predate or are incompatible with the        Internet and electronic commerce, may be applied and enforced in a manner that restricts        the electronic commerce market. The application of such pre-existing 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 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 effect on our business,        revenues, operating results and financial condition.

 

Risks        Related to Our Business

 

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

 

The growth of Internet usage has caused frequent interruptions and delays in        processing and transmitting data over the Internet. There can be no assurance that the        Internet infrastructure or the Company’s own network systems will continue to be able        to support the demands placed on it by the continued growth of the Internet, the overall        online gaming industry or that of our customers.

         

The Internet’s viability could be affected if the necessary        infrastructure is not sufficient, or if other technologies and technological devices        eclipse the Internet as a viable channel.

         

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End-users of our software depend on Internet Service Providers        (“ISPs”), online service providers and our system infrastructure for access to        the Internet gaming sites operated by our licensees. Many of these services have        experienced service outages in the past and could experience service outages, delays and        other difficulties due to system failures, stability or interruption. 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. As a result,        we may not be able to meet a level of service that we have contracted for, and we may be in        breach of our contractual commitments, which could materially adversely affect our        business, revenues, operating results and financial condition.

         

Internet gaming is a developing 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. 

         

The Internet gaming industry continues to evolve rapidly and is        characterized by an increasing number of market entrants. The demand and acceptance for new        products and services are subject to a level of uncertainty and growing competition, and if        our production services do not continue to receive 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 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 and network 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 or attacks will        or can be prevented in the future, and any system intrusion/attack may cause a delay,        interruption or financial loss, which could have a material adverse 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 relies on ISPs to allow our licensees’        customers and servers to communicate with each other. If ISPs experience service        interruptions, it may prevent communication over the Internet and impair our ability to        carry on business. In addition, our ability to process e-commerce transactions depends on        bank processing and credit card systems. In order to prepare for system problems, we are        strengthening and enhancing our current facilities and the capability of our system        infrastructure and support. Nevertheless, any system failure as a result of reliance on        third parties, 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 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.

         

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We compete with a number of public and private companies, which provide        electronic commerce and/or Internet gaming software. In addition to known current        competitors, traditional land-based casino operators and other entities, many of which have        significant financial resources, an entrenched position in the market and name-brand        recognition, may provide Internet gaming services in the future, and thus become our        competitors. As well, such companies may be able to require that their own software, rather        than the software of others, including our gaming software or our e-cash systems and        support, be used in connection with their payment mechanisms.

 

The barriers to entry into most Internet markets are relatively low, making        them accessible to a large 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 of        successful operations, critical mass (particularly relating to online poker), regulatory        compliance, independent oversight and transparency of business practices. While these        barriers will limit those able to enter or compete effectively in the market, it is likely        that new competitors will be established in the future, in addition to our known current        competitors.

         

Increased competition from current and future competitors has and may in the        future result in price reductions and reduced margins, or may result in the loss of our        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.

         

In 2007, our top seven licensees accounted for approximately 79% (2006: 84%;        2005: 90%) of our total revenue. In addition, all our key licensees operate from one        licensing jurisdiction. The loss of one or more of these key licensees, or the loss of        their license to operate in the licensing jurisdictions, could have a material adverse        effect on our business, revenues, operating results and financial condition.

 

We are        subject to risks associated with chargebacks.

         

We are subject to exposure in regard to chargebacks, which may also result        in possible penalties and elimination of the payment option. Chargebacks are any deposit        transaction credited to a user’s account that is later reversed or repudiated. While        the Company has fraud control measures to minimize exposure and provision for chargebacks,        this factor could have a material adverse effect on our business, revenues, operating        results and financial conditions.

         

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

 

As companies and consumers involved in Internet gaming, including the        players 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.

         

There are certain difficulties and risks inherent in doing business        internationally, 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

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consequences and tax risks, and changes in the political and economic        stability, regulatory and taxation structures, and the interpretation thereof, of        jurisdictions in which we, our subsidiaries and our licensees operate, and in which our        licensees’ customers are located, all of which could have a material adverse effect        on our business, revenues, operating results and financial condition.

         

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, including        British Pounds, Euros, and Canadian Dollars. Accordingly, fluctuations in the exchange rate        of world currencies could have a positive or negative effect on our reported results. We        may utilize a hedging program from time to time and/or take advantage of the natural hedge        in having operations in multiple currencies to mitigate a portion of 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 that arises in the ordinary course of business.

 

We, and certain of our subsidiaries, may be involved in litigation arising        in the ordinary course and conduct of business. The outcome of such matters cannot be        predicted with certainty, and could have a material adverse effect on our business,        revenues, operating results and financial condition.

 

If a        third-party asserts that we are infringing its intellectual property, whether successful or        not, it could subject us to costly and time-consuming litigation or expensive licenses,        which could harm our business.

 

There is considerable patent and other intellectual property development        activity in our industry. Our success depends, in part, upon our ability not to infringe        upon the intellectual property rights of others. Our competitors, as well as a number of        other entities and individuals, own or claim to own intellectual property relating to our        industry. From time to time, third parties have asserted and may continue to claim that we        are infringing upon their intellectual property rights, and we may be found to be        infringing upon such rights. Third-parties have in the past sent us correspondence        regarding their intellectual property and in the future we may receive claims that our        products infringe or violate their intellectual property rights. Furthermore, we may be        unaware of the intellectual property rights of others that may cover some or all of our        technology or products. Any claims or litigation could cause us to incur significant        expenses and, if successfully asserted against us, could require that we pay substantial        damages or royalty payments, prevent us from selling our products, or require that we        comply with other unfavorable terms. In addition, we may decide to pay substantial        settlement costs and/or licensing fees in connection with any claim or litigation, whether        or not successfully asserted against us. Even if we were to prevail, any litigation        regarding our intellectual property could be costly and time-consuming and divert the        attention of our management and key personnel from our business operations. As such, the        outcome of such matters cannot be predicted with certainty, and could have a material        adverse affect on our business, revenues, operating results and financial        condition.

 

We may        fail to protect our intellectual property and thereby 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 our        competitive position is dependent in part upon our ability to protect our proprietary        technology. We generally enter into non-disclosure and invention agreements with employees,        licensees, consultants and customers, and historically have

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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.

         

Our Company has patent and trademarks in certain jurisdictions and is in the        process of applying for further trademark registrations and patents, which may provide such        protection in relevant jurisdictions. However, there can be no assurance that this will be        sufficient to fully protect our proprietary technology. In addition, certain provisions of        our license agreements, including provisions protecting against unauthorized use, transfer        and disclosure, may be found to be unenforceable in certain jurisdictions.

         

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.

         

We also have a proprietary interest in our name. The names        “CryptoLogic” and “WagerLogic” have become 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.

         

Due to the complex, sophisticated and global nature of the business, there        can be no assurance that there has been no breach of third parties’ intellectual        property rights by the Company, and any adverse judgment in this regard could have a        material adverse effect on our business, revenues, operating results and financial        condition.

 

We        depend on our key personnel, including our executive officers, and the failure to attract        and retain key personnel could adversely affect our business.

 

Our future performance depends in large part on the continued service of our        key technical, sales and management personnel. None of our key personnel is bound by an        employment agreement requiring service for any defined period of time. If we are unable to        retain members of our management and key employees, we must successfully manage transition        and replacement issues that may result from such departures

 

Our future performance also depends on our ability to attract such skilled        personnel in the future. Competition for personnel is intense. In order to retain our        employees, we provide many of them with cash and stock-based awards that can be realized        over time to increase longer-term commitments. We cannot be assured that we can retain our        key personnel in the future.

         

The loss of services of any of our key personnel, the inability to retain        and attract qualified personnel in the future, or delays in hiring required personnel,        could make it difficult for us to meet key objectives, such as timely product        introductions, and could adversely affect our business, financial condition and results of        operations.

 

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We may        be required to indemnify our directors and officers in certain circumstances. 

 

Under paragraph 42 of the Articles of Association of the Company, our        directors and senior officers are fully indemnified out of the assets and profits of the        Company from and against all actions, expenses and liabilities which they may incur by        reason of any contract entered into or any act in or about the execution of their        respective offices, and for all acts done honestly and in good faith and in the best        interests of the Company, and for all acts done for which they had reasonable grounds for        believing such action was lawful, except such (if any) as they shall incur by or through        their own willful act, neglect or default respectively.

 

Under        current U.S., Guernsey and Canadian law, we may not be able to enforce covenants not to        compete and, therefore, we may be unable to prevent our competitors from benefiting from        the expertise of some of our former employees 

 

Under current U.S., Guernsey and Canadian law, we may not be able to        enforce, in whole or in part, agreements that prohibit some of our employees from competing        with us or working for our competitors after they cease working for us. It may be difficult        for us to restrict our competitors from gaining the expertise our former employees gained        while working for us. Competitors and others have in the past and may in the future attempt        to recruit our employees. While our employees are required to sign standard agreements        concerning confidentiality and ownership of inventions, we may not be able to prevent them        from working with our competitors and providing their expertise to such companies. If we        are unable to enforce covenants not to compete, our competitors may gain access to        employees who are knowledgeable about certain of our proprietary information, which could        harm our business.

 

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, and increasing competition that will put pressure on margins 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, enhance our products and services to respond to market demand, deal with        competition and evolving customer requirements, manage our system infrastructure and        requirements to meet the growing demands of our business, 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 expenses, or our inability to manage or build future growth efficiently, could have a        material adverse effect on our business, revenues, operating results and financial        condition.

 

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

 

As part of our business strategy, we have made and may continue to make        acquisitions of, or significant investments in, businesses or technology that offer        complementary products, services, and technologies. Any acquisition or investment will be        accompanied by risks, including the difficulty of assimilating the operations and personnel        of the acquired businesses; the potential diversion of the attention of management from our        business; the inability of management to maximize the financial and strategic position of        our Company or returns from the investment or acquired businesses; changing technology        approach and requirements, 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 the investment, acquisition or new personnel.

 

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We may        fail to maintain effective internal controls in accordance with Section 404 of the        Sarbanes-Oxley Act of 2002 

 

The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our        executives and directors. Our efforts to comply with the requirements of Section 404 have        resulted in increased general and administrative expense and a diversion of management time        and attention, and we expect these efforts to require the continued commitment of        resources. Section 404 of the Sarbanes-Oxley Act requires (i) management’s        annual review and evaluation of our internal control over financial reporting and (ii) a        statement by management that its independent registered public accounting firm has issued        an attestation report on our internal control over financial reporting, in connection with        the filing of the annual report on Form 20-F for each fiscal year. We have documented and        tested our internal control systems and procedures and have made improvements in order for        us to comply with the requirements of Section 404. Our assessment of our internal control        over financial reporting resulted in our conclusion that as of December 31, 2007, our        internal control over financial reporting was not effective as a result of certain material        weaknesses as described on page 69 of Item 15 in this annual report. We cannot predict the        outcome of our testing in future periods. If we continue to fail to maintain the adequacy        of our internal controls, we may not be able to ensure that we can conclude in future        periods that we have effective internal controls over financial reporting. Failure to        maintain effective internal controls over financial reporting could result in investigation        or sanctions by regulatory authorities, and could have a material adverse effect on our        operating results, investor confidence in our reported financial information, and the        market price of our securities shares.

 

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

         

The market price of our Common Shares has experienced significant        fluctuation and may continue to fluctuate significantly. The market price of our Common        Shares may be adversely affected by various factors, such as proposed Internet gaming        legislation or enforcement of existing laws, the loss of a customer, the announcement of        new products or enhancements, innovation and technological changes, quarterly variations in        revenue and results of operations, 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.

         

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 for our Common Shares. Anti-online gaming legislation        could also impact our ability to remain listed.

 

There is        no assurance that there will always be a liquid market for our shares.

 

Although our Common Shares are listed and traded on the Toronto Stock        Exchange, the NASDAQ Global Select Market and the London Stock Exchange’s Main        Market, this should not imply that there will always be a liquid market in our Common        Shares. In addition, pursuant to a business reorganization completed in 2007 (refer to page        1 of this annual report), Exchangeable Shares of an indirect subsidiary of the Company,        CEC, were issued, and are listed and traded on the Toronto Stock Exchange. Because of        separate listings, the trading prices of the Common Shares and Exchangeable Shares may not        reflect equivalent values. Company-specific or broader market fluctuations may adversely        affect the market price of the Exchangeable Shares, and there can be no assurance that        there will continue to be an active market for these securities.

 

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**ITEM 4. INFORMATION ON THE        COMPANY**

 

**A. HISTORY AND DEVELOPMENT OF THE        COMPANY**

 

The Company 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. On June 28, 1996, we changed our name from “Inter.tain.net Inc.” to        “CryptoLogic Inc.” Currently, the Company operates under “CryptoLogic        Limited”.

         

On June 1, 2007, in order to advance its global strategy, the Company moved        its headquarters from Canada to the Republic of Ireland by introducing a new parent        company, CryptoLogic Limited, a company incorporated in Guernsey with its place of business        in Dublin, Ireland. This business reorganization was implemented by way of an Ontario,        Canada Superior Court of Justice court approved plan of arrangement (the        “Arrangement”) and approved by the shareholders on May 24, 2007. CryptoLogic        Limited acquired control over all of the issued and outstanding common shares of        CryptoLogic Inc., which through the Arrangement became an indirect subsidiary of        CryptoLogic Limited (refer to page 1 of this annual report).

         

Our registered office is located at 1 Le Marchant Street, St. Peter Port,        Guernsey, Channel Islands, GY1 4HP. Our principal office is located at Alexandra House, The        Sweepstakes, Ballsbridge, Dublin 4, Ireland, and its telephone number is        353-1-664-1683.

         

The Company is a pioneer and a global leading software developer and        services provider to the Internet gaming market around the world (excluding the U.S.). We        are one of the industry’s longest-established publicly traded online gaming software        companies, with our software development operations in Toronto, Canada. Our subsidiary,        WagerLogic, through its offices in Cyprus, Malta and the U.K., provides software hosting        and licensing, e-cash systems and support, customer support and marketing support services        for our Internet gaming software to third-party gaming operators. WagerLogic licenses our        software products and services to a select international client base        (“licensees” or “customers”), while retaining ownership and control        of the software. As at December 31, 2007, we had 12 licensees located around the world,        including well-known U.K. and global land-based gaming organizations, who operate under        government authority where their Internet business subsidiaries are domiciled.

In fiscal 2005, we capitalized on the key product areas and geographic        markets of the growing Internet gaming industry through a focus on (a) international        diversification with brand name gaming licensees, (b) investing in and expanding our        software and services offering required to support our licensees’ ability to acquire,        retain and re-activate their players, and (c) regulatory compliance to provide the controls        and safeguards important to land-based and Internet gaming groups and their        clientele.

In fiscal 2005, more than 65% of our licensees’ revenue was derived        from international players (non-U.S. players), continuing a steady rise from 30% in 2001.        The U.K. and Continental Europe remained the largest contributors. For leading U.K. sports        book operator, William Hill, we launched a new Greek-language poker site, which was the        first deployment of our Internet poker software in a European language.

During 2005, we expanded and enhanced our product and service offering,        directed at our core online casino and online poker products, system infrastructure and        back-office solutions. In 2005, we

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launched        more than 20 new casino games including our own patented*Millionaires ClubTM*slot game, which        offers million-dollar-plus online jackpots*.*We developed the world’s first and only play-for-real, slot version of        the popular gem-matching game,*Bejeweled®*, and the Internet’s first        and only multi-currency jackpot video slot games featuring popular*Marvel*action characters such as*The HulkTM, DaredevilTM and        X-MenTM*– which brands have been exclusively licensed        for CryptoLogic-developed games. In Internet poker, we introduced high-speed*LightningTM*games, 10 new lower-limit        stake games for recreational players and increased our licensees’ central poker        network to accommodate more than 16,000 players at one time. We also enhanced our        back-office and decision-support tools to help our licensees better understand, respond to        and target market their players.

 

Given our regulatory experience, we began to position ourselves and our        licensees for the implementation of The Gambling Act 2005 in the U.K., a law to regulate        online gaming for the first time in that jurisdiction.

In 2005, capital expenditures amounted to $8.9 million, which related to        purchases in the normal course of business for hardware, software licenses, leasehold        improvements and associated with our major investment program aimed at upgrading our gaming        platform, back-office tools and system and service infrastructure.

 

Revenues derived from the global online gaming industry including the U.S.        grew from $5.7 billion in 2003 to $10.7 billion in 2005 (source: Global Betting and Gaming        Consultants, February 2007 (“GBGC”)). However, on October 13, 2006, the U.S.        enacted the UIGEA, which effectively banned online gaming in the U.S. by making it illegal        to process related financial transactions. Our management has estimated that the UIGEA        enactment, which had an industry-wide impact, resulted in approximately $8.0 million in        lost revenue in the fourth quarter of 2006 and $6.0 million in lost earnings related to        those revenues for the Company. Our management has estimated that the enactment of the        UIGEA would have reduced our revenue by $31.0 million and earnings by $24.0 million if the        act had been in force for all of 2006.

         

Prior to the enactment of the UIGEA, approximately 70% of our        licensees’ revenue was derived from non-U.S. sources due to the Company’s        global diversification strategy initiated in 2002. After the UIGEA enactment, 100% of        licensees’ revenue came from outside the U.S.

         

In fiscal 2006, we continued to advance our growth strategy focused on        player-oriented product development, targeted international licensees and regulatory        compliance. During the year, we continued to strengthen our presence in the key U.K. market        and diversified across European and Scandinavian markets by adding new customers and        renewing existing licensees. We signed three new licensees: PlayboyGaming, one of the        world’s most recognizable entertainment and lifestyle brands; Betsafe, a popular        poker site among Scandinavian players; and DTD Poker, the online home of DUSKTILLDAWN, the        first fully-licensed dedicated land-based poker club in the U.K. We solidified our customer        base by renewing: major customer, William Hill, thereby continuing our exclusive        relationship; ukbetting, a large European online sports content network; and our largest        customer, OIGE NV, which operates the award-winning InterCasino and InterPoker sites. We        also launched a new Spanish poker site for William Hill.

         

Betfair, an Internet poker licensee, exited the CryptoLogic poker network at        the end of October 2006, having announced in 2005 its intention to bring its poker software        in-house in line with its long term strategy to own and operate its core products. The Ritz        Club Online also left our network in the fourth quarter of 2006.

         

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As well in 2006, we established our first Asian presence by hiring a        Managing Director for Asia-Pacific. While the Company believes that Asia will be the next        major Internet gaming market, there are currently legislative issues and limited payment        forms in the region to adequately support the industry.

         

During 2006, we expanded and enhanced our core Internet casino and poker        software. Forty-nine new Internet casino games were introduced, including exclusive games        for new*Marvel*characters such as*ThorTM, Silver SurferTM, ElektraTM*and*Ghost RiderTM,*and the world’s first and only play-for-real, slot version of*CubisTM.*We significantly upgraded our        poker platform to support more than 50,000 simultaneous players, allow for near-perfect        network uptime, enable “live” seamless updates of new features and games, and        provide the flexibility to seamlessly locate the network in the most favorably regulated        jurisdictions. Other poker enhancements included a redesign of the poker software interface        for greater appeal and simplicity, and easier selection and access to games and statistics,        and the introduction of*Hold’em        BlackjackTM*, which combines the simplicity of blackjack and        the intensity of poker.

         

In September 2006, in order to advance its global strategy, the Company        announced that it would move its new global headquarters to Dublin, Ireland to be closer to        the world’s major markets that embrace Internet gaming, and therefore, closer to its        key customers and corporate opportunities. Upon regulatory and shareholder approval, the        Company completed this move pursuant to a reorganization effective June 2007 (for        information regarding the reorganization, refer to page 1 of this annual        report).

We anticipate that the industry-wide impact of the UIGEA will continue to        have a material short-term impact on our financial results, as evidenced by our        significantly reduced revenue and earnings in 2007. We also expect increasing competition        in our core European markets. However, we remain in a strong competitive position as a        result of our globally-diverse licensee base.

In 2006, capital expenditures amounted to $8.6 million, which related to        purchases in the normal course of business for hardware, leasehold improvements, software        licenses, and capitalized software development expenses.

With more than $128.4 million in net cash and $93.8 million in working        capital at the end of 2006, CryptoLogic was well-capitalized to take advantage of growth        opportunities.

         

In fiscal 2007, we advanced our strategy designed to capitalize on the        growth in the Internet gaming market by focusing on ongoing software development, new        licensee opportunities including through brand ownership and management, and further        expansion into Europe and in Asia.

In 2007, we added 15 new downloadable Internet casino games including: more        slot games featuring*Marvel*Super        Heroes,*Spider-ManTM*and*the Fantastic FourTM*; the exclusive rights        for the first-ever slot version of*Jewel Quest®,*a slot version of*Sudoku*,        and our new patent-pending game,*Multi-Hand Video        Blackjack*. We also introduced*Headhunter        Challenge*, an industry first and new type of multi-table Internet        poker tournament that allows players to earn cash for every player (‘head’)        they eliminate as well as a Tournament Key Hands Review tool allowing Internet poker        players to review key hands and identify the turning point in a big match.

During 2007, we added three new licensees and launched sites for four        licensees to further our geographic diversification. New licensees included a private        company in Malta operating Parbet.com, Holland Casino, and global leading poker        entertainment company, World Poker Tour. During the year, we launched new sites for        Betsafe, Parbet.com, World Poker Tour and PlayboyGaming.

         

Our regulatory leadership contributed to the Company signing the milestone        exclusive three-year agreement with Holland Casino, our first government-owned casino        operator licensee. The new sites to be

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run by        Holland Casino on behalf of the Dutch government were ready to be launched, subject to        government ratification. In April 2008, a narrow vote by Dutch parliamentarians prevented        Holland Casino from establishing its Internet gaming sites. While the Company had hoped to        benefit from the establishment of such sites, the Company has been fully compensated for        its development work and has other revenue-generation initiatives underway in both Europe        and Asia.

 

In January 2007, the Company acquired the poker brand and related assets of        Parbet.com, a popular Scandinavian online poker room, for $11.8 million. We then licensed        these Parbet assets, together with our poker software, payment processing services and        multi-lingual customer support and services, to a private Maltese online gaming company        that will operate Parbet.com. This acquisition extended our brand ownership and licensing        strategy. Under this strategy, the Company owns or controls key brands that it licenses to        third party operators, along with its full suite of online gaming software, network        services and marketing support services, in order to generate higher revenue and expand        geographically. For online players, trust is critical. This is why CryptoLogic has focused        on leveraging established brands that enhance the entertainment value and trust factor for        our licensees’ players.

         

In August 2007, CryptoLogic acquired Casino.co.uk, a gaming portal popular        with U.K. and European users, for $6.1 million. This web-portal business complements the        Company’s existing WinnerOnLine portal, which earns advertising revenue from gaming        operators and directs traffic to operator sites and those sites owned by the        Company’s licensees.

         

While CryptoLogic’s global strategy has focused on Europe, we see Asia        as a developing major market for Internet gaming. In 2007, we invested in two Asian game        developers by acquiring: a 19.4% minority interest in 568 Network Inc. for $1.1 million,        and a 12.7% minority interest in Mikoishi Studios Inc. for $4.3 million.

 

In August 2007, the Company also assisted in the relocation of our        licensees’ primary Internet gaming jurisdiction to Malta.  Certain technical        requirements set out by the licensing authority in Malta need to be fulfilled in order to        maintain their licenses in good standing.  We expect to satisfy these requirements by        mid 2008. The license in Malta facilitates access to the Continental European and U.K.        markets by our licensees from within the EU, which are major markets for the licensees and        consequently for CryptoLogic.

         

In 2007, capital expenditures amounted to $13.1 million, which related to        purchases in the normal course of business for hardware, leasehold improvements, software        licenses, and capitalized software development expenses.

         

In March 2008, we acquired a 15.0%        ownership interest in Mobilebus Inc. (“Mobilebus”), a privately held Korean        company specializing in game development, for cash consideration of $0.6 million. In        exchange for the cash consideration, the Company received common shares.

         

In May 2008, we acquired an 11.1%        interest in Jingle Prize, Inc. (“Jingle”), a leading supplier of online        mah-jong games, for $0.9 million. In exchange for the cash consideration, we received        preference shares, which rank pari passu to the common shares with respect to all dividends        and voting rights. Under the terms of the agreement, the Company is required to make        additional investments in Jingle of up to $1.5 million should Jingle achieve certain        financial targets. In addition, under the terms of the agreement, the Company is required        to pay up to approximately $1.0 million without receipt of additional equity as a        contingent acquisition price increase should Jingle achieve certain performance        milestones.

         

We will continue to invest in our Internet gaming software and support        services. We have several casino and poker software projects, both underway and planned,        which are designed to enhance licensees’ revenue. The Company continues to have a        strong balance sheet to invest and expand its product offering, and advance its growth        strategy. At the year-ended 2007, we had net cash of $77.5 million and working capital of        $68.2 million.

         

**B. BUSINESS        OVERVIEW**

 

Founded in 1995, CryptoLogic is one of the first publicly listed online        gaming software developers and suppliers, and a leader in the global Internet gaming        industry around the world (excluding the U.S.). The Company’s Common Shares trade on        the Toronto Stock Exchange (symbol: CRY), NASDAQ Global Select Market (symbol: CRYP) and        the London Stock Exchange’s Main Market

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(symbol:        CRP). The Company’s Exchangeable Shares trade on the Toronto Stock Exchange (symbol:        CXY). Our head office, located in Dublin, Ireland, provides executive functions to our        corporate group. Our Toronto, Canada office provides software development, upgrades and        technical support for WagerLogic, a subsidiary of the Company, as well as all usual        administrative functions. Located in Cyprus, Malta and the U.K., the WagerLogic group of        companies provides licensing and hosting for our Internet gaming software, e-cash systems        and support, customer support, marketing support services to third-party gaming operators.        Our Singapore office is responsible for advancing our strategy and business development in        Asia.

         

We also operate a gaming portal business under two brands: Casino.co.uk and        WinnerOnLine. These portals earn advertising revenue from gaming operators, and direct        traffic to operator sites and those sites owned by the Company’s licensees –        providing an excellent, known-name marketing channel and an attractive player acquisition        tool for licensees.

         

As at December 31, 2007, we had 12 licensees located around the world        including a number of well-known U.K. brand name and land-based gaming organizations. Our        licensees operate under government authority where their Internet business subsidiaries are        domiciled.  In August 2007, the Company assisted in the relocation of our        licensees’ primary Internet gaming jurisdiction to Malta.  Certain technical        requirements set out by the licensing authority in Malta need to be fulfilled in order to        maintain their licenses in good standing.  We expect to satisfy these requirements by        mid 2008. The license in Malta facilitates access to the U.K. and Continental European        markets by the Company’s licensees from within the EU, which are major markets for        the licensees and consequently for CryptoLogic.

 

PRINCIPAL MARKETS

 

CryptoLogic, through WagerLogic, provides a complete, turn-key online gaming        solution predominantly focused on the Internet casino and poker markets of the global        online gaming industry. We work with a select group of international licensees and target        prospective licensees with a focus in the key geographic markets for online gaming        including the U.K. and Continental Europe, which we view as the regions that offer the best        near-term growth opportunities. With the relocation of all licensees’ operations to        Malta, a member of the EU, access to the European markets is strengthened. As a result of        the UIGEA, the Company will not support licensees who take wagers from U.S.-based players.        In the longer term, we see Asia as the next major market. The population is ten times that        of North America and gaming in this region is very popular. However, significant regulatory        and commercial challenges remain in the market, which the Company does not believe will be        resolved immediately. In 2006, CryptoLogic established its first Asian presence by        establishing an office in Singapore, and the Company is developing its strategy for the        region from that base. In 2007, the Company acquired minority interests in two Asian game        developers (refer to pages 55 and 56 of this annual report for further information        regarding these acquisitions).

         

MARKETING STRATEGIES 

 

At the time the UIGEA was enacted in October 2006, the entire U.S. market        was estimated to represent approximately 50% of the global online gaming market (source:        GBGC). However, the Internet casino and Internet poker markets outside the U.S., the core        areas of our business, are expected to continue to grow. By the end of 2006, after the U.S.        ban, the non-U.S. online casino market was estimated to be worth $2.4 billion, and this        market is expected to grow to approximately $3.9 billion by 2012 (source: GBGC). The        non-U.S. online poker market was estimated to be worth $1.6 billion at the end of 2006, and        is expected to double to $3.2 billion by 2012 (source: GBGC).

         

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We currently market our technology and services through a select sales and        marketing strategy whereby we identify key potential customers that meet our licensee        profile, and then contact such prospects directly. The Company has recently expanded its        marketing effort by adding a marketing director. We also attend industry trade shows around        the world to generate new prospects, and respond to referrals from existing customers and        other industry participants. CryptoLogic has generally sought licensees with an established        brand, an audience with a propensity to gamble, and sufficient resources and commitment to        successfully market the business. In the changed online gaming environment following the        passage of the UIGEA, CryptoLogic has adapted this strategy to our core Internet casino and        poker markets.

 

In Internet casino, the key to success is differentiation through the        combination of our new and innovative games with effective marketing to players by our        licensees. CryptoLogic will continue to pursue new casino opportunities emphasizing brand        name licensees with marketing commitment. In online poker, the key to success is        “liquidity”, that is, more players from more sources – 24/7. Given our        significantly enhanced poker platform, we have the infrastructure and capacity to also        pursue promising new European Internet poker licensees and will continue to seek these        growth opportunities to contribute to our overall poker network liquidity.

 

We are leveraging our strong U.K. licensee base to continue to focus our        sales and marketing efforts in our key markets of the U.K. and Continental Europe, and to        explore longer term prospects in other markets such as Asia. Our strategy in these markets        includes the use of or introduction of multi-language and multi-currency software versions,        by 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. As a result of the UIGEA,        the Company will not support licensees who take wagers from U.S.-based players.

         

While Asia offers large market potential, this region represents a longer        term opportunity because of higher barriers to entry due to fragmented legislation and the        absence of a popular payment form in that region. In 2006, we established our first Asian        presence by hiring a managing director for the Asia-Pacific region, who is based in        Singapore. This managing director is responsible for our strategy development and        implementation in the region and is identifying local partners that can help us establish        meaningful contacts with governments and major, brand name gaming organizations. We will        continue to pursue opportunities in this market that we believe will generate an        appropriate return. In 2007, we acquired minority interests in two Asian game developers        (refer to pages 55 and 56 of this annual report for further information regarding these        acquisitions).

 

REVENUE

         

Substantially all of our revenue is of a recurring nature in that        WagerLogic’s licensees pay an ongoing fee each month over the contract term for the        licensing and support of our software, calculated as a percentage of each licensee’s        level of activity. Additional revenues are derived from other sources including fees for        the provision of software customization, and advertising and marketing services related to        our portal business. Historically, we have experienced seasonality with slower sales in the        second and third quarters, 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. Typically, our first        and fourth quarters (during the winter and fall seasons) are our strongest revenue        periods.

         

In 2007, revenue was $73.7 million (2006: $104.0 million; 2005: $86.3        million), with 93.6% (2006: 89.5%; 2005: 92.7%) of this amount represented by ongoing        software licensing fees. Other revenue sources accounted for 6.4% of total revenue (2006:        10.5%; 2005: 7.3%).

 

 

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Fee revenue from our Internet casino business is calculated as a percentage        of a licensee’s level of activity in its online casino site. By contrast, fees from        Internet poker are based on a percentage of the licensee’s “rake” per        hand in regular or ring games (the rake is typically 5% of the pot, up to a maximum amount        per hand), or fixed fees for entry into poker tournaments. In 2007, $49.5 million or 67.1%        of our total revenue was derived from our casino business (2006: $59.2 million or 56.9%;        2005: $53.0 million or 61.4%). Internet poker fees were $19.5 million or 26.5% of total        revenue in 2007 (2006: $33.9 million or 32.6%; 2005: $27.0 million or 31.3%).

         

CryptoLogic’s global strategy has resulted in a        geographically-diversified business to mitigate the risks of ongoing legislative        uncertainty in various countries, increase exposure to gaming-friendly jurisdictions like        the U.K., and benefit from near-term growth opportunities in non-U.S. markets. When the        UIGEA was enacted in October 2006, our licensees’ revenue from non-U.S. sources was        approximately 70% of total revenue, a steady increase from over 65% in 2005. This compared        to 30% in 2001 when the Company initiated its global diversification strategy. As a result        of the UIGEA, 100% of our licensees’ revenue came from outside the U.S. in 2007. The        Company’s principal geographic markets are in the U.K. and Continental Europe. In        2007, the U.K. and Continental Europe represented 49% and 40% respectively, of our        licensees’ total revenue (2006: 35% and 32%; 2005: 32% and 29%)

 

PRODUCTS        AND SERVICES 

         

The Company’s software offers a complete online gaming solution to our        licensees, comprised of:

 

| 1. | A broad, turn-key Internet-based game suite, available in both                    play-for-fun and play-for-cash mode, featuring: |
|----|-----------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | more than 280 download and non-download casino table and slot                    games |
|--------|------------|----------------------------------------------------------------------------------------|

|   | **•** | player-to-player poker |
|--------|------------|------------------------|

|   | **•** | multi-languages (English, Spanish, Greek, Japanese, Chinese,                    French, German, Italian) |
|--------|------------|----------------------------------------------------------------------------------------------------------|

|   | **•** | multi-currencies (U.S. dollars, British pounds and                    Euros) |
|--------|------------|------------------------------------------------------------------------------|

|   | **•** | multi-platforms (download, non-download (Java and Flash),                    wireless) |
|--------|------------|----------------------------------------------------------------------------------------|

|   | **•** | multi-player bingo; |
|--------|------------|---------------------|

| 2. | E-cash systems and support for player deposits and                    withdrawals; |
|----|------------------------------------------------------------------------------------|

| 3. | Business intelligence and data analysis tools to assist                    licensees in their marketing efforts; |
|----|------------------------------------------------------------------------------------------------------------------|

| 4. | Licensee support through WagerLogic’s 24/7 multi-language                    customer support; and |
|----|----------------------------------------------------------------------------------------------------------|

| 5. | Marketing support services, to assist licensees in developing                    and executing strategies for marketing their online gaming                    businesses. |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Our Internet-based gaming and electronic commerce software products are used        by licensees to create virtual casinos, poker rooms or bingo halls. Currently, no customer        licenses our bingo software. 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, poker room or bingo hall, while the licensees’        gaming servers perform the “dealer” function, generating the random numbers of        playing cards, roulette numbers and dice numbers, as applicable. Many of our most popular        casino games are also available on either the Flash and Java platforms, which provide an        entertaining gaming experience without having to wait for software to download.

         

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Among other things, our software contains proprietary encryption features,        which allows secure transmission of data, and permits our licensees to offer multi-player        games, a 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 financial transactions. We are also able        to restrict registration and game play from residents of jurisdictions in which online        gaming is prohibited.

         

Our gaming solution is complemented by e-cash systems and support. We        provide Internet-based electronic commerce support and technology to our licensees and        their respective customers and maintain, through our subsidiaries, electronic commerce        accounts for both merchants of our electronic commerce software and their end-users. For        the majority of our licensees, we report and remit to our licensees the net transaction        revenues less licensing and support fees payable to the Company (as specified in the        applicable licensing agreements). Some licensees have responsibility for their own e-cash        systems and support to enable an integrated single player account for all their online        offerings, which have our licensees remit licensing fees to us.

         

Utilizing our e-cash software, players can use a wide range of payment        options, including credit and debit card and various electronic wallets.  Web cashier        accounts can be opened in U.S. dollars, British pound and Euros.

         

To assist our licensees in retaining players and re-activating lapsed        accounts, we have invested significantly in our customer relationship management solution.        We have introduced and improved our back-office offering with sophisticated business        intelligence, data warehousing and marketing tools to assist licensees in understanding,        servicing and building one-on-one relationships with their players.

         

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

         

Increasingly, we view our marketing support services as a key differentiator        in our product and service offerings, as they form a key part of the Company's brand        ownership and management strategy. During 2006, OIGE NV, operator of the InterCasino,        InterPoker and ExtremePoker brands, was the only licensee to use our marketing support        services. In 2007, the Company began providing these services to Parbet and Oceania Caribe        Licensing N.V., operator of PlayboyGaming, as well. Our ability to offer these services was        a key differentiator in winning the business of the Playboy brand.

 

Although CryptoLogic was instrumental in pioneering the Internet gaming        software industry, there has been increasing competition over the past three years. In        order to remain an industry leader, we have invested and continue to invest significantly        in product and service enhancements in our core casino and poker software solutions. Since        2005, we have introduced more than 80 popular new slot and casino table games, including        unique, first-to-market offerings such as:

         

| **•** | The Internet’s first and only multi-currency jackpot video                    slot games featuring popular*Marvel*action characters such as*The                    Incredible Hulk(, Daredevil(*,*X-Men(, Thor(, Elektra(*,*Ghost Rider(*,*Spider-Man(*and*The Fantastic Four(,*which brands                    have been exclusively licensed for CryptoLogic-developed games; |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

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| **•** | The world’s first and only play-for-real slot versions of                    highly popular online casual games, such as*CubisTM*, an                    award-winning, three-dimensional puzzle game, and*Bejeweled®*, a gem-matching                    game—both among the most played games on AOL, MSN and other major                    portals—and most recently,*Jewel                    Quest®*, a popular puzzle-match game; |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| **•** | Our own designed and patented games including the progressive                    jackpot slot,*Millionaires ClubTM,*which, in 2007, awarded the two largest online jackpots in                    history (over $8.0 million and $4.0 million); and a new patent-pending                    game,*Multi-Hand Video Blackjack,*which brings together blackjack and video poker; and |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **•** | The Internet’s first “Fruit Machines”, a                    tradition in UK pubs. |
|------------|-----------------------------------------------------------------------------------------------------|

         

Over the past three years, we have also continued to expand the game        offering and functionality of our poker software including:

         

| **•** | A major upgrade to our poker platform that significantly                    increased the capacity for simultaneous online playing, allowing for                    near-perfect network uptime, and enabled "live" seamless updates of new                    features and games; |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| **•** | An appealing poker software redesign that includes enhancements                    to the main lobby, game tables and tournament lobby, making it easier than ever                    for players to navigate, select their game and stake level, and access key                    statistics on games, tournaments and their play;

                      |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | Introduced*Thunder                    TournamentsTM*for high-speed tournament                    action;*Headhunter                    Challenge*, an industry first and new type of                    multi-table poker tournament that allows players to earn cash for every player                    (‘head’) they eliminate;*Bounty                    Tournaments*, which adds a cash bounty to the                    ‘heads’ of big-name entrants such as celebrities and professional                    players; and new features including broader access to land-based tournaments, a                    tournament leader board to give licensees opportunities to create exciting new                    events, and a Tournament Key Hands Review tool that allow players to review key                    hands and identify the turning point in a big match; and |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| **•** | Launched*My Poker                    Points*, a loyalty rewards system. |
|------------|-------------------------------------------------------------------------|

         

To help our licensees understand, respond to and market to their players in        a personalized fashion, we also enhanced our back-office, decision-management and contact        centre tools. We have continued to expand our payment solutions including new e-check/debit        methods (e.g.*Click2Pay*,*EverywhereMoney*,*PaySafeTM),*added a new European processor        and expanded fraud controls (e.g., third-party address/credit card verifications, negative        databases, poker fraud tool).

         

It is our objective to continue to introduce innovative software products,        support tools and services that appeal to broad segments of gaming audiences        worldwide.

         

GLOBAL        REGULATORY ENVIRONMENT

 

Since 1995, Internet gaming has grown into a large, multi-billion dollar        industry, but with regulatory inconsistencies among countries and limited formal        regulation. Laws around the world are often outdated, ambiguous and continue to develop on        a country-by-country basis.

         

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On October 13, 2006, the U.S. enacted the UIGEA, which effectively banned        online gaming in that country by making it illegal to process related financial        transactions. The industry-wide impact of UIGEA has negatively affected our business by        significantly reducing our revenue and earnings in 2007.

         

At the time the UIGEA was enacted, the entire U.S. market was estimated to        represent approximately 50% of the global online gaming market (source: GBGC). However, the        Internet casino and Internet poker markets outside the U.S., the core areas of our        business, are expected to continue to grow. Prior to the enactment of UIGEA, approximately        70% of our licensees’ revenue was derived from non-U.S. sources due to our global        diversification strategy. Since 2002, we have focused on licensees that primarily target        non-U.S. markets, most notably the U.K. and Continental Europe. After the UIGEA enactment,        100% of licensees’ revenue came from outside the U.S.

         

We anticipate that the industry-wide impact of UIGEA will continue to have a        significant short-term impact on our financial results and increase competition in our core        European markets. However, as our licensees have significant exposure to the international        market compared to those of our major competitors, we believe that we remain in a strong        competitive position. Today, we work with some of the best international names in online        and land-based gaming, as well as major entertainment brands, including William Hill,        PlayboyGaming, Littlewoods Gaming, InterCasino and ukbetting, which has enabled us to        develop a strong presence in the U.K.

         

In September 2007, the UK Gaming Act went into force, which regulates online        gaming for the first time in that jurisdiction, and is generally viewed as a positive        development for the industry, our customers and for CryptoLogic. Most of the underlying        rules and codes in relation to entities established in the UK, or marketing into the UK,        have now been enacted. However, there is no assurance that the UK regulatory regime as        interpreted by the Gambling Commission, the Gambling Act’s regulator, will provide a        commercially-viable market and may create restrictions that will have a material adverse        effect on our customers, our business, revenues, operating results and financial        condition.

 

Elsewhere in Europe the legislative environment continues to evolve, with        some countries showing signs of following the U.K.’s lead while others are moving to        protect state gambling monopolies. The EU Commission has commenced infringement proceedings        against some member states that are taking a protectionist approach— a development        that we believe is favorable to the industry in Europe.

         

CryptoLogic is also extending its international reach into Asia. In 2007, we        acquired minority interests in two Asian game developers. Industry experts expect Asia to        be the fastest growing and ultimately the largest online gaming market in the world. China        alone has over 135 million Internet users, making it the world's second largest user group        after the U.S. While we believe that Asia will be the next major Internet gaming market,        there are currently regional legislative issues and limited payment forms to adequately        support the industry. Accordingly, we do not expect Asia to be a major revenue contributor        in the near term.

 

CryptoLogic has long advocated a regulatory approach to foster a        transparent, credible and growing online gaming industry. 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. We have sought and achieved certification of our software in        strictly regulated jurisdictions. It is through this process that we maintain our        reputation as the pioneer in online gaming and a trusted provider for licensees and their        customers. Our regulatory leadership contributed to the Company signing a milestone        exclusive three-year agreement with Holland Casino, our first government-owned casino        operator licensee, in 2007.

 

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For more information regarding the global regulatory environment in which        the Company and its licensees do business, refer to “Risk Factors”, pages 4-6        set out in this annual report.

 

COMPETITION 

 

Although online gaming is a fast-growing industry, it has become        increasingly competitive and sophisticated. GBGC, a U.K. consulting firm focused on the        land-based and online interactive gaming industries, estimates that the global market for        online gaming, which is comprised of casino games, sports betting, poker, bingo, and        lotteries, reached $7.2 billion in annual revenue in 2006 (excluding the U.S.), up from        $2.7 billion in 2003. While it is difficult to confirm the exact number of Internet gaming        sites since most companies are private, current estimates are around 2,400 online gaming        properties down from more than 2,800 (source: GBGC) several years ago. This decrease points        to industry consolidation. As Internet gaming has developed and increased in        sophistication, so have the players who can choose from a proliferation of sites.        Competition for players’ attention and share of wallet is intensifying, and players        are demanding more value, more games and the ultimate entertainment experience.

         

CryptoLogic’s primary focus areas are Internet casino and poker, which        are proven, cash generative business sectors on the Internet. Online casino first developed        more than a decade ago. Therefore, Internet casino is a more mature marketplace compared        with Internet poker, although it remains a major pillar at 33.5% of the global online        gaming market in 2006 (excluding the U.S.) (source: GBGC). While online casino growth        outside the U.S. is predicted to remain healthy at over 21% per year in the next two years        (source: GBGC), we expect it will be insufficient to compensate for the loss of the U.S.        market. Industry experts forecast Internet casino to reach $3.9 billion by 2012, excluding        the U.S. (source: GBGC).

         

Although Internet poker was first established just a few years ago, it has        grown to an estimated $1.5 billion in 2007 (excluding the U.S.) (source: GBGC). This sector        is already dominated by major operators offering liquidity (that is, a site which is well        populated to ensure a player will always find a game, at the appropriate stake level and in        the appropriate currency, around the clock), and a variety of games and tournaments. While        online poker growth outside the U.S. is predicted to remain strong at over 17% per year in        the next two years (source: GBGC), we expect it will be insufficient to compensate for the        loss of the U.S. market. Industry experts forecast Internet poker to reach $3.2 billion by        2012, excluding the U.S. (source: GBGC).

         

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, expand        our system infrastructure and resiliency, 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 stage of development of the        industry and the number 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 the Company. Increased competition and expenditures from current and future        competitors have and could continue to result in the reduction of our margins, or could        result in the loss of our market share.

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The global nature of the 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 of successful operations, critical mass (particularly relating to online poker),        regulatory compliance, independent oversight and transparency of business practices. While        these barriers will limit those able to enter or compete effectively in the market, it is        likely that new competitors will be established in the future, in addition to known current        competitors.

 

ECONOMIC        DEPENDENCE 

 

In 2007, our top seven licensees accounted for approximately 79% of our        total revenue (2006: 84%; 2005: 90%). In addition, all of our licensees operate from one        licensing jurisdiction. The loss of one or more of these key licensees or their license to        operate in the licensing jurisdiction or a material change in the terms of the license        agreements could have a material adverse effect on our business, revenues, operating        results and financial condition.

 

**C. ORGANIZATIONAL        STRUCTURE**

 

The organizational structure of the Company as of December 31, 2007 is set        forth below. CryptoLogic Limited, a company incorporated under the laws of Guernsey with        its corporate headquarters in Dublin, Ireland, provides executive functions to our        corporate group. Our CryptoLogic Inc. subsidiary located in Canada, provides software        development, upgrades and technical support for our WagerLogic Limited subsidiary. Located        in Cyprus, Malta and the U.K., the WagerLogic group of companies provides software hosting        and licensing for our Internet gaming software, e-cash systems and support, customer        support, marketing support and other services to third-party gaming operators or licensees        around the world. Our ECash Direct subsidiary provides e-cash systems and support that        enables licensees’ players to deposit and withdraw funds through a wide range of        payment options for use with the licensee. Our AdsDotCom subsidiary offers marketing        services to licensees. Our CryptoLogic Asia subsidiary is responsible for advancing the        Company’s strategy and business development in Asia.

         

 

 

 

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*Note:*CryptoLogic Exchange Corporation and        CryptoLogic Callco ULC exist solely to facilitate the exchange of shares for CryptoLogic        Limited in connection with the Arrangement (refer to page 1 of this annual report for        further information regarding the Arrangement).

 

**D. PROPERTY, PLANTS AND        EQUIPMENT**

 

The following table sets forth the Company’s principal leased        properties.

         

| **Company**                         | **Location**      | **Principal Use**              | **Approx. Area**

**(sq. ft.)** | **Term of Lease** | **Current Rent**

**(per annum)** |
|-------------------------------------|-------------------|--------------------------------|---------------------------------|-------------------|-----------------------------------|
|                                |              |                           |                            |              |                              |
| CryptoLogic Limited                 | Dublin, Ireland   | Head office                    | 500                             | 6 months          | €9,970                       |
| CryptoLogic Inc.                    | Toronto, Canada   | Research and development       | 40,834                          | 10 years          | C$1,344,600                       |
| CryptoLogic Inc.                    | Toronto, Canada   | Research and development       | 11,426                          | 8 years 3 months  | C$373,859                         |
| CryptoLogic Inc.                    | Vancouver, Canada | Portal business                | 2,306                           | 3 years           | C$66,123                          |
| WagerLogic Limited                  | Nicosia, Cyprus   | Software licensing and support | 9,900                           | 3 years 3 months  | Cypriot Pounds 74,720             |
| Ads Dot Com Limited                 | London, England   | Marketing support              | 4,880                           | 3 years 5 months  | £282,928                    |
| CryptoLogic (Asia Pacific) Pte Ltd. | Singapore         | Business development           | 350                             | 3 months          | Singapore $8,000                  |

 

**ITEM 4A. UNRESOLVED STAFF        COMMENTS**

 

|                                                                        | Not applicable. |   |
|-----------------------------------------------------------------------------|-----------------|--------|
| **ITEM 5. OPERATING AND FINANCIAL REVIEW AND                    PROSPECTS** |

 

The Company’s consolidated financial statements have been prepared in        accordance with Canadian GAAP. The significant measurement differences between Canadian        GAAP and U.S. GAAP for the years ended December 31, 2007, 2006 and 2005 are disclosed in        Note 19 to our audited consolidated financial statements and as described in Item 3 on page        4 of this annual report.

         

The following discussion should be read in conjunction with our consolidated        financial statements and related notes for the years ended December 31, 2007, 2006 and 2005        as set out in this annual report under “Item 17 - Financial        Statements.”

 

**A. OPERATING RESULTS**

 

Revenue

 

CryptoLogic reported revenues for the year ended December 31, 2007 of $73.7        million, a decline of 29.2% from the previous year (2006: $104.0 million). The decline was        anticipated with the industry-wide impact of the UIGEA, which effectively banned online        gaming in the U.S. The effect of the UIGEA on our revenue was somewhat mitigated as a        result of our licensees’ deriving substantial revenue from non-U.S. players; however,        the impact was still significant to our Company.

         

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In 2006, revenue rose 20.5% from $86.3 million a year ago, as a result of        increasing fees from both Internet poker and Internet casino.

 

Licensing fees and services from our casino licensees are calculated as a        percentage of a licensee’s level of activity in its online casino site. Fees from        online poker are based on a percentage of the licensee’s “rake” per hand        in regular or ring games (the rake is typically 5% of the pot, up to a maximum amount per        hand) or fixed fees for entry into poker tournaments.

 

When the UIGEA was enacted in October 2006, licensees’ revenue from        outside the U.S. was approximately 70% of total revenue, as it was at the end of 2005.        After the UIGEA enactment, 100% of licensees’ revenue came from outside the        U.S.

 

Substantially all of our revenue is of a recurring nature in that our        licensees pay an ongoing fee each month pursuant to software licensing and services        contracts that generally extend three years in term. In 2007, recurring revenue represented        93.6% of licensing and support revenue (2006: 89.5%; 2005: 92.7%).

         

Additional revenues are derived from other sources including fees for the        provision of software customization, and advertising and marketing services related to our        portal business. In 2007, other revenue decreased 56.9% to $4.7 million or 6.4% of total        revenue (2006: $10.9 million or 10.5%; 2005: $6.3 million or 7.3%). The decline was        primarily a result of the non-recurring revenue from our exit agreement with Betfair in        October 2006 resulting in no revenues received in 2007, and reduced marketing support        revenue due to the UIGEA. The 2006 increase over 2005 reflected higher revenue from our        marketing support services and increased revenue associated with our gaming portal        business.

         

Internet casino and Internet poker remained core product areas for        CryptoLogic. In 2007, Internet casino fee revenue decreased to $49.5 million or 67.1% of        total revenue (2006: $59.2 million or 56.9%; 2005: $53.0 million or 61.4%). While casino        fees declined in absolute dollars due to UIGEA, they have increased as a percentage of        total revenue because of the success of new games and casino launches for World Poker Tour        and Parbet in 2007. Looking at 2006 versus 2005, higher Internet casino fees were        attributed to the addition of more than 25 new casino games including exclusive offerings        such as*Bejeweled®*, our own        mega-jackpot slot game,*Millionaires ClubTM,*and new*Marvel*video slot        games based on*ThorTM, Silver SurferTM and        ElektraTM*.

         

In 2007, Internet poker fees decreased to $19.5 million or 26.5% of total        revenue (2006: $33.9 million or 32.6%; 2005: $27.0 million or 31.3%). This decrease was        primarily due to the UIGEA and the exit of Betfair from the poker room, both in October        2006, and a slowing of growth in European poker. Poker fee growth is expected only with the        addition of new licensees. Higher Internet poker fees in 2006 versus the year prior        reflected the organic growth of our existing customers in cross marketing poker to their        established player base; and new poker enhancements and features including an appealing        poker software redesign, tournament innovation such as*Thunder        TournamentsTM*and the launch of My Poker Points, a loyalty        reward system.

         

During the first quarter of 2008, the        Companyrevised its estimate for certain royalty        payments based on new facts and circumstances including recent negotiations resulting in a        reduction inaccrued liabilities and a corresponding        increase in revenue ofapproximately $1.0        million.

 

Expenses

 

In 2007 and 2006, we incurred expenses in five categories: operating,        general and administrative, reorganization charges, finance and amortization.

         

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Total expenses declined to $72.4 million in 2007 (2006: $81.6 million; 2005:        $67.9 million), as we focused our attention on adjusting our cost base to the significant        reduction in revenues post UIGEA implementation. We continue to focus on maintaining close        control over all discretionary expenditures as we align to the new market        environment.

 

Higher 2006 expenses compared with 2005 were largely in step with our 20.5%        increase in 2006 revenue. Expenses in the first half of 2006 were relatively consistent as        a percentage of revenue, but rose in the back half of the year as a result of costs        associated with the establishment of the Company’s head office in Ireland and due to        the UIGEA significantly reducing revenue in Q4 2006. In 2005, we also incurred $3.3 million        expense associated with expensing previously capitalized software and related severances,        for which there was no similar expense in 2006 and 2007.

 

Operating

 

Operating expense comprises development and support expense, which includes:        all personnel and equity compensation costs for employee stock options and the long term        incentive program; licensee support; e-cash systems and support costs; customer service        expense; and expense related to regulatory compliance.

 

Development costs are expensed as incurred unless costs meet the criteria        for deferral and amortization under generally accepted accounting principles.

 

Operating expense was $49.4 million or 67.1% of total revenue (2006: $64.7        million or 62.2%; 2005: $52.7 million or 61.0%). Our 2007 operating expenses have decreased        in absolute terms when compared to the prior year due to reduced compensation costs,        software development expense and e-cash processing fees. The reduction in the e-cash        processing fees was associated with better management of our external providers, lower        revenues and financial transaction levels. These decreases were offset in part by a        one-time charge of $1.75 million associated with the program costs of a major licensee. The        2006 increase over 2005 reflected our growing game and back-office portfolio, higher e-cash        transaction processing fees commensurate with increased transaction volumes at our        licensees’ growing businesses; and higher performance-related compensation expense        accruals due to the Company’s better-than-expected financial results in        2006.

         

We must continue our investment in our core product and services to help        licensees grow market share and player loyalty despite the reduction in revenue.        Consequently we have gaming capacity for additional licensee fees that we are aggressively        looking to fill.

 

At December 31, 2007, CryptoLogic had 310 employees dedicated to        implementing our strategy in a competitive and increasingly sophisticated market, compared        with 400 in 2006 and 358 in 2005.

 

General        and Administrative Costs

 

General and administrative (“G&A”) expense includes overhead        and administrative expense, travel expense and professional fees relating to our business        development, infrastructure and public company listings.

         

In 2007, G&A expense of $10.2 million represented 13.8% of total revenue        (2006: $7.9 million or 7.6%; 2005: $7.6 million or 8.9%). The increase in 2007 G&A        expense was primarily a result of professional fees from additional tax planning, cost        associated with the implementation of Sarbanes Oxley and advice for merger and acquisition        opportunities. In addition, occupancy costs increased with the new head office in Ireland        and offices in Malta and Singapore.

         

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Higher G&A expense in 2006, in absolute terms, reflected higher        consulting fees in connection with our Sarbanes Oxley compliance initiatives, and higher        professional fees due to regulatory and strategic activities, including the exploration of        acquisition opportunities, and work on new customer contracts.

         

Reorganization Charges

 

One-time reorganization charges are associated with our establishment of the        executive headquarters in the Republic of Ireland in 2007 and the related restructuring of        the organization initiated in 2006. In 2007, such costs totaled $5.7 million or 7.7% of        revenue (2006: $3.7 million or 3.6%; 2005: nil) and primarily comprised professional fees        and expenses related to employee relocation and severance.

         

Finance        Costs

 

Finance costs include bank charges and fees for bank        drafts. These costs were fairly consistent over the past three years, and at $0.55 million        in 2007 (2006: $0.55 million; 2005: $0.42 million). Finance costs remained less than 1% of        revenue in the past three years.

 

Amortization

 

Amortization expense is based on the estimated useful lives of the assets        and includes the amortization of our investments in computer equipment, leasehold        improvements, software licenses, and intangible assets to support our business        activities.

 

Amortization expense was $6.6 million or 8.9% of revenue (2006: $4.8 million        or 4.6%; 2005: $3.9 million or 4.5%). In 2007, the increase from the previous year        reflected purchased intangibles for Casino.co.uk and Parbet.com, investment in computer        equipment, and software licenses, in accordance with GAAP. The 2006 increase over 2005        reflected i) higher investment in computer equipment, leasehold improvements, software        licenses, and capitalized software development expenses, where required by GAAP, and ii)        change in the estimated useful life of computer equipment and office furniture and        equipment.

 

EBITDA(1)

 

As we expected at the beginning of 2007, earnings before interest, taxes,        amortization and minority interest (“EBITDA”) decreased significantly to $7.8        million from $27.2 million in 2006 (2005: $22.3 million). EBITDA margin, or EBITDA as a        percentage of revenue, declined significantly to 10.6% in 2007 (2006: 26.2%; 2005: 25.8%)        as a result of the revenue impact from UIGEA.

 

In 2008, we expect EBITDA and EBITDA margin to improve as a result of our        efforts to reduce costs to the levels supported by the reduced revenues. Longer term, we        expect to be able to return to and exceed 2006 revenue, EBITDA and EBITDA margin        levels.

 

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Interest        Income

 

Interest income, comprising interest earned on cash and short-term        investment balances, declined to $6.2 million in 2007 (2006: $7.1 million; 2005: $3.6        million). The decrease in 2007 was primarily due to the cash used in operations and the        acquisitions of the Parbet assets and Casino.co.uk, and investments in Mikoishi and 568        Network Inc. We expect improvements in interest income as we work to return to previous        balances. The increase in 2006 versus 2005 reflected growing cash and cash equivalents        balances and higher interest yields.

 

Provision for Income Taxes

 

In 2007, income taxes were $1.0 million (2006: $4.7 million; 2005: $1.5        million), and were net of a future income tax recovery. The decrease in 2007 primarily        resulted from lower revenues and lower earnings. Changes in future income taxes result from        differences between tax and accounting recognition with respect to certain of        CryptoLogic’s expenses. The increase in 2006 versus 2005 related primarily to higher        taxable income driven by higher revenues in 2006, and the use of tax loss carryforwards in        2005.

 

We are subject to tax in many jurisdictions. Subject to significant changes        in the tax rates of those jurisdictions or significant changes in our corporate structure,        we generally expect a blended tax rate of approximately 15%.

 

Minority        Interest

 

Pursuant to a business reorganization implemented by way of an Ontario,        Canada Superior Court of Justice approved plan of Arrangement and approved by the        shareholders on May 24, 2007, the Company acquired control over all of the issued and        outstanding common shares of CryptoLogic Inc., an Ontario company, which through the        Arrangement became an indirect subsidiary of CryptoLogic Limited. As part of the        Arrangement, the Company issued either an equivalent amount of CryptoLogic Limited Common        Shares or, in the case of taxable Canadian residents, Exchangeable Shares of CEC, an        indirect subsidiary of the Company (refer to page 1 of this annual report for further        information regarding the Arrangement).

 

The Exchangeable Shares are considered a non-controlling interest of the        Company for accounting purposes only and consequently, a proportional amount of the net        earnings before minority interest associated with subsidiaries directly or indirectly owned        by CEC is recorded as minority interest.

 

Minority interest will continue until all Exchangeable Shares have been        exchanged into Common Shares or until June 1, 2014 when we will redeem all outstanding        Exchangeable Shares in return for Common Shares.

 

Earnings 

 

Our earnings have been significantly impacted by our licensees’ loss        of U.S. online gaming customers and have declined to $5.5 million or $0.47 per diluted        share (2006: $24.8 million or $1.81 per diluted share; 2005: $20.5 million or $1.46 per        diluted share). CryptoLogic’s earnings rose in 2006 over 2005 due to the        Company’s strong revenue growth.

         

In 2008, we anticipate our earnings to improve as the full extent of our        cost control efforts take effect along with continued focus on control over discretionary        expenses and new licensee revenues are realized. During 2009, we should start to trend        toward improved quarterly revenue run rates similar to those realized prior to the UIGEA        enactment and continue to strive for net margins (net earnings as a percentage of revenue)        in excess of 20%.

 

 

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Return        on equity

 

                                 In 2007, CryptoLogic’s return on shareholders’ equity was severely impacted by        the UIGEA compared to the prior two years. Return on shareholders’ equity in 2006 and        2005 reflected profitable growth.

 

|             | 2007 | 2006 | 2005 |
|------------------|------|------|------|
| Return on equity | 6%   | 25%  | 25%  |

 

Return on        equity is a non-GAAP measure and is defined as the year’s net earnings before        minority interest divided by the average shareholders’ equity for that        year.

 

Foreign        Exchange

 

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, including        British Pounds, Euros, and Canadian Dollars. Accordingly, fluctuations in the exchange rate        of world currencies could have a positive or negative effect on our reported results. We        may utilize a hedging program from time to time and/or take advantage of the natural hedge        in having operations in multiple currencies to mitigate a portion of 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.

 

In 2007, the Company recognized a total foreign exchange gain of $0.68        million (2006 - foreign exchange gain of $0.57 million; 2005 - foreign exchange loss of        $1.8 million), which is recorded as an operating expense in the accompanying consolidated        statements of earnings.

 

Government Regulation

 

As companies and consumers involved in Internet gaming are located around        the globe, including our licensees and their players, there is uncertainty regarding which        government has authority to regulate or legislate the industry. On October 13, 2006, the        U.S. enacted the UIGEA, which effectively banned online gaming in that country by making it        illegal to process related financial transactions. The industry-wide impact of UIGEA has        negatively affected our business by significantly reducing our revenue and earnings in        2007. Similar prohibition legislation may be adopted in other jurisdictions.

 

While the U.K. and other European countries such as Malta and Gibraltar are        adopting a regulated online gaming approach, opposing views are developing in Europe. Some        European countries, including Italy, Germany and France where there are state-owned        monopolies, are taking action aimed at banning foreign online gaming operators to protect        their monopolies. The EU Commission has commenced infringement proceedings against some        member states that are taking a protectionist approach— a development that we believe        is favorable to the industry in Europe.

 

There can be no assurance that legislation prohibiting Internet gaming or        regulating various aspects of Internet gaming or the Internet gaming industry will not be        proposed and passed in potentially relevant jurisdictions. The burden of compliance with        any such legislation may have a material adverse effect on our business, financial        condition and results of operations.

 

 

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**B. LIQUIDITY AND CAPITAL        RESOURCES**

 

CryptoLogic remained highly liquid and debt-free. Our strong balance sheet        continues to provide the Company with the flexibility to fund working capital needs, pay        dividends, repurchase our own shares through issuer bids, and pursue strategic initiatives        and acquisitions consistent with our growth strategy.

 

NetCash(2)

 

As at December 31, 2007, our net cash (includes cash and cash equivalents,        short-term investments, restricted cash and security deposits) was $77.5 million or $5.57        per diluted share (December 31, 2006: $128.4 million or $9.35 per diluted share; December        31, 2005: $99.1 million or $7.05 per diluted share). In 2007, the decrease in net cash of        $50.9 million was primarily due to the acquisition of Casino.co.uk ($6.1 million) and        Parbet ($11.8 million), investments in Mikoishi and 568 Network Inc. ($5.4 million),        dividend payments ($6.7 million), purchase of capital assets ($13.1 million) and payment of        two significant amounts to winners of cumulative jackpot games during the year ($14.1        million).

 

Security deposits and restricted cash are amounts held by the Company's bank        as collateral provided to foreign banks and payment processors that process deposits and        credit card transactions, and are not available for general corporate purposes. For 2007,        2006 and 2005, security deposits and remained consistent at $1.5 million for each fiscal        year. In 2007, we were also required to maintain restricted cash or a deposit of $20.6        million (2006 and 2005: nil) to support a letter of credit to the Lottery Gaming Authority        of Malta to support user funds on deposit. In February 2008, this requirement was reduced        to $5.0 million.

 

Operating Activities

 

In 2007, cash flow used in operating activities was $11.9 million (2006:        $40.7 million provided by operating activities; 2005: $34.7 million provided by operating        activities). In 2007, several factors contributed to the decrease from the prior year        including, but not limited to: (i) reduced profitability after accounting for non-cash        items primarily due to the impact of UIGEA; (ii) costs associated with the relocation of        our corporate headquarters to Dublin, Ireland; and (iii) reduced jackpot provisions due to        significant cumulative jackpot payments.

         

The increase in operating cash flow in 2006 versus 2005 was attributed        largely to higher earnings in 2006. As well, accounts payable and accrued liabilities were        higher at 2006 year-end, primarily due to higher provisions related to growing jackpot        prizes and for performance-related compensation costs due to better-than-expected financial        performance.

 

Financing Activities

 

In 2007, $2.8 million was used for financing activities (2006: $2.7 million;        2005: $7.2 million) related to: $3.9 million provided by the exercise of stock options        during the year; and $6.7 million used for the payment of quarterly cash dividends. In        2006, financing activities were related to: $3.1 million (2005: $5.0 million) from the        exercise of stock options; and $5.8 million (2005: $3.0 million) paid in quarterly cash        dividends. The higher dividend payment was attributed to an increase in our quarterly cash        dividend from $0.07 per share to $0.12 per share (an annual rate of $0.48) commencing with        the dividend paid on June 15, 2006.

 

None of the Company’s shares were repurchased in 2007 and 2006. In        2005, $9.2 million was applied to repurchase and cancel 509,700 shares through the        Company’s Normal Course Issuer Bids.

         

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While each future dividend is subject to Board approval based on our        financial results for that particular period and the Board’s view from time to time        on the optimal uses of cash, we expect to continue paying dividends on a regular basis.        With the industry-wide impact of the UIGEA enactment, revenues and earnings will be        negatively impacted. However, as noted above, during 2009, we should start to trend toward        quarterly revenue run rates similar to those realized prior to the UIGEA enactment, and        continue to strive for net margins (net earnings as a percentage of revenue) in excess of        20%.

 

Investing Activities

 

Investing activities used cash of $6.8 million in 2007 (2006: $55.4 million;        2005: $23.7 million). In 2007, the use of cash was largely due to strategic acquisitions        including the Parbet assets ($11.8 million), Casino.co.uk ($6.1 million), Mikoishi ($4.3        million) 568 Network Inc. ($1.1 million). As well, there was a reclassification of $20.6        million from cash to restricted cash primarily associated with a required deposit of $20.0        million to support a letter of credit to the Lottery Gaming Authority of Malta to support        user funds on deposit. In February 2008, this requirement was reduced to $5.0        million.

         

In March 2008, we acquired a 15.0%        ownership interest in Mobilebus, a privately held Korean company specializing in game        development, for cash consideration of $0.6 million. In exchange for the cash        consideration, the Company received common shares. 

         

In May 2008, we acquired an 11.1%        interest in Jingle, a leading supplier of online mah-jong games, for $0.9 million. In        exchange for the cash consideration, we received preference shares, which rank pari passu        to the common shares with respect to all dividends and voting rights. Under the terms of        the agreement, the Company is required to make additional investments in Jingle of up to        $1.5 million should Jingle achieve certain financial targets. In addition, under the terms        of the agreement, the Company is required to pay up to approximately $1.0 million without        receipt of additional equity as a contingent acquisition price increase should Jingle        achieve certain performance milestones.

         

Additionally, funds used for capital expenditures amounted to $13.0 million        in 2007 (2006: $8.6 million; 2005: $8.9 million), which related to purchases in the normal        course of business for hardware, leasehold improvements, software licenses, and capitalized        software development expenses. These decreases in cash were offset by a shift of $50.0        million into cash and cash equivalents from short-term investments to fund strategic        investments completed during 2007. Fiscal 2006 and 2005 also reflected shifts between cash        and cash equivalents and short term investments.

         

Working Capital(3)

 

CryptoLogic’s working capitalat December 31,        2007 was $68.2 million or $4.90 per diluted share (December 31, 2006: $93.8 million or        $6.83 per diluted share; December 31, 2005: $73.6 million or $5.23 per diluted share). In        2007, the decrease was primarily related to i) lower earnings due to the UIGEA; and ii)        cash used for strategic investments. The 2006 increase over 2005 was primarily due to        higher earnings.

 

In the foreseeable future, we expect our cash needs to be funded through        existing cash resources and operating cash flow. Our liquidity gives us the financial        flexibility to continue to invest in our business and take advantage of opportunities in        our markets, consider potential strategic acquisitions, pay shareholders dividends, and        repurchase common shares under our Normal Course Issuer Bid.

 

User        Funds Held on Deposit

 

User funds held on deposit increased 6.7% to $22.3 million at December 31,        2007 (2006: $20.9 million; 2005: $26.0 million). In 2007, the increase reflected the        success of our efforts to expand our licensee base despite a significant decrease at the        end of 2006 reflecting the reduction of players’ deposits subsequent to the UIGEA        enactment. Cash related to user funds on deposit is segregated and shown separately as an        asset and liability on the balance sheet, and does not form part of the Company’s        total cash position.

 

Capitalization

 

Since inception, CryptoLogic has had no debt and unutilized credit        facilities. At December 31, 2007, CryptoLogic had 12.8 million Common Shares and 1.4        million stock options outstanding (2006: 13.6 million Common Shares and 1.0 million stock        options; 2005: 13.3 million Common Shares and 1.1 million stock options). In 2007, the        outstanding Common Shares excluded 1.1 million (2006: nil; 2005: nil) Exchangeable Shares,        which are entitled to be exchanged on a one-for-one basis with our Common Shares. Including        the Exchangeable Shares, the Common Shares outstanding would be 13.9 million.

 

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In 2007, CryptoLogic completed a court approved plan of Arrangement. As part        of the Arrangement, Canadian residents received Exchangeable Shares of CEC, an indirect        subsidiary of CryptoLogic. The Exchangeable Shares are, as nearly as practicable, the        economic equivalent of the Common Shares. For accounting purposes, the acquisition is        accounted for using the continuity of interest method, which recognizes CryptoLogic Limited        as the successor entity to CryptoLogic Inc. The Exchangeable Shares can be exchanged for an        equivalent amount of Common Shares at anytime and are accounted for as a minority interest.        On June 1, 2014, CryptoLogic through its subsidiaries will redeem not less than all of the        then outstanding Exchangeable Shares for an amount per share equal to the redemption price.        The redemption price will be satisfied through the issuance and delivery of one Common        Share for each Exchangeable Share. CryptoLogic Limited has issued a special voting share to        a third party trustee, the purpose of which is to provide holders of Exchangeable Shares        with the right to vote on CryptoLogic matters. All outstanding options of CryptoLogic Inc.        as of the date of Arrangement were fully assumed by CryptoLogic Limited under the same        terms and conditions as originally granted by CryptoLogic Inc. The Exchangeable Shares        provide those shareholders with the same voting and dividend rights as the Common Shares.        No additional shares of CEC will be issued and all stock options will give rise to the        issue of additional CryptoLogic Limited shares (refer to page 1 of this annual report for        further information on the Arrangement).

 

From November 14, 2007 to November 13, 2008, CryptoLogic has, through its        Normal Course Issuer Bid, authorization to repurchase up to 1.28 million Common Shares,        under which we have yet to buy back any shares.

 

From September 29, 2006 to September 28, 2007, the Company had, through its        Normal Course Issuer Bid, authorization to repurchase up to 1.35 million Common Shares,        under which we did not buy back any shares.

 

From September 28, 2005 to September 27, 2006, CryptoLogic’s Normal        Course Issuer Bid authorized the Company to repurchase up to 1.34 million Common Shares.        The Company bought back 239,200 shares at an average price of $16.62 under the 2005/2006        bid. In total, we repurchased 509,700 shares for $9.2 million in 2005.

 

CryptoLogic entered 2005 with a Normal Course Issuer Bid, which authorized        the buyback of up to 1.25 million Common Shares. We repurchased and cancelled 270,500        shares at an average price of $19.32 under this bid before it expired on September 22,        2005. Our buy back programs allow us to repurchase our shares on occasions when we believe        that our share price does not reflect the underlying value of our Company.

 

Critical        Accounting Policies

 

CryptoLogic’s accounting policies are specified in the Notes to the        Company’s financial statements, in particular Note 1, which are included in this        annual report. The accounting estimates discussed below are considered particularly        important as they require judgments by management. Management has instituted policies that        are intended to ensure these judgments are well controlled and consistently applied from        period to period.

 

Each time progressive jackpot casino games are played by an end user a        specified amount is added to the “Jackpot”. The “Jackpot” is won by        a player on a random basis and is not predictive. Each “Jackpot” also has a        minimum amount of prize money. As the “Jackpot” progresses the        Company

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regularly        collects funds from participating licensees and assumes the liability of future        “Jackpot” wins. Management provides for the “Jackpot” based on        frequency of each game played, history of wins and minimum prize requirements. During 2007,        the Company performed an analysis of the accumulation of the funds in the jackpot and a        statistical analysis of the amounts required to address jackpot payouts. Consequently, the        Company revised its estimated liability based on this analysis. This change of estimate        resulted in the reduction of the liability for jackpot accrual and a corresponding increase        in revenue of $4.5 million.

 

The Company may receive from time to time claims and enter into litigation        arising out of the ordinary course and conduct of business including intellectual property        matters. Management assesses such claims, and if considered likely to result in material        exposure and where the amount of the claim is quantifiable, provisions for loss are made        based on management’s assessment of the likely outcome. Management does not make        provisions for claims that are considered unlikely to result in a significant loss, claims        for which the outcome is not determinable or claims where the amount of the loss cannot be        reasonably estimated. Any settlements or awards under such claims are provided for when        reasonably determinable. Adjustments will be made to the accrual for such amounts as new        information is obtained or the claim settled. During the year, the Company reviewed its        accounting for certain contingencies and determined $2.0 million was no longer required,        which increased revenue by a corresponding amount.

 

The Company has a stock option plan where the amount of compensation        expensed is determined using an option pricing model. In addition, the Company provides a        long-term incentive program where the amount of the compensation expensed is determined        based on estimated performance criteria and the Company’s stock price. Calculations        for these plans with the necessary assumptions inherently mean judgments are required by        management.

 

**Recently        issued and adopted accounting pronouncements**

 

*Recently        adopted accounting pronouncements*

 

*Financial Instruments*

 

Effective January 1, 2007, the Company adopted the recommendations of The        Canadian Institute of Chartered Accountants' ("CICA") Handbook Section 1530, Comprehensive        Income ("Section 1530"); Section 3855, Financial Instruments - Recognition and Measurement        ("Section 3855"); Section 3861, Financial Instruments - Disclosure and Presentation        ("Section 3861"); and Section 3251, Equity ("Section 3251"). These sections provide        standards for recognition, measurement, disclosure and presentation of financial assets,        financial liabilities and non-financial derivatives. Section 1530 provides standards for        the reporting and presentation of comprehensive income, which represents the change in        equity from transactions and other events and circumstances from non-owner sources. Other        comprehensive income refers to items recognized in comprehensive income that are excluded        from net income calculated in accordance with Canadian GAAP. The impact of adopting the        accounting for financial instruments did not have a material impact on the Company's        results of operations.

 

Upon adoption of the new standards on January 1, 2007, the Company        classified all cash, cash equivalents, short-term investments, investments and user funds        on deposit as held-for-trading assets, which are measured at fair value and the changes in        fair value are recognized in earnings. Long-term investments are classified as available        for sale assets which are measured at fair value. The changes in fair value of long-term        investments, if any, will be recognized in other comprehensive income. Transaction costs        related to financial assets and liabilities that are designated as held-for-trading are        expensed as incurred, transaction costs related to available-for-sale assets are included        in the carrying value of the asset, and transaction costs related to all other financial        assets and financial liabilities are recognized over the life of the investment using the        effective interest rate method. Accounts receivable and other are classified as loans and        receivables and measured at amortized costs. Accounts payable and accrued liabilities and        user funds held on deposit are classified as other financial liabilities and are measured        at amortized cost using the effective interest method. The Company did not have held-to        maturity instruments during the year ended December 31, 2007 and no available for sale        instruments as of January 1, 2007.

 

|   | 35 |
|--------|----|

 

----

Section 3855 requires the Company to identify embedded derivatives that        require separation from the host contract and measure those embedded derivatives at fair        value. Subsequent changes in fair value of embedded derivatives are recognized in earnings        in the year the change occurs. The Company did not identify any material embedded        derivatives that are required to be separated from the host contract as of January 1,        2007.

 

*Recently        issued accounting pronouncements*

 

*Handbook        Section 1535, Capital Disclosures*

 

Handbook Section 1535, Capital Disclosures ("Section 1535"), establishes        standards for disclosing information about a company's capital and how it is managed to        enable users of financial statements to evaluate the Company's objectives, policies and        procedures for managing capital. This section is effective for the Company's fiscal year        ending December 31, 2008. The Company is evaluating the impact of adopting this standard on        its consolidated financial statements.

 

*Handbook        Section 3862, Financial Instruments - Disclosures*

 

Handbook Section 3862, Financial Instruments - Disclosures ("Section 3862"),        requires disclosure in the financial statements that will enable users to evaluate the        significance of financial instruments for a company's financial position and performance,        the nature and extent of risks arising from financial instruments to which a company is        exposed during the period and at the balance sheet date, and how the Company manages those        risks. This accounting standard is effective for the Company's fiscal year ending December        31, 2008. The Company is evaluating the impact of adopting this standard on its        consolidated financial statements.

 

*Handbook        Section 3863, Financial Instruments - Presentation*

 

Handbook Section 3863, Financial Instruments - Presentation ("Section        3863"), establishes standards for presentation of financial instruments and non-financial        derivatives. This section complements the existing Handbook Section 3861, Financial        Instruments - Disclosure and Presentation. This accounting standard is effective for the        Company's fiscal year ending December 31, 2008. The Company is evaluating the impact of        adopting this standard on its consolidated financial statements.

         

*Handbook        Section 3064, Goodwill and Intangible Assets*

         

Handbook Section 3064, Goodwill and Intangible Assets ("Section 3064"),        which replaces Section 3062, Goodwill and Intangible Assets, and Section 3450, Research and        Development Costs, establishes standards for recognition, measurement and disclsoure of        goodwill and intangible assets.  This new standard is effective for the Company's        fiscal year commencing January 1, 2009.  The Company is evaluating the impact of        adopting this standard on its consolidated financial statements.

 

Financial Instruments

         

Financial instruments that potentially expose the Company to a concentration        of credit risk, interest rate and foreign exchange risk consist principally of cash and        cash equivalents and short-term investments. The Company manages credit risk by investing        in cash equivalents and short-term investments rated as A and R1 or above. Our cash and        cash equivalents are primarily held in U.S. dollars, Pound Sterling and Euros.

 

The Company does not believe that the results of operations or cash flows        would be affected to any significant degree by a sudden change in market interest rates        relative to interest rates on the investments, owing to the short-term nature of the        investments.

 

|   | 36 |
|--------|----|

 

----

The Company believes its exposure to foreign exchange risk is to a large        degree naturally hedged. The Company may engage from time to time in currency hedging,        although no hedging has been done in 2007, 2006 and 2005.

 

The weighted average effective interest rate on short-term investments as at        December 31, 2007 is 5.03% (2006 - 5.30%; 2005 - 4.20%).

 

The related interest income or expense and gains and losses for financial        assets classified as held-for-trading are included as interest income in the accompanying        consolidated statements of earnings. Interest income or expense relating to loans and        receivables and other financial liabilities are included in operating expenses in the        accompanying consolidated statements of earnings.

 

**C. RESEARCH AND        DEVELOPMENT**

 

We make significant investments in research and development to remain        competitive with technology advancements and product evolution in the global online gaming        market. Research and development personnel comprised 23% of our workforce at 2007 year end,        consistent with 2006 and 2005. Our research and development expenditures, which are        accounted for as part of operating expenses, totaled $49.4 million in 2007 (2006: $64.7        million; 2005: $52.7 million).

         

**D. TREND INFORMATION**

 

While the global online gaming market continues to promise growth potential,        competition is intensifying for players and market position, growth in online poker is        moderating from previous exponential rates, and the global legislative environment for        online gaming continues to evolve. Despite these challenges, CryptoLogic remains optimistic        about the future of online gaming and believes that its disciplined strategy will continue        to help the Company remain a leader within it.

         

In order to remain competitive, CryptoLogic has had to devote increasing        financial and human resources to meet the technological and regulatory challenges        associated with remaining an industry leader. As product diversification and player        sophistication increases, our need to hire greater numbers of software and industry        specialists has increased. This has contributed to higher operating costs to accommodate        the growth of our business and in order to maintain our competitive advantage in our        priority game areas. In particular, we have increased investments in Internet casino and        poker to broaden our product offering in response to growing competition and player        demands.

 

Given the trend to regulate online gaming in certain European markets, the        costs associated with carrying on our business may increase as regulatory initiatives may        require greater resources to meet changing compliance standards. Changes in regulatory        requirements, including regulatory fees and taxation, could impact on our cost of doing        business.

 

The Company’s financial results were negatively affected by the        industry-wide impact of UIGEA, which was enacted in October 2006. Our management has        estimated that the UIGEA resulted in approximately $8.0 million in lost revenue in the        fourth quarter 2006 and $6.0 million in lost earnings related to those revenues for        CryptoLogic. Our management has also estimated that the UIGEA would have reduced our        revenue by $31.0 million and our earnings by $24.0 million if the UIGEA had been in force        for all of 2006. In 2007, the Company’s revenue declined by 29.2% to $73.7 million in        2007 (2006: $104.0 million) and earnings decreased significantly to $5.5 million (2006:        $24.8 million). Even though revenue and earnings have decreased significantly in the short        term, and we are exercising even tighter control over discretionary expenses, we are not        planning a cost reduction sufficient to offset the lost revenue. During 2009, we should        start to trend toward quarterly revenue run rates similar to those realized prior to the        UIGEA enactment, and continue to strive for net margins (net earnings as a percentage of        revenue) in excess of 20%.

|   | 37 |
|--------|----|

 

----

         

Not all changes in the industry are foreseeable, but the growth of the        industry, heightened competition and anticipated legislation will all likely increase the        rate at which we need to offer comprehensive player solutions. As a result, we continue to        focus on investing in our core Internet casino and Internet poker solutions, and increasing        our international diversification in global markets that embrace online gaming.

 

**E. OFF-BALANCE SHEET        ARRANGEMENTS**

 

As of May 12, 2008, the Company has no off-balance sheet arrangements that        have or are reasonably likely to have a current or future effect on the Company’s        financial condition, revenues or expenses, results of operations, liquidity, capital        expenditures or capital resources.

 

**F. CONTRACTUAL        OBLIGATIONS**

 

|   | The following table summarizes our known contractual obligations                    as of December 31, 2007: |
|--------|--------------------------------------------------------------------------------------------------------------|

 

|                                              | **Payments due by period**                    |
|---------------------------------------------------|-----------------------------------------------|
|  

*(In thousands of U.S. dollars)*          |  

                     

**Total** | **Less than**

**1 year** |  

**1-3**

**years** |  

**3-5**

**years** | **More than**

**5 years** |
| Facility leases                                   | $15,008                                       | $2,478 | $3,896 | $3,790 | $4,844 |
| Minimum royalty payments and purchase commitments | 2,640                                         | 2,265 | 375 | - | - |
| Total outstanding cash commitments                | $17,648                                       | $4,743 | $4,271 | $3,790 | $4,844 |

 

Total contractual obligations at the end of fiscal 2007 totaled $15.7        million (2006: $20.0 million). The Company has entered into lease agreements for premises        expiring at various periods up to July 2015.

         

During the first quarter of 2008, the Company revised its        estimate for certain royalty payments based on new facts and circumstances including recent        negotiations resulting in a reduction in accrued liabilities and a corresponding increase        in revenue of approximately $1.0 million.

 

**G. SAFE HARBOR**

 

Refer to “Cautionary Statement Regarding Forward-Looking        Information” on page 2 of this annual report.

| **ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND                    EMPLOYEES** |
|---------------------------------------------------------------------------|

 

**A.  DIRECTORS        AND SENIOR MANAGEMENT**

 

The following table and the narrative that follows set forth the name, age,        residence, position, and date of first election of each director and member of senior        management for CryptoLogic Limited, including the predecessor company, as at May 12,        2008.

 

|  

**Name and Municipality of Residence**

                      |  

**Age** |  

**Principal Occupation**                                                    | **Served as a Director(5)/                    Officer Since** |
|----------------------------------------------------------------------------|-----------------|-------------------------------------------------------------------------------------|---------------------------------------------------------------|
| Thomas Byrne(1)(2)(3)

Dublin, Ireland                                     | 57              | **•**Director

**•**Self-employed Chartered                    Accountant | April 13, 2007                                                |

|   | 38 |
|--------|----|

 

----

| Stephen H. Freedhoff, CA, CFP(1)(2)(6)

Toronto, Ontario | 71 | **•**Director

**•**Self-employed                    consultant                                                                                  | May 1, 2003    |
|----------------------------------------------------------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|
| Brian Hadfield(4)(7)

Burnham Beeches, England           | 55 | **•**Director

**•**President and CEO                                                                                                            | May 30, 2007   |
| Michael Starzynski

Whitby, Ontario                      | 49 | **•**CTO                                                                                                                                              | March 17, 2003 |
| Robert H. Stikeman(3)(4)Toronto, Ontario                 | 62 | **•**Chairman of the Board and                    Director

**•**Partner, Stikeman Keeley                    Spiegel Pasternack LLP (a law firm) | March 7, 1996  |
| Stephen B. Taylor, CA

Dublin, Ireland                   | 50 | **•**Director

**•**CFO                                                                                                                          | August 8, 2005 |
| Justin Thouin

Toronto, Ontario                          | 30 | **•**VP, Product Management and                    Business Development                                                                               | August 1, 2006 |
| Wai Ming Yap(3)(4)

Singapore                            | 46 | **•**Director

**•**Partner, Stamford Law                    Corporation                                                                         | May 30, 2007   |

 

*Notes:*

| *(1)* | * * | *Member of                Audit Committee.* |
|-------|----------|---------------------------------------------|

| *(2)* |   | *Member of                Remuneration Committee.* |
|-------|--------|----------------------------------------------------|

| *(3)* |   | *Member of                Nominating Committee.* |
|-------|--------|--------------------------------------------------|

| *(4)* |   | *Member of                Compliance and Governance Committee.* |
|-------|--------|-----------------------------------------------------------------|

| *(5)* |   | *Each                director is elected annually to hold office until the next annual meeting of                shareholders.* |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------|

| *(6)* | * * | *Stephen Freedhoff was a                Director of CryptoLogic Inc., the predecessor company of CryptoLogic Limited, from                May 2003 to June 2007. He rejoined the Board of Directors of CryptoLogic Limited in                February 2008.  * |
|-------|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(7)* | * * | *Brian                Hadfield was appointed to President and CEO on February 27, 2008.* |
|-------|----------|------------------------------------------------------------------------------------------|

 

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.

         

**Thomas Byrne**is a Chartered Accountant and was        a partner of a global accounting firm before joining Ireland’s largest brokerage        house in 1987. He was head of corporate finance at the brokerage house until he set up his        own corporate advisory company in 2001. Mr. Byrne is Chairman of the Board’s Audit        Committee. At present, Mr. Byrne also serves as a non-executive director of a number of        companies, both public and private, and is actively involved in advising early stage        companies in Ireland. His directorships include Eco Securities Group plc, SWIP Private        Equity Fund of Funds 11, Oglesby & Butler Group plc, Irish Takeover Panel, Vivemotion        Limited, Alatto Technologies Limited, Abaris Corporate Advisers Limited and Tourism        Accommodation Approvals Limited.

 

**Stephen H. Freedhoff, CA, CFP**has been a        self-employed consultant since July 1999. Prior to that, he was a partner of a Canadian        national accounting firm for 30 years. Mr. Freedhoff had been a Director of the Company        from May 1, 2003 to June 30, 2007, and had also served as Chairman of the Board’s        Audit Committee until May 31, 2007. He rejoined as a Director of the Company on February        27, 2008, and is Chairman of the Board’s Remuneration Committee. Mr. Freedhoff holds        non-executive directorships at IBI Income Fund and IAMGOLD Corporation.

         

**Brian Hadfield**was appointed as the        Company’s President and Chief Executive Officer on February 27, 2008, and has been a        Director of the Board since May 30, 2007. He has held progressively more senior positions        at Unisys Limited from 1984 to 2005 and for the period 2000 to 2005 was its managing        director. Mr. Hadfield holds non-executive directorships at Sigma Capital plc, Tesselate        Ltd. and Awards Management Limited, as well as at non-for-profit groups, Elephant Family        and International Women of Excellence.

 

 

|   | 39 |
|--------|----|

 

----

 

 

**Michael Starzynski**was appointed Chief        Technology Officer of the Company on March 17, 2003, and has more than 20 years of global        information technology experience in both the telecommunications 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. Prior to that, he was Chief Technology Architect at CGI        Canada, and had been employed thirteen years with Bell Canada, Canada’s leading        telecommunication service provider.

 

**Robert H. Stikeman**was named Chairman of the        Board in May 2003, has been a Director since May 30, 2002 and also has served as the        Company’s Secretary since 1996. He has been a partner for the past 20 years in        Stikeman Keeley Spiegel Pasternack LLP, a law firm he was instrumental in establishing. His        firm acts as outside counsel to the Company. Mr. Stikeman has played a key role in guiding        the Company’s legal and compliance strategies since 1996. He is also Chairman of two        Board committees: the Nominating Committee and the Compliance and Governance        Committee.

 

**Stephen B. Taylor, CA**was appointed Chief        Financial Officer of the Company on August 8, 2005 and brings more than two decades of        experience in financial and business management, public markets, and mergers and        acquisitions. Mr. Taylor is a Chartered Accountant. From 2001 to 2005, he was President of        BCL Advisors Inc., an investment banking company affiliated with Seale & Associates of        Arlington, VA, which he founded. From 2002 to 2004, Mr. Taylor also served as Executive        Vice President and Chief Operating Officer of Buffett, Taylor & Associates, a benefits        consulting and wellness practice, functioning as Executive in Residence. Previous posts        included senior financial and corporate roles at Derlan Industries, a TSX-listed aerospace        company; President and Chief Operating Officer of Spellcaster Telecommunications, an        early-stage private software company; and Vice President of Mergers and Acquisitions with        Ernst & Young’s corporate finance practice. Mr. Taylor spent the first 11 years        of his career with Coopers & Lybrand (now PricewaterhouseCoopers) auditing        multinational clients in the manufacturing, mining and financial services        sectors.

 

**Justin Thouin**is the Vice President of Product        Management and Business Development, and has been with the Company since July 21, 2003. Mr.        Thouin leads the strategic direction of the Company’s Internet casino suite to ensure        that the Company continues to lead the market in innovation. He is responsible for player        research to drive game development and for developing strategic partnerships with such top        brands as*Marvel*and*Bejeweled*. Prior to his tenure at the Company,        Justin worked at Maple Leaf Foods, Canada's largest food company, in a variety of roles        including consumer marketing, sales, and finance. Justin has a Commerce (Honours) degree        from Queen's University in Kingston, Ontario, a leading Canadian business        school.

 

**Wai Ming Yap**is a practicing lawyer in        Singapore and Malaysia. He is a partner and a director of Stamford Law Corporation in        Singapore and a partner with the Malaysian law firm of Tay & Partners. Mr. Yap        specializes in commercial law, electronic entertainment and gaming commerce, and has more        than 20 years of experience. He is the Singapore general member of the International        Masters of Gaming Law, an international organization of gaming attorneys. Mr. Yap sits on        boards of international companies with activities in Southeast Asia including Genting        International Public Limited Company, Lasseters Interactive Gaming Pte Ltd., Lasseters        Investments Pte Ltd., Lasseters Resorts Pte. Ltd., Life International Holdings Pte Ltd.,        Materna Information & Communications Pte Ltd., SFM South East Asia Pte Ltd., SI        Group-Singapore Pte Ltd., SFM South East Asia Pte Ltd., Sino Construction Limited, Austin        Hills Country Resort Berhad, Hermes Epitek Corporation Sdn Bhd, Romex Malaysia Sdn Bhd,        Yulitex Trading Sdn Bhd and Stamford Corporate Services Pte        Ltd.   

 

|   | 40 |
|--------|----|

 

----

No director or officer of the Company has any family relationship with any        other officer or director of the Company.

 

**B.          COMPENSATION**

**Officers**

 

The following table sets forth all compensation paid to the Company’s        executive officers for services in all capacities to the Company and its subsidiaries for        the year ended December 31, 2007.

 

**SUMMARY COMPENSATION TABLE**

 

|                                                                                               | **Annual Compensation**                                                                              | **Long Term Compensation Awards**                                                                                                  |  

                     

                     

**All Other**

**Compensation**

**(C$)**                         |
|----------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|
|  

                     

                     

**Name and Principal Position**    |  

                     

                     

                     

**Year** |  

                     

                     

                     

**Salary**

                      |  

                     

                     

                     

**Bonus**

                      |  

                     

**Other Annual**

**Compen-sation** | **Securities**

**Under Options/**

**SARs Granted**

**(#)(6)** |  

**Restricted Shares or Restricted Share Units** |  

                     

                     

**LTIP Pay-outs**

**(C$)** |
|  

**Javaid                    Aziz**(1)

President and CEO                                   |  

2007

                                                                                  |  

€296,158

                                                                                                       |  

£450,000

                                                                                                     |  

€42,300

                      |  

525,000 |  

Nil

                      |  

Nil

                      |  

Nil |
|  

**Lewis Rose**(2)

President and CEO                                                       |  

2007                                                                                         |  

C$134,245                                                                                                                  |  

C$360,600                                                                                                                 |  

C$27,750 |  

Nil |  

Nil |  

C$339,960 |  

C$999,400 |
|  

**Stephen                    Taylor**(3)

CFO                                              |  

2007

2007                                                                                   |  

C$128,354

€146,429                                                                                                   |  

€98,771                                                                                                              |  

C$27,240

€42,327 |  

30,000

                      |  

Nil

                      |  

Nil

                      |  

Nil

                      |
|  

**Michael                    Starzynski**(4)

CTO                                          |  

2007

                                                                                  |  

C$246,480

                                                                                                           |  

Nil

                                                                                                                |  

C$5,500

                      |  

30,000

                      |  

Nil

                      |  

C$23,530

                      |  

Nil

                      |
|  

**Justin                    Thouin**(5)

VP, Product Management & Business Development |  

2007

                                                                                  |  

C$239,808

                                                                                                           |  

Nil

                                                                                                                |  

Nil

                      |  

29,000

                      |  

Nil

                      |  

C$9,412

                      |  

Nil

                      |

 

*Notes:*

| *(1)* | *Javaid Aziz was appointed President and CEO on April 1, 2007.                    In 2007, he earned a signing bonus of £100,000, cash bonus of                    £350,000 and received a car allowance of €42,300. On February 27,                    2008, Mr. Aziz retired from corporate life to be with his family and was                    succeeded by Brian Hadfield as the Company’s new President and CEO (refer                    to pages 42, 43 and 56 for information regarding Mr. Hadfield’s                    biography, compensation and employment agreement, respectively).* |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| *(2)* | *At the time of the Company’s announcement to move its                    headquarters to Dublin, Ireland in September, 2006, Lewis Rose announced his                    intention to step down as CEO because of family commitments, effective upon the                    hiring of the new CEO. Mr. Rose’s employment with the Company was                    terminated on March 30, 2007. In 2007, Mr. Rose received a pro-rated cash bonus                    of C$135,600 and retention bonus of C$225,000, as well as C$27,750 in car and                    benefit allowances. Mr. Rose received severance amounting to                    C$999,400.* |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| *(3)* | *Stephen Taylor was appointed the Chief Financial Officer of                    the Company on August 8, 2005. Upon moving to Ireland in July 2007, Mr.                    Taylor’s compensation was paid in Euros. In 2007, he received a                    relocation bonus of €98,771. Mr. Taylor also received C$27,240 and                    €13,230 for relocation costs, equalization benefits of €22,797 and a                    car allowance of €6,300 associated with his move to                    Ireland.* |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

|   | 41 |
|--------|----|

 

----

| *(4)* | *Michael Starzynski was appointed to Chief Technology Officer                    on March 17, 2003.* |
|-------|------------------------------------------------------------------------------------------------------|

         

| *(5)* | *Justin Thouin joined the Company on July 21, 2003, and was                    promoted to Vice President on August 1, 2006.* |
|-------|-------------------------------------------------------------------------------------------------------------------------------|

         

| *(6)* | *Options granted under the Company’s stock option                    plan.* |
|-------|-----------------------------------------------------------------------------------|

 

**Stock        Option/Long-Term Incentive Plan Unit Grants in Fiscal 2007**

 

The following table sets forth stock options and long-term incentive plan        units granted under the Company’s stock option and long-term incentive plans during        the most recently completed financial year to each officer.

|  

                     

                     

**Name** |  

                     

**Options Granted** |  

                     

**Option Exercise Price**

**(C$)** |  

                     

                     

**Option Expiry Date** |  

                     

                     

**LTIP Units** |
|--------------------------------------------------------------------------|---------------------------------------------------------|-------------------------------------------------------------------------|----------------------------------------------------------------------------------------|--------------------------------------------------------------------------------|
|  

Javaid Aziz                                                      |  

500,000

25,000                                 |  

28.66

18.56                                                    |  

April 2, 2012

November 13, 2012                                               |  

Nil                                                                    |
|  

Lewis Rose                                                       |  

Nil                                             |  

Nil                                                             |  

Nil                                                                            |  

Nil                                                                    |
|  

Stephen B. Taylor, CA

                                     |  

5,000

25,000                                   |  

29.68

18.56                                                    |  

January 29, 2012

November 13, 2012                                            |  

25,000                                                                 |
|  

Michael Starzynski

                                        |  

5,000

25,000                                   |  

29.68

18.56                                                    |  

January 29, 2012

November 13, 2012                                            |  

10,000                                                                 |
|  

Justin Thouin

                                             |  

4,000

25,000                                   |  

29.68

18.56                                                    |  

January 29, 2012

November 13, 2012                                            |  

15,000                                                                 |

 

 

Employment Agreements

 

Brian Hadfield, President and CEO of the Company, entered into an employment        agreement with the Company dated February 27, 2008 to become President and CEO for an        indefinite term, at a base salary of €473,000 per annum with an entitlement between        six and twelve months’ payment upon termination without cause or in the event of        change in control of the Company, depending on certain critiera.

 

Javaid Aziz was the President and CEO of the Company from April 1, 2007 to        February 27, 2008, at which time he retired from corporate life. Mr. Aziz entered into an        engagement letter with the Company on March 30, 2007 to become President and CEO effective        April 1, 2007 for an indefinite term, at a base salary of £350,000 per annum and an        assured bonus for the first year of £350,000 with a signing bonus of £100,000        in the first year and an additional signing bonus of £50,000 in the second        year.

 

Lewis Rose, the President and CEO of the Company prior to the hiring of        Javaid Aziz, entered into an employment agreement with the Company dated January 1, 2003,        to become President and CEO for an indefinite term, with an entitlement to 12 months’        notice upon termination without cause, and 24 months’ notice in the event of a change        of control of the Company. On September 22, 2006, Mr. Rose signed an agreement with the        Company restricting his departure from the Company to after March 30, 2007 and providing an        incentive of C$75,000 for the months of January, February and March of 2007 to remain as        CEO of the Company. Mr. Rose’s employment with the Company ended on March 30,        2007.

 

|   | 42 |
|--------|----|

 

----

Stephen Taylor, the CFO of the Company, entered into an employment agreement        with the Company dated July 8, 2005, for an indefinite term with an entitlement to 12        months’ notice upon termination without cause and 12 months in the event of a change        of control of the Company. On June 27, 2006, Mr. Taylor accepted a relocation package that        provides for a relocation and equalization allowance of C$242,000 and 15,000 long-term        incentive plan units and 25,000 stock options of the Company to move his residency to        Ireland.

 

Michael Starzynski, the Chief Technology Officer of the Company, entered        into an employment agreement with the Company dated March 6, 2003, for an indefinite term        with an entitlement to 12 months’ notice upon termination without cause and 12 months        in the event of a change of control of the Company.

 

Justin Thouin, the Vice President, Product Management & Business        Development of the Company, entered into an employment agreement with the Company on July        21, 2003, for an indefinite term with an entitlement to eight months’ notice upon        termination without cause. Mr. Thouin was promoted to Vice President on August 1,        2006.

 

**Directors**

 

From January to May 2007, the Chairman of the Board was paid a fee at an        annual rate of C$35,000. Other non-employee Directors were each paid a fee at an annual        rate of C$15,000 plus an additional fee at an annual rate of C$2,500 for each committee        chairman. A fee of C$1,200 was paid for each Directors’ or committee meeting attended        in person, and a fee of C$600 for each meeting attended by telephone. Directors who were        not members of that committee, but were invited to attend, were paid a fee for each meeting        attended in person or by telephone as described above. In addition, the Directors were        eligible to receive stock options under the Company’s stock option plan. Management        officers who were Directors did not receive any Directors’ fees.

         

Following the Company’s move to Ireland, effective June to December        2007, non-employee Directors were each paid a fee of £35,000 per annum. The Chairman        of the Audit Committee and the Chairman of the Remuneration Committee received an        additional £5,000 per annum. The Chairman of the Board received an additional        £45,000 per annum.

 

The following table sets forth the aggregate cash compensation paid to each        non-employee Director for the year ended December 31, 2007.

**SUMMARY COMPENSATION TABLE**

 

|  

**Name**              | **Director Fees**

**(C$)** |
|-------------------------------|-----------------------------|
| Randall Abramson(1)           | 15,250                      |
| Thomas Byrne                  | 47,448                      |
| Stephen Freedhoff, CA, CFP(2) | 18,692                      |
| Brian Hadfield(3)             | 41,521                      |
| Nigel Simon(1)                | 32,242                      |
| Robert Stikeman               | 120,728                     |
| Wai Ming Yap                  | 44,926                      |

 

|   | 43 |
|--------|----|

 

----

*Notes:*

| *(1)* | *Randall Abramson and Nigel Simon stepped down as part of the                    Company’s reorganization to Ireland.* |
|-------|------------------------------------------------------------------------------------------------------------------------------|

| *(2)* | *Stephen Freedhoff was a Director of CryptoLogic Inc., the                    predecessor company of CryptoLogic Limited, from May 2003 to June 2007. He                    rejoined the Board of Directors of CryptoLogic Limited in February                    2008.* |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(3)* | *Brian Hadfield was appointed as President and CEO of the                    Company on February 27, 2008.* |
|-------|-------------------------------------------------------------------------------------------------------------|

 

Bonus        Plan

         

Under the Company’s 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.

 

Stock        Option Plan

         

The 2002 Stock Option Plan (the “Plan”) was adopted by        CryptoLogic Limited as part of the Arrangement and provides that options to purchase an        aggregate of 3,900,000 Common Shares may be awarded to employees, officers and directors of        the Company and its subsidiaries, and others providing management or consulting services to        the Company.  The purpose of the Plan is to reward these individuals for their        contributions toward the long-term goals and success of the Company and to enable the        Company to retain, attract and motivate experienced and skilled management, staff and        consultants by providing them with the opportunity, through options to acquire Common        Shares, to acquire a proprietary interest in the Company and to benefit from its        growth.

 

Under the terms of the Plan, all stock option grants for directors and        senior officers are subject to the approval of the Company's Board of Directors on the        advice of the Compensation Committee. The number of Common Shares reserved for insiders        cannot exceed 10% of all issued and outstanding Common Shares. The exercise price is fixed        by the Board but shall not be less than the fair market value of the Common Shares on the        Toronto Stock Exchange at the date of the grant. Options issued under the Plan may be        exercised over a period not exceeding five years from the date of grant.  Options        granted to non-executive 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 granted become exercisable in four equal annual installments beginning on the first        anniversary of the grant. The Chief Executive Officer is authorized to issue to        non-executive employees up to 5,000 stock options per grant.

         

As at the date of this annual report, there were 1,346,524 stock options        outstanding under the Plan.

         

Long-Term Incentive Plan

 

CryptoLogic Inc.’s Long-Term Incentive Plan (the        “LTIP”)was adopted by the Board of Directors effective January 1, 2005, and        assumed by CryptoLogic Limited as part of the Arrangement. The LTIP is intended to enhance        our ability to attract and retain high quality individuals to serve as officers and        executives of the Company and to align their interests with those of shareholders. The LTIP        provides performance-based incentives, payable in cash, Common Shares and or a combination        of each, with any payments in Common Shares made through acquisitions of those Common        Shares by the Company in the secondary market. Therefore, the LTIP is not dilutive to        shareholders’ interests.

 

|   | 44 |
|--------|----|

 

----

The LTIP was prepared with input from an internationally recognized        consulting firm specializing in executive compensation. The Company, like many public        companies, has elected to compensate through the granting of “units” under the        LTIP, known as Performance Share Units (“PSUs”).

 

The LTIP has been designed to reward participants for growth in earnings per        share (“EPS”) and share price through overlapping three-year performance        periods. Depending on actual performance achieved against pre-set EPS targets, payouts may        range from zero to 150% of the initial target award times share price at the end of the        performance period.

 

The LTIP payout will be based upon the product of three factors: 1) The        number of PSUs awarded; 2) the share price at the end of the performance period; and 3) a        “performance modifier” that is based upon cumulative EPS. If cumulative        targeted EPS are not satisfied, no payouts are made. The minimum level of performance that        must be achieved to receive a payout is a three-year compounded growth in EPS of 5% per        year, from the year of the grant.

 

The LTIP has the following principal features:

         

| 1. | The LTIP provides for the granting of PSUs on a discretionary                    basis to reward participants for growth in EPS and share price with vesting                    over a three-year performance period. In the inaugural year, 50% of the initial                    grant of PSUs vested in year two, and the remaining 50% in year three.                    Thereafter, subsequent grants vest 100% in year three. Vesting can accelerate                    under certain circumstances, such as a change of control of the Company as                    defined in the LTIP, or a Participant’s death. |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

| 2. | The CEO, President, Vice President, Director or director-level                    executive, any other officer of the Company and certain consultants are                    eligible to participate. Non-employee members of the Board of Directors are not                    eligible. |
|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| 3. | PSU grants and the financial and performance objectives required                    for PSUs to vest are reviewed and approved by the Compensation Committee and                    are generally set to achieve a total and aggregate compensation between the                    50th and 75th percentile of comparable companies. |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The LTIP is administered by the Compensation Committee. The Board of        Directors, in its sole discretion, may amend or terminate the LTIP at any time. As at the        date of this annual report, an aggregate of 124,500 PSUs were outstanding under the        LTIP.

 

Employee        Share Purchase Plan

 

In 2005, the Company established an Employee Share Purchase Plan        (“SPP”) to provide employees with an opportunity to purchase Common Shares,        further their alignment with the interests of shareholders and participate in the growth of        the Company. The SPP was adopted by CryptoLogic Limited as part of the        Arrangement.

 

Under the terms of the SPP, participation is limited to eligible employees        and independent consultants of the Company. There are four offering periods per year (once        a quarter), as determined by the Board of Directors. Common Shares are purchased, through        an agent, at fair market value. Employees may elect to purchase Common Shares through a        cash transaction at the beginning of the offering period, or through payroll deductions        over a 12-month period. Employees can contribute up to 10% of their salary (excluding        bonuses). The Company will match 50% of the Employee’s contribution, subject to a        C$2,500 annual limit. Common Shares purchased with the Company match funds will have a        12-month hold following the date of purchase.

 

|   | 45 |
|--------|----|

 

----

**C.  ****BOARD PRACTICES**

 

All Directors are elected annually by the Company’s shareholders and        hold office until the next Annual Meeting of Shareholders. There are no Directors' service        contracts with the Company or any of its subsidiaries providing for benefits upon        termination of service.

 

The Board of Directors is responsible for the general supervision of the        management of the business. The Board will discharge its responsibilities directly or        through its committees, which consist of the Audit Committee, the Remuneration Committee,        the Compliance and Governance Committee and the Nominating Committee. The Board will meet        regularly to review the business operations, corporate governance and financial results of        the Company.

 

Audit        Committee

         

The members of the Audit Committee are Thomas Byrne and Stephen Freedhoff.        Mr. Byrne serves as Chairman of the Audit Committee. Both members are        “independent” as that term is defined by the NASDAQ listing standards        applicable to the Company. The Audit Committee normally meets a minimum of four times per        year.

         

The overall purpose of the Audit Committee is to monitor the Company’s        system of internal financial controls and procedures, to evaluate and report on the        integrity of the financial statements of the Company, to enhance the independence of the        Company’s external auditors and to oversee the financial reporting process of the        Company.

         

Remuneration Committee

         

The members of the Remuneration Committee are Thomas Byrne and Stephen        Freedhoff, both of whom are independent directors. Mr. Freedhoff serves as the Chairman of        the Remuneration Committee. The Remuneration Committee normally meets a minimum of two        times per year. The duties of the Remuneration Committee include recommending to the Board        appropriate human resource and compensation policies for the Company. The Remuneration        Committee has responsibility for reviewing compensation for the directors and officers. The        committee periodically reviews the adequacy and form of the compensation of the directors        of the Company with a view to ensuring that such compensation realistically reflects the        responsibilities and risks of being a director.

         

The Remuneration Committee is responsible for reviewing the performance of        the Chief Executive Officer and setting the salary, bonus and other benefits of the        Chairman and Chief Executive Officer. The Remuneration Committee has retained an        independent consultant on compensation standards to assist it in performing those functions        and assessing compensation for the CEO. In addition, the Company has retained Towers        Perrin, an internationally-recognized independent firm specializing in compensation, to        evaluate and recommend short- and long-term compensation measures to ensure that the        Company remains well positioned to retain and attract key employees, while remunerating        employees and officers (including the CEO) throughout the organization at a level        appropriate to the achievement of their performance objectives.

         

Compliance and Governance Committee

         

The members of the Compliance and Governance Committee are Robert Stikeman        and Brian Hadfield. Mr. Stikeman serves as Chairman of the Compliance and Governance        Committee. The Compliance and Governance Committee normally meets not less than once per        year. The Compliance and Governance Committee is responsible for reviewing the        Company’s corporate governance (committees, mandates and composition) on an annual        basis to ensure: i) adherence to best practices based on evolving industry standards; and        (ii) legal compliance with all applicable statutes and regulations pertaining to, among        other things, financial reporting, internal controls, disclosure of a non-financial nature,        as well as the evolution of fiduciary standards, and prescribed by statute, regulation and        as it evolves in common law.

         

|   | 46 |
|--------|----|

 

----

The Compliance and Governance Committee also reviews the Company’s        compliance practice relating to the license and certification of its subsidiary’s        gaming software to the Internet gaming industry, reviewing all probity reports requested        respecting its subsidiaries’ licensees, and assessing global legislative developments        as they may affect the Company’s business around the world.

 

Nominating Committee

         

The Board of Directors considers its size each year when it considers the        number of Director nominees to recommend to the shareholders for election at the annual        meeting of shareholders, taking into account the number required to carry out the        Board’s duties effectively and to maintain a diversity of views and        experience.

 

The members of the Nominating Committee are Thomas Byrne, Wai Ming Yap and        Robert Stikeman. Mr. Stikeman serves as Chairman of the Nominating Committee. The        Nominating Committee normally meets when appropriate, but at least once per year. The        Nominating Committee reviews the skills of the prospective directors, identifies any        deficiencies and directs interviewing of suitable candidates. In order to encourage an        independent nominating process, once a candidate is identified, such candidate meets with        the Directors on an individual basis and as a group to discuss the Company’s business        and regulatory activities. The Directors then receive a recommendation from the Nominating        Committee on any candidate, who must be approved by the Board as a whole. The Nominating        Committee also assesses the effectiveness of the Board of Directors as a whole, its        committees, and the contribution of individual directors.

         

**D.  EMPLOYEES**

 

The following table sets        forth information detailing the total number of employees at the years ended December 31,        2007, 2006 and 2005, which included an average of 23 consultants or independent contractors        during the most recent financial year.

 

|                                          | **2007** | **% Total** | **2006** | **% Total** | **2005** | **% Total** |
|-----------------------------------------------|----------|-------------|----------|-------------|----------|-------------|
| Total number of employees                     | 310      | 100%        | 400      | 100%        | 358      | 100%        |
|                                          |     |        |     |        |     |        |
| Number of employees located in Canada         | 177      | 57%         | 256      | 64%         | 239      | 67%         |
| Number of employees located outside of Canada | 133      | 43%         | 144      | 36%         | 119      | 33%         |

 

**E.  SHARE OWNERSHIP**

 

The following table sets        forth, as of May 12, 2008, the number of the Company’s Common Shares (including        Exchangeable Shares) beneficially owned by the officers and Directors of the Company,        individually, and as a group, and the percentage of ownership of the outstanding Common        Shares (including Exchangeable Shares) represented by such shares.

 

|   | 47 |
|--------|----|

 

----

The Common Share        (including Exchangeable Shares) held by the officers and Directors listed below have voting        rights no different than the voting rights associated with Common Shares        generally.

 

| **Name of Beneficial Owner**                                                   | **Common Shares                    Held** | **Percent of Class** |
|--------------------------------------------------------------------------------|-------------------------------------------|----------------------|
| Thomas Byrne                                                                   | 2,000                                     | *                    |
| Stephen H. Freedhoff                                                           | 13,333(1)                                 | *                    |
| Michael Starzynski                                                             | 53,865(1)                                 | *                    |
| Robert Stikeman                                                                | 97,000(1)                                 | *                    |
| Stephen B. Taylor                                                              | 106,200(1)                                | *                    |
| Justin Thouin                                                                  | 55,250(1)                                 | *                    |
| Officer and Directors of the Company as a group (6                    persons) | 327,648(1)                                | 2.4                  |

 

* Less than        1%.

(1) Includes        the following options to purchase Common Shares:

 

| **Name**             | **Number of Options**

**(#)**       | **Exercise Price**

**(C$)**      | **Date of Expiration**                                                                |
|----------------------|--------------------------------------|-----------------------------------|---------------------------------------------------------------------------------------|
| Stephen H. Freedhoff | 3,333

10,000                        | 21.39

23.56                      | September 2, 2010

December 14, 2011                                                  |
| Michael Starzynski   | 6,250

2,500

15,000

5,000

25,000  | 15.70

24.40

26.80

29.68

18.56 | January 7, 2009

February 2, 2011

June 27, 2011

January 29, 2012

November 13, 2012 |
| Robert Stikeman      | 35,000

12,000

45,000               | 19.00

21.39

23.56               | January 16, 2009

September 2, 2010

December 14, 2011                                |
| Stephen B. Taylor    | 45,000

2,500

25,000

5,000

25,000 | 24.05

24.40

26.80

29.68

18.56 | August 9, 2010

February 2, 2011

June 27, 2011

January 29, 2012

November 13, 2012  |
| Justin Thouin        | 1,250

5,000

20,000

4,000

25,000  | 9.62

24.40

25.08

29.68

18.56  | July 21, 2008

February 2, 2011

August 4, 2011

January 29, 2012

November 13, 2012  |

 

**Shares Authorized        for Issuance** 

 

The Company maintains a        stock option plan for its directors, officers and employees and may issue up to 3,900,000        options. The following table sets forth the number of Common Shares authorized for issuance        under the Company’s stock option plan as at December 31, 2007.

 

 

|   | 48 |
|--------|----|

 

----

 

 

| Plan category                                                                                          | Number of securities tobe issued upon exerciseof outstanding options,warrants and rights | Weighted-averageexercise price ofoutstanding options,warrants and rights | Number of securitiesremaining available for futureissuance under equitycompensation plans(excluding securities reflectedin column (a)) |
|--------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------|--------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                   | (a)                                                                                      | (b)                                                                      | (c)                                                                                                                                    |
| Equity compensation plans approved                    by security holders

**•**Stock Option Plan | 1,391,525                                                                                | C$25.13                                                                  | 109,412                                                                                                                                |
| Total(1)                                                                                               | 1,391,525                                                                                | C$25.13                                                                  | 109,412                                                                                                                                |

         

| (1) | Excludes PSUs under the LTIP, which may be paid in cash, Common                    Shares or a combination of each, with any payments in Common Shares made                    through acquisitions of those Common Shares by the Company in the secondary                    market. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

CryptoLogic’s SPP        provides employees with an opportunity to purchase Common Shares during four offering        periods per year. In 2007, 10,313 Common Shares were purchased at an average price of        C$23.64 (refer to page 45 of this annual report for more information on the Company’s        SPP).

 

**ITEM        7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**

         

**A. MAJOR SHAREHOLDERS**

 

As at May 12, 2008,        there were 12,824,337 Common Shares and 1,112,144 Exchangeable Shares. Including        Exchangeable Shares, the Common Shares outstanding would be 13,936,481. The holders of        Exchangeable Shares are entitled to one vote per Exchangeable Share. CryptoLogic Limited        has issued a special voting share to a third party trustee, the purpose of which is to        provide holders of Exchangeable Shares with the right to vote on CryptoLogic matters. For        the purposes of the table below, the number of Common Shares and Exchangeable Shares are        added together to determine the percentage of votes held.

 

The following table sets        forth certain information regarding beneficial ownership of our Common Shares as of May 12,        2008 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        Shares.

         

|  

**Name and Location of Beneficial Owner**        |  

 

**Number of Common Shares** |  

**Percent of Common Shares Outstanding** |
|----------------------------------------------------------|---------------------------------------------|--------------------------------------------------|
|                                                     |                                        |                                             |
| Pabrai Investment Funds

Los Angeles, U.S.A.

      | 1,223,905                                   | 8.8%                                             |
| Royce & Associates, LLC

New York, U.S.A.            | 1,075,275                                   | 7.7%                                             |
| Renaissance Technologies Corp.

New York, U.S.A.

  | 943,730                                     | 6.8%                                             |

 

|   | 49 |
|--------|----|

 

----

 

To the knowledge of the        Directors and officers of the Company, the following significant changes in the percentage        ownership held by major shareholders between December 31, 2004 to December 31, 2007        were:

         

| **•** | As at December 31, 2006, Pabrai Investment Funds held 1,017,707                    or 7.46% of our outstanding Common Shares. |
|------------|-------------------------------------------------------------------------------------------------------------------------------|

| **•** | As at December 31, 2004, Royce & Associates held 1,328,958                    or 10.1% of our outstanding Common Shares, which decreased to 9.1% at                    year-ended 2005, and 8.8% at year-ended 2006. |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | As at December 31, 2004, 2005 and 2006, Renaissance Technologies                    Corp. held less than 1%, 1.4% and 3.4% respectively of our outstanding Common                    Shares. |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | As at December 31, 2004, AWM Investment Co. of New York, U.S.A.                    held 742,924 or 5.7% of our Common Shares, which decreased to 4.5%, 2.7% and                    3.6% respectively at the end of 2005, 2006 and 2007. |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | On June 22, 2005, the Company received notification from                    Fidelity Management and Research Co., a U.S. investment fund, that the fund                    held 1,394,200 Common Shares or approximately 10%. |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The Common Shares held        by the major shareholders listed above have voting rights no different than the voting        rights associated with Common Shares, generally.

         

As at March 31, 2008,        there were nine record holders of our Common Shares in the U.S., holding 12,771,715 Common        Shares or 91.7% of the outstanding Common Shares (including Exchangeable Shares). The        Company’s Exchangeable Shares are only held by Canadian residents.

         

As far as is known to        the Company, CryptoLogic is not directly or indirectly owned or controlled by another        corporation, by another foreign government or by any other natural or legal person        severally or jointly.

         

**B. RELATED PARTY TRANSACTIONS**

         

In the normal course of        operations, the Company engages the services of Stikeman Keeley Spiegel Pasternack LLP, a        law firm in which Robert Stikeman (Chairman of the Board of Directors) is a partner. Fees        paid to this firm were $0.9 million in 2007 (2006: $0.6 million; 2005: $0.6 million). At        December 31, 2007, there was $0.09 million in fees outstanding.

 

The Company also paid        $0.3 million in fees to Stamford Law Corporation, a law firm in which Wai Ming Yap (a        member of the Board of Directors) is a partner. As at December 31, 2007, there were no        amounts outstanding. There were no comparable amounts paid or outstanding for the years        ended December 31, 2006 and 2005 to this law firm.

 

In 2006, the Company        purchased software from a company in which Andy Goetsch (a former officer of the Company)        had a personal interest. Payments to Mr. Goetsch in 2006, relating to this transaction,        amounted to $0.04 million (2005: $0.15 million). There were no such payments in        2007.

 

 

|   | 50 |
|--------|----|

 

----

 

 

**ITEM        8. FINANCIAL INFORMATION**

         

**A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION**

         

See Item 17 –        Financial Statements.

         

Legal        Proceedings

         

As at May 12, 2008 the        Company and its subsidiaries are not involved nor have they been involved in any legal or        arbitration proceedings (including any such proceedings which are pending or threatened, of        which the Company or its subsidiaries are aware) which may have, or have had in the past 12        months a significant effect on our financial position or profitability.

 

Given the nature of the        business environment in which we operate and the relative strength of our financial        position, third parties have threatened to issue legal proceedings against the Company        based on alleged infringement of patents, trademark, copyright and/or other intellectual        property rights. None of these threats has as yet resulted in legal proceedings, although        there can be no assurance that the assertion of such claims will not result in litigation        or that the Company would prevail in any such litigation. An adverse determination in        litigation proceedings could subject the Company to significant liabilities to third        parties. Although patent and intellectual property disputes are often settled through        licensing or similar arrangements, the costs associated with such arrangements may be        substantial and could include ongoing royalties. Furthermore, the necessary licenses may        not be available to the Company on satisfactory terms, if at all.

 

The Company closely        monitors the progress of all threatened litigation and, where the Board of Directors        consider it appropriate, makes the appropriate provisions and reserves in its financial        statements for litigation contingencies that are likely to result in material exposure and        the amount is quantifiable.

 

Dividends

 

On September 10, 2003,        the Board of Directors declared the Company’s first quarterly dividend of $0.03 per        Common Share (annual rate of $0.12), paid on November 24, 2003. On November 4, 2004, the        Board approved an increase in our quarterly dividend to $0.05 per Common Share (annual rate        of $0.20). On November 1, 2005, the quarterly rate was increased to $0.07 per Common Share        (annual rate of $0.28). On May 9, 2006, the Company announced a subsequent increase to        $0.12 per Common Share per quarter (annual rate of $0.48). On February 14, 2007, a        quarterly dividend of $0.12 per Common Share was announced, the same rate as the prior four        quarters and for the remaining quarters of 2007. The holders of Exchangeable Shares and        Common Shares participate equally in voting and dividends. Each future dividend will be        subject to Board approval based on the Company’s financial results.

 

Significant        Changes

 

There have been no        significant changes since December 31, 2007.

 

 

|   | 51 |
|--------|----|

 

----

 

 

**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 Toronto Stock Exchange (symbol: CRY), NASDAQ Global Select Market        (symbol: CRYP) and the Main Market of the London Stock Exchange (symbol:        CRP):

 

|                                | **Toronto Stock Exchange**

(C$) | **NASDAQ**

(US$) | **London Stock Exchange**

(British pence) |
|-------------------------------------|----------------------------------|-------------------|--------------------------------------------|
|                                | **High**                         | **Low**           | **High**                                   | **Low** | **High** | **Low** |
| Fiscal Year Ended December 31, 2007 | 34.81                            | 17.00             | 31.20                                      | 17.26 | 1,520.00 | 893.50 |
| Fiscal Year Ended December 31, 2006 | 33.09                            | 17.06             | 29.20                                      | 15.24 | 1,625.00 | 872.50 |
| Fiscal Year Ended December 31, 2005 | 45.88                            | 17.60             | 36.81                                      | 14.84 | 1,960.00 | 852.50 |
| Fiscal Year Ended December 31, 2004 | 30.00                            | 15.25             | 25.49                                      | 11.80 | 1,275.00 | 670.00 |
| Fiscal Year Ended December 31, 2003 | 17.50                            | 5.76              | 13.25                                      | 3.71 | 770.00 | 547.50 |
|                                |                             |              |                                       |   |   |   |
| Fiscal Year Ended December 31, 2007 |                             |              |                                       |   |   |   |
| First Quarter                       | 33.60                            | 25.55             | 28.63                                      | 21.50 | 1,427.50 | 1,142.50 |
| Second Quarter                      | 34.81                            | 24.86             | 31.20                                      | 23.05 | 1,520.00 | 1,190.00 |
| Third Quarter                       | 26.03                            | 19.51             | 24.70                                      | 18.47 | 1,219.00 | 921.00 |
| Fourth Quarter                      | 20.75                            | 17.00             | 21.14                                      | 17.26 | 1,010.00 | 893.50 |
|                                |                             |              |                                       |   |   |   |
| Fiscal Year Ended December 31, 2006 |                             |              |                                       |   |   |   |
| First Quarter                       | 30.43                            | 22.32             | 26.79                                      | 19.31 | 1,505.00 | 1,120.00 |
| Second Quarter                      | 33.09                            | 25.10             | 29.20                                      | 22.63 | 1,625.00 | 1,252.00 |
| Third Quarter                       | 30.45                            | 20.67             | 27.25                                      | 18.21 | 1,385.00 | 1,025.00 |
| Fourth Quarter                      | 27.72                            | 17.06             | 23.83                                      | 15.24 | 1,167.50 | 872.50 |
|                                |                             |              |                                       |   |   |   |
| October 2007                        | 20.58                            | 18.24             | 21.14                                      | 19.26 | 1,010.00 | 965.00 |
| November 2007                       | 20.45                            | 17.13             | 21.00                                      | 18.26 | 1002.00 | 903.50 |
| December 2007                       | 20.75                            | 17.00             | 20.24                                      | 17.26 | 955.50 | 893.50 |
| January 2008                        | 18.00                            | 15.21             | 17.95                                      | 14.81 | 922.50 | 804.50 |
| February 2008                       | 18.00                            | 16.01             | 18.19                                      | 15.95 | 909.00 | 805.00 |
| March 2008                          | 17.78                            | 14.07             | 17.50                                      | 14.20 | 860.00 | 721.50 |
| April 2008                          | 20.37                            | 16.04             | 20.17                                      | 15.73 | 1048.00 | 792.00 |

 

The following table sets        forth, for the periods indicated, the range of the high and low prices of our Exchangeable        Shares as reported by the Toronto Stock Exchange (symbol: CXY):

         

|                                | **Toronto Stock Exchange(1)**

(C$) |
|-------------------------------------|-------------------------------------|
|                                | **High**                            | **Low** |
| Fiscal Year Ended December 31, 2007 | 27.40                               | 17.40 |
|                                |                                |   |
| Fiscal Year Ended December 31, 2007 |                                |   |
| First Quarter                       | --                                  | -- |
| Second Quarter                      | 27.40                               | 25.00 |
| Third Quarter                       | 26.00                               | 20.65 |
| Fourth Quarter                      | 22.70                               | 17.40 |
|                                |                                |   |
| October 2007                        | 22.70                               | 18.04 |
| November 2007                       | 20.00                               | 17.40 |
| December 2007                       | 21.00                               | 19.50 |
| January 2008                        | 20.50                               | 15.50 |
| February 2008                       | 18.90                               | 16.27 |
| March 2008                          | 18.80                               | 16.20 |
| April 2008                          | 21.00                               | 16.40 |

|   | (1) | The Company’s Exchangeable Shares have been listed for                    trading on the Toronto Stock Exchange since June 1, 2007. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------|

|   | 52 |
|--------|----|

 

----

 

 

**ITEM        10. ADDITIONAL INFORMATION**

         

**A. SHARE CAPITAL**

 

|   | Not applicable. |
|--------|-----------------|

 

**B. MEMORANDUM AND ARTICLES OF ASSOCIATION**

 

The following statements        are subject to the detailed provisions of our Memorandum of Association and Articles of        Association (the “Articles”). These statements do not purport to be complete        and, while we believe the descriptions of the material provisions of the Articles 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 to which reference is        hereby made for a full description of such provisions. A copy of the Company’s        Memorandum of Association and Articles of Association are incorporated herein by reference        to Exhibits 1.1 and 1.2 to this annual report.

 

Objects and        Purpose

 

1.            On        April 13, 2007, CryptoLogic Limited was incorporated under the laws of Guernsey with        registered number 46770, but with its corporate headquarters in Dublin, Ireland where it        operates and is resident for tax purposes. The Company’s registered office is located        at 1 Le Marchant Street, St. Peter Port, Guernsey, Channel Islands, GY1 4HP. The        Company’s head office is located at Alexandra House, The Sweepstakes, Ballsbridge,        Dublin 4, Ireland.

 

The memorandum of        association provides that the Company’s objects are,*inter        alia*, to carry on business as a general commercial company. The        objects of the Company are set out in full in clause 3 of the Company’s        Memorandum.

 

Directors and        Powers

 

2.            The        Company’s Articles specify a maximum number of ten directors. 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 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 Company 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.

         

Directors are charged        with managing the officers of the Company.

 

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. A director may vote in respect of any contract or        arrangement in which he has a material interest.

         

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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. Directors’ borrowing powers are not        generally restricted where the borrowing is in the Company’s best        interests.

 

Rights and Privileges        of Common Shares

 

3.             Our        Articles provide that our authorized share capital is an unlimited number of Common Shares        at no par value and one special voting share. 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 dividends unclaimed for a period of six years after having been        declared shall be forfeited and shall revert to 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. Holders of        Exchangeable Shares are entitled to vote through the special voting share, a voting trust        arrangement established under the Arrangement as described on page 1 of this annual        report.

 

4.                   A special resolution        (requiring a three-fourth majority) 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 Articles 15-19:

 

*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 to be laid before the annual meeting, electing directors, appointing auditors,        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 25% 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.

         

*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, and the special voting share        authorizes additional votes on the basis of one additional vote for each Exchangeable Share        held other than by the Company or its affiliates.

         

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*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.

 

6.           There        are no limitations on the rights to own our securities, including the rights of        non-resident or foreign shareholders to hold or exercise voting rights on our securities        imposed by foreign law or under the Company’s Articles.

 

7.           There        are no provisions in the Company’s Articles that would have an effect of delaying,        deferring, or preventing a change in control of the Company.

 

**C. MATERIAL CONTRACTS**

 

In January 2007, we        acquired the poker brand and related assets of Parbet.com, a popular Scandinavian online        poker room, for $11.8 million. The purchase included all rights to the Parbet brand name,        associated domain names such as Parbet.com, customer lists, databases and players' cash on        deposit.

         

On June 1, 2007, in        order to advance its global strategy, the Company moved its headquarters from Canada to the        Republic of Ireland by introducing a new parent company, CryptoLogic Limited, a company        incorporated in Guernsey with its place of business in Dublin, Ireland. This business        reorganization was implemented by way of an Ontario, Canada Superior Court of Justice court        approved Arrangement and approved by the shareholders on May 24, 2007. CryptoLogic Limited        acquired control over all of the issued and outstanding common shares of CryptoLogic Inc.,        which through the Arrangement became an indirect subsidiary of CryptoLogic Limited (refer        to page 1 of this annual report for further information regarding the        Arrangement).

         

In August 2007, we        acquired Casino.co.uk, a popular gaming portal with U.K. and European users, for $6.1        million. Additional consideration of up to $1.3 million may be payable if certain        performance criteria are met.

         

In August 2007, we        acquired a 19.4% minority interest in 568 Network Inc., a developer and distributor of        online casual games in the Chinese market, for $1.1 million. In January 2008, we made a        further investment in 568 Network Inc. by way of a $0.25 million convertible note. Under        the terms of the agreement, we are required to make additional investments of up to $0.35        million should 568 Network Inc. achieve certain financial targets. We have an option to        increase our interest in 568 Network Inc. to a controlling interest in the        future.

         

In November 2007, we        acquired a 12.7% minority interest in Mikoishi Studios Inc., one of Asia’s best known        game development and design companies, for $4.3 million. Unless specified performance        criteria are not met, the Company is required to increase its ownership position with        additional cash investments up to $4.0 million.

         

Brian Hadfield,        President and CEO of the Company, entered into an employment agreement with the Company        dated as of February 27, 2008 to become President and CEO for an indefinite term, at a base        salary of

 

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£360,000 per annum        with an entitlement to six months’ payment upon termination without cause and six        months in the event of a change of control of the Company.

 

        In May 2008, we acquired an 11.1% interest in Jingle, a leading supplier of online mah-jong        games, for $0.9 million. In exchange for the cash consideration, we received preference        shares, which rank pari passu to the common shares with respect to all dividends and voting        rights. Under the terms of the agreement, the Company is required to make additional        investments in Jingle of up to $1.5 million should Jingle achieve certain financial        targets. In addition, under the terms of the agreement, the Company is required to pay up        to approximately $1.0 million without receipt of additional equity as a contingent        acquisition price increase should Jingle achieve certain performance        milestones.

 

**D. EXCHANGE CONTROLS**

 

|   | Not applicable. |
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**E. TAXATION**

 

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 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.

 

**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 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 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 shares of the        Company.**

 

**U.S. FEDERAL INCOME        TAX CONSIDERATIONS**

 

**Ownership of        CryptoLogic Shares**

 

The following is a        summary of certain material U.S. federal income tax consequences to a U.S. Holder (as        defined below) of the acquisition, ownership and disposition of CryptoLogic        shares.

 

This summary is for        general information purposes only and does not purport to be a complete analysis or listing        of all potential U.S. federal income tax consequences that may apply to a U.S. Holder as a        result of the acquisition, ownership, and disposition of CryptoLogic shares. In addition,        this summary does not take into account the individual facts and circumstances of any        particular U.S. Holder that may affect the U.S. federal income tax consequences of the        acquisition, ownership, and disposition of CryptoLogic shares. Accordingly, this summary is        not intended to be, and should not be construed as, legal or U.S. federal income tax advice        with respect to any U.S. Holder. Each U.S. Holder should consult its own financial advisor,        legal counsel, or accountant regarding the U.S. federal income, U.S. state and local, and        foreign tax consequences of the acquisition, ownership, and disposition of CryptoLogic        shares.

         

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**Scope of this        Summary**

 

Authorities

 

This summary is based on        the Internal Revenue Code of 1986, as amended (the “Code”), Treasury        Regulations (whether final, temporary, or proposed), published rulings of the Internal        Revenue Service (the “IRS”), published administrative positions of the IRS, the        Convention Between the Government of the United States and the Government of Ireland for        the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes        on Income and Capital Gains, signed at Dublin on July 28, 1997 as amended ("the        Convention"), and U.S. court decisions that are applicable and, in each case, as in effect        and available, as of the date of this annual report. Any of the authorities on which this        summary is based could be changed in a material and adverse manner at any time, and any        such change could be applied on a retroactive basis. This summary does not discuss the        potential effects, whether adverse or beneficial, of any proposed legislation that, if        enacted, could be applied on a retroactive basis.

 

U.S.        Holders

 

For purposes of this        summary, a “U.S. Holder” is a beneficial owner of CryptoLogic shares that, for        U.S. federal income tax purposes, is (a) an individual who is a citizen or resident of        the U.S., (b) a corporation, or any other entity classified as a corporation for U.S.        federal income tax purposes, that is created or organized in or under the laws of the U.S.        or any state in the U.S., including the District of Columbia, (c) an estate if the        income of such estate is subject to U.S. federal income tax regardless of the source of        such income, or (d) a trust if (i) such trust has validly elected to be treated        as a U.S. person for U.S. federal income tax purposes or (ii) a U.S. court is able to        exercise primary supervision over the administration of such trust and one or more U.S.        persons have the authority to control all substantial decisions of such        trust.

 

Non-U.S.        Holders

 

For purposes of this        summary, a “non-U.S. Holder” is a beneficial owner of CryptoLogic shares other        than a U.S. Holder. This summary does not address the U.S. federal income tax consequences        of the acquisition, ownership, and disposition of CryptoLogic shares to non-U.S. Holders.        Accordingly, a non-U.S. Holder should consult its own financial advisor, legal counsel, or        accountant regarding the U.S. federal income, U.S. state and local, and foreign tax        consequences (including the potential application of and operation of any tax treaties) of        the acquisition, ownership, and disposition of CryptoLogic shares.

 

U.S. Holders Subject        to Special U.S. Federal Income Tax Rules Not Addressed

 

This summary does not        address the U.S. federal income tax consequences of the acquisition, ownership, and        disposition of CryptoLogic shares to U.S. Holders that are subject to special provisions        under the Code, including the following U.S. Holders: (a) U.S. Holders that are        tax-exempt organizations, qualified retirement plans, individual retirement accounts, or        other tax-deferred accounts; (b) U.S. Holders that are financial institutions,        insurance companies, real estate investment trusts, or regulated investment companies;        (c) U.S. Holders that are dealers in securities or currencies or U.S. Holders that are        traders in securities that elect to apply a mark-to-market accounting method; (d) U.S.        Holders that have a “functional currency” other than the U.S. dollar;        (e) U.S. Holders that are liable for the alternative minimum tax under the Code;        (f) U.S. Holders that own CryptoLogic Shares as part of a straddle, hedging        transaction, conversion transaction, constructive sale, or other arrangement involving more        than one position; (g) U.S. Holders that acquired CryptoLogic shares in connection        with the exercise of employee stock options or otherwise as compensation for services;        (h) U.S. Holders that hold

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CryptoLogic shares other        than as a capital asset within the meaning of Section 1221 of the Code, (i) U.S.        Holders that own (directly, indirectly, or by a attribution) 10% or more of the total        combined voting power of the outstanding shares of CryptoLogic or (j) U.S. Holders that are        expatriates or former long-term residents of the United States. U.S. Holders that are        subject to special provisions under the Code, including U.S. Holders described immediately        above, should consult their own financial advisor, legal counsel or accountant regarding        the U.S. federal income, U.S. state and local, and foreign tax consequences of the        acquisition, ownership, and disposition of CryptoLogic shares.

 

If an entity that is        classified as a partnership (or “pass-through” entity) for U.S. federal income        tax purposes holds CryptoLogic shares, the U.S. federal income tax consequences to such        partnership (or “pass-through” entity) and the partners of such partnership (or        owners of such “pass-through” entity) generally will depend on the activities        of the partnership (or “pass-through” entity) and the status of such partners        (or owners). Partners of entities that are classified as partnerships (or owners of        “pass-through” entities) for U.S. federal income tax purposes should consult        their own financial advisor, legal counsel or accountant regarding the U.S. federal income        tax consequences of the acquisition, ownership, and disposition of CryptoLogic        shares.

 

Tax Consequences        Other than U.S. Federal Income Tax Consequences Not Addressed

 

This summary does not        address the U.S. state and local, U.S. federal estate and gift, or foreign tax consequences        to U.S. Holders of the acquisition, ownership, and disposition of CryptoLogic shares. Each        U.S. Holder should consult its own financial advisor, legal counsel, or accountant        regarding the U.S. state and local, U.S. federal estate and gift, and foreign tax        consequences of the acquisition, ownership, and disposition of CryptoLogic        shares.

 

Distributions on        CryptoLogic Shares, Tax Consequences of Distributions in General

 

Subject to the PFIC        rules discussed below, a U.S. Holder that receives a distribution, including a constructive        distribution, with respect to the CryptoLogic shares will be required to include the amount        of such distribution in gross income as a dividend (without reduction for any Irish income        tax withheld from such distribution) to the extent of the current or accumulated        “earnings and profits” of CryptoLogic, as computed for U.S. federal income tax        purposes. To the extent that a distribution exceeds the current and accumulated        “earnings and profits” of CryptoLogic, such distribution will be treated first        as a tax-free return of capital to the extent of a U.S. Holder’s adjusted tax basis        in the CryptoLogic shares and thereafter as gain from the sale or exchange of such        CryptoLogic shares. (See “Disposition of CryptoLogic Shares” below). Dividends        received on the CryptoLogic shares generally will not be eligible for the “dividends        received deductions.”

 

Reduced Tax Rates for        Certain Dividends

 

For taxable years        beginning before January 1, 2011, a dividend paid by CryptoLogic generally will be taxed at        the preferential tax rates applicable to long-term capital gains if (a) CryptoLogic is a        “qualified foreign corporation” (as defined below); (b) the U.S. Holder        receiving such dividend is an individual, estate, or trust; and (c) such dividend is paid        on CryptoLogic shares that have been held by such U.S. Holder for at least 61 days during        the one hundred and twenty-one (121) day period beginning sixty (60) days before the        ex-dividend date.

 

CryptoLogic generally        will be a “qualified foreign corporation” under Section 1(h)(11) of the U.S.        Code (a “**QFC**”) if        CryptoLogic is eligible for the benefits of the U.S.-Ireland Income Tax Treaty or, if not,        the CryptoLogic shares are readily tradable on an established securities market in the U.S.        However, even if CryptoLogic satisfies one or more of such requirements, CryptoLogic will        not be treated as a QFC if CryptoLogic is a PFIC for the taxable year during which        CryptoLogic pays a dividend or for the preceding taxable year.

 

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As discussed below,        CryptoLogic does not believe that it was a PFIC for the previous taxable year, and does not        expect that it will be a PFIC for the current taxable year. (See “Passive Foreign        Investment Company” below). However, there can be no assurance that the IRS will not        challenge the determination made by CryptoLogic concerning its PFIC status or that        CryptoLogic will not be a PFIC for the current taxable year or any subsequent taxable        year.

 

If CryptoLogic is not a        QFC, a dividend paid by CryptoLogic to a U.S. Holder generally will be taxed at ordinary        income tax rates (and not at the preferential tax rates applicable to long-term capital        gains).

 

Distributions Paid in        Foreign Currency

 

The taxable amount of a        distribution received on the CryptoLogic shares in foreign currency generally will be equal        to the U.S. dollar value of such distribution based on the exchange rate applicable on the        date of receipt. A U.S. Holder that does not convert foreign currency received as a        distribution into U.S. dollars on the date of receipt generally will have a tax basis in        such foreign currency equal to the U.S. dollar value of such foreign currency on the date        of receipt. Such a U.S. Holder generally will recognize ordinary income or loss on any        subsequent sale or other taxable disposition of such foreign currency (including an        exchange for U.S. dollars).

 

Disposition of        CryptoLogic Shares

 

A U.S. Holder will        recognize gain or loss on the sale or other taxable disposition of CryptoLogic shares in an        amount equal to the difference, if any, between (a) the amount of cash plus the fair market        value of any property received; and (b) such U.S. Holder’s adjusted tax basis in the        CryptoLogic shares sold or otherwise disposed of. Subject to the PFIC rules discussed        below, any such gain or loss generally will be capital gain or loss, which will be        long-term capital gain or loss if the CryptoLogic shares are held for more than one        year.

 

Preferential tax rates        apply to long-term capital gains of a U.S. Holder that is an individual, estate, or trust.        There are currently no preferential tax rates for long-term capital gains of a U.S. Holder        that is a corporation. Deductions for capital losses are subject to significant limitations        under the U.S. Code.

 

Foreign Tax        Credit

 

A U.S. Holder that pays        (whether directly or through withholding) Irish income tax with respect to dividends        received on the CryptoLogic shares generally will be entitled, at the election of such U.S.        Holder, to receive either a deduction or a credit for such Irish income tax paid.        Generally, a credit will reduce a U.S. Holder’s U.S. federal income tax liability on        a dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holder’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 (whether directly or through withholding) by a U.S.        Holder during a taxable year.

 

Complex limitations        apply to the foreign tax credit, including the general limitation that the credit cannot        exceed the proportionate share of a U.S. Holder’s U.S. federal income tax liability        that such U.S. Holder’s “foreign source” taxable income bears to such        U.S. Holder’s worldwide taxable income. In applying this limitation, a U.S.        Holder’s various items of income and deduction must be classified, under complex        rules, as either “foreign source” or “U.S. source”. In addition,        this limitation is calculated

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separately with respect        to “passive category income” and “general category income”. Gain or        loss recognized by a U.S. Holder on the sale or other taxable disposition of CryptoLogic        shares generally will be treated as “U.S. source” for purposes of applying the        foreign tax credit rules unless the gain is subject to tax in Ireland and is resourced as        “foreign source” under the Convention and such U.S. Person elects to treat such        gain or loss as “foreign source”. Dividends received on the CryptoLogic shares        generally will be treated as “foreign source” and generally will be categorized        as “passive category income”. Income or loss on the sale or other taxable        disposition of foreign currency will be U.S. source. The foreign tax credit rules are        complicated, and each U.S. Holder should consult its own tax advisor regarding the foreign        tax credit rules.

 

**Passive Foreign        Investment Company**

 

The foregoing discussion        assumes that CryptoLogic was not a PFIC for any taxable year during which a U.S. Holder        held CryptoLogic shares.

 

A non-U.S. corporation        is classified as a PFIC for each taxable year in which (a) 75% or more of its gross income        is passive income (as defined for U.S. federal income tax purposes); or (b) on average for        such taxable year, 50% or more (by value) of its assets either produce or are held for the        production of passive income. In addition, if a corporation is classified as a PFIC for any        taxable year during which a U.S. Holder has held shares of such corporation, such        corporation may continue to be classified as a PFIC for any subsequent taxable year in        which the U.S. Holder continues to hold the shares even if the corporation’s income        and costs are no longer passive in nature in that subsequent taxable year. For purposes of        the PFIC provisions, passive income generally includes dividends, interest, royalties,        rents, and gains from commodities or securities transactions, including certain        transactions involving oil and gas. In determining whether or not it is classified as a        PFIC, a non-U.S. corporation is required to take into account its pro rata portion of the        income and assets of each corporation in which it owns, directly or indirectly, at least        25% (by value) of the stock.

         

For purposes of the PFIC        income test and asset test described above, if a corporation owns, directly or indirectly,        25% or more of the total value of the outstanding shares of another foreign corporation, it        will be treated as if it (a) holds a proportionate share of the assets of such other        foreign corporation and (b) receives directly a proportionate share of the income of        such other foreign corporation. In addition, for purposes of the PFIC income test and asset        test described above, "passive income" does not include any interest, dividends, rents, or        royalties that are received or accrued by a corporation from a "related person"        (as defined in Section 954(d)(3) of the Code), to the extent such items are        properly allocable to the income of such related person that is not        passive income.

         

Additionally, if a        non-U.S. corporation is a PFIC and if one or more of its non-U.S. corporate        subsidiaries were treated as a PFIC ("lower-tier PFICs"), U.S. Holders of shares of        such corporation would be considered to own, and also would be subject to U.S. federal        income tax on (i) a distribution on the shares of a lower-tier PFIC and (ii) a disposition        of shares of a lower-tier PFIC, both as if the holder directly held the shares of such        lower-tier PFIC regardless of the percentage of their ownership in the corporation. In such        circumstances a U.S. Holder of common shares could elect an alternative taxation        regime in respect of its indirect ownership interest in a lower-tier PFIC, subject to        certain conditions as discussed below.

 

Consequences if        CryptoLogic Classified as a PFIC

 

CryptoLogic believes        that it was not a PFIC for its taxable year ending December 31, 2007, based on current        financial projections and business plans, does not expect that it will be a PFIC for its        taxable year ending December 31, 2008 or in future years. Whether CryptoLogic will be        considered a PFIC for

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any taxable year will        depend on the assets and income of CryptoLogic over the course of such taxable year. PFIC        classification is fundamentally factual in nature, generally cannot be determined until the        close of the taxable year in question, and is determined annually. The determination of        whether CryptoLogic will be a PFIC for a taxable year depends, in part, on the application        of complex U.S. federal income tax rules, which are subject to differing interpretations.        Consequently, there can be no assurance that CryptoLogic has not been and will not become a        PFIC during any taxable year in which U.S. Holders held CryptoLogic shares. Each U.S.        Holder should consult its own financial advisor, legal counsel, or accountant regarding the        status of CryptoLogic under the PFIC rules.

 

Whether CryptoLogic will        be considered a PFIC for its current taxable year or for any subsequent taxable year, will        depend on the assets and income of CryptoLogic over the course of each such taxable year        and, as a result, cannot be predicted with certainty as of the date of this annual report.        Accordingly, there can be no assurance that CryptoLogic will not be considered a PFIC for        the taxable year that includes the day after this publication or for any subsequent taxable        year. CryptoLogic expects that CryptoLogic will not meet the definition of a PFIC for the        taxable year that includes the date of this annual report or any future taxable year. PFIC        classification is fundamentally factual in nature, generally cannot be determined until the        close of the taxable year in question, and is determined annually. Consequently, there can        be no assurance that CryptoLogic will not be or become a PFIC for any taxable year during        which U.S. Holders hold CryptoLogic shares.

 

If CryptoLogic is or has        been classified as a PFIC for any taxable year during which a U.S. Holder holds or has held        CryptoLogic shares, the U.S. federal income tax consequences to a U.S. Holder of the        acquisition, ownership, and disposition of CryptoLogic shares will depend on whether such        U.S. Holder makes an election to treat CryptoLogic as a “qualified electing        fund” or “QEF” under Section 1295 of the Code (a “QEF        Election”) or a mark-to-market election under Section 1296 of the Code (a        “Mark-to-Market Election”). A U.S. Holder that does not make either a QEF        Election or a Mark-to-Market Election will be referred to in this summary as a        “Non-Electing U.S. Holder.”

 

Under Section 1291        of the Code, any gain recognized on the sale or other taxable disposition of CryptoLogic        shares, and any “excess distribution” (as defined in Section 1291(b) of        the Code) paid on the CryptoLogic shares, must be ratably allocated to each day in a        Non-Electing U.S. Holder’s holding period for the CryptoLogic shares. The amount of        any such gain or excess distribution allocated to prior years of such Non-Electing U.S.        Holder’s holding period for the CryptoLogic shares generally will be subject to U.S.        federal income tax at the highest tax applicable to ordinary income in each such prior        year. A Non-Electing U.S. Holder will be required to pay interest on the resulting tax        liability for each such prior year, calculated as if such tax liability had been due in        each such prior year.

 

A U.S. Holder that makes        a QEF Election generally will not be subject to the rules of Section 1291 of the Code        discussed above. However, a U.S. Holder that makes a QEF Election generally will be subject        to U.S. federal income tax on such U.S. Holder’s pro rata share of (a) the        “net capital gain” of CryptoLogic, which will be taxed as long-term capital        gain to such U.S. Holder, and (b) and the “ordinary earnings” of        CryptoLogic, which will be taxed as ordinary income to such U.S. Holder. A U.S. Holder that        makes a QEF Election will be subject to U.S. federal income tax on such amounts for each        taxable year in which CryptoLogic is a PFIC, regardless of whether such amounts are        actually distributed to such U.S. Holder by CryptoLogic.

 

A U.S. Holder that makes        a Mark-to-Market Election generally will not be subject to the rules of Section 1291        of the Code discussed above. A U.S. Holder may make a Mark-to-Market Election only if the        CryptoLogic shares are “marketable stock” (as defined in Section 1296(e)        of the Code). A U.S. Holder that makes a Mark-to-Market Election will include in gross        income, for each taxable year in which CryptoLogic is a PFIC, an amount equal to the        excess, if any, of (a) the fair market value of the

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----

 

CryptoLogic shares as of        the close of such taxable year over (b) such U.S. Holder’s tax basis in such        CryptoLogic shares. A U.S. Holder that makes a Mark-to-Market Election will, subject to        certain limitations, be allowed a deduction in an amount equal to the excess, if any, of        (a) such U.S. Holder’s adjusted tax basis in the CryptoLogic shares over        (b) the fair market value of such CryptoLogic shares as of the close of such taxable        year.

 

                                 U.S. Holders should be aware that, in the event that CryptoLogic is or becomes a PFIC,        there can be no assurance that CryptoLogic will supply U.S. Holders with the information        and statements that such U.S. Holders require to make a the QEF election discussed        above.

 

The PFIC rules are        complex, and each U.S. Holder should consult its own financial advisor, legal counsel, or        accountant regarding the PFIC rules and how the PFIC rules may affect the U.S. federal        income tax consequences of the acquisition, ownership, and disposition of CryptoLogic        shares.

 

**Backup Withholding        Tax and Information Reporting Requirements**

 

Unless the U.S. Holder        is a corporation or other exempt recipient, payments to certain U.S. Holders of dividends        made on CryptoLogic shares, or the proceeds of the sale or other disposition of the        CryptoLogic shares or the CryptoLogic shares that are made within the U.S. or through        certain U.S. related financial intermediaries may be subject to information reporting and        U.S. federal backup withholding tax at the current rate of twenty-eight percent (28%)        (subject to periodic adjustment) if the U.S. Holder fails to supply a correct taxpayer        identification number or otherwise fails to comply with applicable U.S. information        reporting or certification requirements. Any amount withheld from a payment to a U.S.        Holder under the backup withholding rules is allowable as a credit against the U.S.        Holder’s U.S. federal income tax, provided that the required information is furnished        to the IRS.

         

**IRISH INCOME TAX        CONSIDERATIONS**

**General**

The following summary,        which is intended as a general guide only, outlines certain aspects of legislation and        Revenue practice in Ireland regarding the Irish taxation of dividends as applicable to U.S.        and Canadian residents. It is based on existing Irish tax legislation, court decisions, the        current practice of the Revenue Commissioners in Ireland and the respective double taxation        agreements between Ireland and the U.S. and Ireland and Canada. This summary is not        exhaustive and does not purport to deal with the Irish taxation of dividends for all        categories of U.S. and Canadian resident investors, some of which may be subject to special        rules such as dealers in securities.

 

All shareholders should        seek independent advice on the tax implications arising in their own particular situations        as to the taxation consequences relevant to them. Each shareholder should also understand        that future legislative, administrative and judicial changes could modify the tax        consequences described below, possibly with retroactive effect.

 

The following summary is        also prepared on the basis that CryptoLogic, which is Guernsey incorporated, is tax        resident in Ireland by virtue of its central management and control being situated in        Ireland. However, this summary does not constitute confirmation that CryptoLogic will be        solely tax resident in Ireland.

 

 

|   | 62 |
|--------|----|

 

----

 

 

**Irish Taxation of        Dividends for U.S. and Canadian Residents**

 

The following summary,        which is intended as a general guide only, outlines certain aspects of legislation and        Revenue practice in Ireland regarding the Irish taxation of dividends as applicable to U.S.        and Canadian residents. It is based on existing Irish tax legislation, court decisions, the        current practice of the Revenue Commissioners in Ireland and the respective double taxation        agreements between Ireland and the U.S. and Ireland and Canada. This summary is not        exhaustive and does not purport to deal with the Irish taxation of dividends for all        categories of U.S. and Canadian resident investors, some of which may be subject to special        rules such as dealers in securities.

 

All shareholders should        seek independent advice on the tax implications arising in their own particular situations        as to the taxation consequences relevant to them. Each shareholder should also understand        that future legislative, administrative and judicial changes could modify the tax        consequences described below, possibly with retroactive effect.

 

The following summary is        also prepared on the basis that CryptoLogic, which is Guernsey incorporated, is tax        resident in Ireland by virtue of its central management and control being situated in        Ireland. However, this summary does not constitute confirmation that CryptoLogic will be        solely tax resident in Ireland.

 

Withholding        Tax

 

All dividends paid by        CryptoLogic, other than dividends paid entirely out of exempt patent income (this exemption        is subject to specific conditions), will be subject to Irish withholding tax at the        standard rate of income tax in force at the time the dividend is paid, currently        20%**.**Anindividual        shareholder who is neither resident nor ordinarily resident for tax purposes in Ireland,        but is resident in a country with which Ireland has a double tax treaty, which includes the        U.S. and Canada, or in a member state of the EU, other than Ireland (together a        “Relevant Territory”), will be exempt from withholding tax provided he or she        makes the requisite declaration.

 

Non-Irish resident        corporate shareholders that:

         

| **•** | are ultimately controlled by residents of a Relevant                    Territory; |
|------------|------------------------------------------------------------------------------------|

| **•** | are resident in a Relevant Territory and are not controlled by                    Irish residents; |
|------------|----------------------------------------------------------------------------------------------------|

| **•** | have the principal class of their shares, or shares of a 75%                    parent, substantially and regularly traded on one or more recognized stock                    exchanges; or |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | are wholly owned by two or more companies, each of whose                    principal class of shares is substantially and regularly traded on one or more                    recognized stock exchanges; |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

will be exempt from        withholding tax on the production of the appropriate certificates and declarations except        in those circumstances where the shares are held in bare trust on behalf of the beneficial        owner. In these latter circumstances, it may be possible to avoid the withholding tax with        the prior approval of the Irish tax authorities if the beneficial owner is resident in a        Relevant Territory and not under the control of Irish residents.

 

Income        Tax

 

Under certain        circumstances, non-Irish resident shareholders will be subject to Irish income tax on        dividend income. This liability is limited to tax at the standard rate and therefore, where        withholding tax has been deducted, this will satisfy the tax liability.

 

|   | 63 |
|--------|----|

 

----

 

However, a non-Irish        resident shareholder will not have an Irish income tax liability on dividends from the        company if the holder is neither resident nor ordinarily resident in the Republic of        Ireland and the holder is:

 

| • |   | an individual                resident in the U.S. or Canada (or any other country with which Ireland has                concluded a double taxation treaty); |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

| • |   | a corporation                that is ultimately controlled by persons resident in the U.S. or Canada (or any                other country with which Ireland has concluded a double taxation treaty); |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| • |   | a corporation                whose principal class of shares (or its 75% of greater parent’s principal                class of shares) is substantially and regularly traded on a recognized stock                exchange in an EU country or a country with which Ireland has concluded a double                taxation treaty; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| • |   | a corporation                resident in another EU member state or in a country with which Ireland has                concluded a double taxation treaty, which is not controlled directly or indirectly                by Irish residents; or |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| • |   | a corporation                that is wholly owned by two or more corporations each of whose principal class of                shares is substantially and regularly traded on a recognized stock exchange in an                EU country or a country with which Ireland has concluded a double taxation                treaty. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

U.S. or Canadian        Shareholders that do not fulfill the documentation requirements or otherwise do not qualify        for the withholding tax exemption may be able to claim treaty benefits under the relevant        treaty.

 

**Irish Capital Gains        Tax for U.S. and Canadian Residents**

 

CryptoLogic shares        constitute chargeable assets for Irish capital gains tax purposes and, accordingly,        Shareholders who are resident or ordinarily resident in Ireland, depending on their        circumstances, may be liable to Irish tax on capital gains on a disposal of CryptoLogic        shares. A Shareholder who is neither resident nor ordinarily resident in Ireland should not        be liable to Irish capital gains tax on a disposal of CryptoLogic shares unless the        CryptoLogic shares (i) are or were held for the purposes of a trade carried on by the        shareholder in Ireland; or (ii) derive the greater part of their value from Irish land or        exploration rights and are unquoted.

 

There are provisions to        subject a person who disposes of an interest in a company while temporarily being non-Irish        resident, to Irish capital gains tax. This treatment will apply to Irish domiciled        individuals:

 

| • |   | who cease to be                an Irish resident; |
|--------|--------|---------------------------------------------------|

| • |   | who own the                shares when they cease to be a resident; |
|--------|--------|---------------------------------------------------------------------|

| • |   | if there are                not more than 5 years of assessment between the last year of Irish tax residence                prior to becoming temporarily non-resident and the tax year that he/she resumes                Irish tax residency; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| • |   | who dispose of                an interest in a company during this temporary non-residence; and |
|--------|--------|-------------------------------------------------------------------------------------------------|

 

|   | 64 |
|--------|----|

 

----

 

 

| • |   | the interest                disposed of represents 5% or greater of the share capital of the company or exceeds                €500,000 in value. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|

In these circumstances        the person will be deemed, for Irish capital gains tax purposes, to have sold and        immediately reacquired the interest in the company on the date of his or her departure and        will be subject to tax at 20% of the taxable gain.

         

**Irish Stamp Duty for        U.S. and Canadian Residents**

 

On the basis that        CryptoLogic, which is a Guernsey incorporated company, also has its registered office and        maintains its share register in Guernsey, the ordinary shares of CryptoLogic should not be        considered Irish property and therefore no Irish stamp duty should apply on their transfer        unless:

 

|   | (i) | the transfer of such shares is executed in Ireland;                    or |
|--------|-----|---------------------------------------------------------------------------|

 

|   | (ii) | the transfer relates to a matter or thing done or to be done in                    Ireland. |
|--------|------|---------------------------------------------------------------------------------------------|

 

Even if the above        circumstances i) and ii) apply, there is an exemption currently applied in practice by the        Irish Revenue Commissioners to the effect that no Irish stamp duty should arise on the        transfer of shares in non-Irish registered companies provided the transfer of shares is not        related to immoveable property in Ireland or related to shares of a company which is        registered in Ireland.

 

Irish stamp duty is        payable on transfers of ordinary shares of Irish registered companies (other than between        spouses) wherever a document of transfer is executed. Where such transfers are attributable        to a sale, stamp duty will be charged at a rate of one per cent., rounded to the nearest        Euro. The stamp duty is calculated on the amount or value of the consideration (i.e.        purchase price) or, if the transfer is by way of a gift (subject to certain exceptions) or        for consideration less than the market value, on the market value of the shares. Where the        consideration for the sale is expressed in a currency other than Euro, the duty will be        charged on the Euro equivalent calculated at the rate of exchange prevailing on the date of        the transfer.

 

The person accountable        for payment of stamp duty is the transferee or, in the case of a transfer by way of gift or        for a consideration less than the market value, all parties to the transfer. Stamp duty is        normally payable within 30 days after the date of execution of the transfer. Late or        inadequate payment of stamp duty will result in liability for interest, penalties and        surcharges.

 

**Irish Capital        Acquisitions Tax for U.S. and Canadian Residents**

 

Irish capital        acquisitions tax (‘‘CAT’’) comprises principally of gift tax and        inheritance tax.

 

CryptoLogic shares        should not be regarded as property situated in Ireland for CAT purposes on the basis the        share register of CryptoLogic is not is held in Ireland. However, CAT could apply to a gift        or inheritance of Ordinary Shares if the donor or person who receives the gift or        inheritance is resident or ordinarily resident in Ireland at the date of the gift or        inheritance. The person who receives the gift or inheritance is primarily liable for CAT        but in some circumstances the donor is secondarily liable.

 

CAT is levied at a rate        of 20% above certain tax-free thresholds. The appropriate tax-free threshold is dependent        upon: (1) the relationship between the donor and the donee; and (2) the aggregation of the        values of previous gifts and inheritances received by the donee from persons within the        same group threshold. Gifts and inheritances passing between spouses are exempt from        CAT.

 

|   | 65 |
|--------|----|

 

----

 

**F. DIVIDENDS AND PAYING AGENTS**

 

|   | Not applicable. |
|--------|-----------------|

 

**G. STATEMENT BY EXPERTS**

 

|   | Not applicable. |
|--------|-----------------|

 

**H. DOCUMENTS ON DISPLAY**

 

Any documents referred        to in this annual report may be inspected at the Company’s office located at 55 St.        Clair Avenue West, 3rd Floor, Toronto, Ontario, Canada M4V 2Y7, or the        Company’s head office located at Alexandra House, The Sweepstakes, Ballsbridge,        Dublin 4, during normal business hours. In addition, the Company’s Securities and        Exchange Commission (“SEC”) filings are available on the SEC’s website at        www.sec.gov.

         

**I. SUBSIDIARY INFORMATION**

         

Not        applicable.

| **ITEM 11. QUANTITATIVE AND QUALITATIVE                    DISCLOSURES ABOUT MARKET RISK** |
|--------------------------------------------------------------------------------------------|

 

**Foreign Exchange        Risk**

         

We operate in a number        of foreign jurisdictions, generate revenues and incur expenses in the currencies of these        jurisdictions (U.S. Dollars, British Pounds, Euros, and Canadian Dollars).  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, including British Pounds,        Euros, and Canadian Dollars. 

         

Monetary items        denominated in currencies 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 and related        amortization are translated at rates of exchange in effect when the assets were acquired or        obligations incurred.  Revenue and expenses other than amortization are translated at        rates in effect at the time of the transactions.  Foreign exchange gains and losses        are included in the consolidated statements of earnings.

         

We have performed        sensitivity analyses as of December 31, 2007 using a modeling technique that measures the        change in the fair values arising from a hypothetical 10% adverse movement in the levels of        foreign currency exchange rates relative to the U.S. dollar, with all other variables held        constant. The analyses cover all of our foreign currency contracts offset by the underlying        exposures. The foreign currency exchange rates we used were based on market rates in effect        at December 31, 2007. The sensitivity analysis indicated that a hypothetical 10% adverse        movement in foreign currency exchange rates would have caused an increase in the expenses        by approximately $2.0 million.

 

The Company believes its        exposure to foreign exchange risk is to a large degree naturally hedged.  The Company        may engage from time to time in currency hedging, although no hedging has been done in        2007, 2006 and 2005.

         

We may utilize a hedging        program from time to time and/or take advantage of the natural hedge in having operations        in multiple currencies to mitigate a portion of 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.

 

|   | 66 |
|--------|----|

 

----

 

**Interest Rate        Risk**

 

Financial instruments        that potentially expose the Company to a concentration of credit risk, interest rate and        foreign exchange risk consist principally of cash and cash equivalents and short-term        investments and user funds on deposit.  The Company manages credit risk by investing        in cash equivalents and short-term investments rated as A and R1 or above.  Our cash        and cash equivalents are primarily held in U.S. dollars, British Pounds and        Euros.

 

The Company does not        believe that the results of operations or cash flows would be affected to any significant        degree by a sudden change in market interest rates relative to interest rates on the        investments, owing to the short-term nature of the investments.

 

The weighted average        effective interest rate on short-term investments as at December 31, 2007 is 5.03% (2006 -        5.30%; 2005 - 4.20%).

         

A hypothetical 10%        adverse movement in our interest rate yield earned on net cash and user funds on deposit        during the year ended December 31, 2007 would have decreased interest income by        approximately $0.6 million.

 

The related interest        income or expense and gains and losses for financial assets classified as held-for-trading        are included as interest income in the accompanying consolidated statements of        earnings.  Interest income or expense relating to loans and receivables and other        financial liabilities are included in operating expenses in the accompanying consolidated        statements of earnings.

         

**ITEM        12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES**

         

Not        applicable.

 

**PART        II**

 

**ITEM        13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES**

         

Not        applicable.

         

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

         

Pursuant to a business        reorganization implemented by way of an Ontario, Canada Superior Court of Justice court        approved plan of arrangement and approved by the shareholders on May 24, 2007, CryptoLogic        Limited acquired control over all of the issued and outstanding common shares        of

|   | 67 |
|--------|----|

 

----

 

CryptoLogic Inc., an        Ontario company, which through the Arrangement became an indirect subsidiary of CryptoLogic        Limited. As part of the Arrangement, the Company issued either an equivalent amount of        CryptoLogic Limited Common Shares or, in the case of taxable Canadian residents,        Exchangeable Shares of CEC, an indirect subsidiary of CryptoLogic Limited. The Exchangeable        Shares are, as nearly as practicable, the economic equivalent of the Common Shares. The        holders of Exchangeable Shares and Common Shares participate equally in voting and        dividends. No additional shares of CEC have been or will be issued. CryptoLogic        Limited’s Common Shares trade on the NASDAQ Global Select Market (symbol: CRYP),        Toronto Stock Exchange (symbol: CRY), and the London Stock Exchange’s Main Market        (symbol: CRP). CEC Exchangeable Shares trade on the Toronto Stock Exchange (symbol: CXY).        Further information regarding the Arrangement is contained in the Management Information        Circular dated April 23, 2007, which is incorporated herein by reference to Exhibit 4.1 to        Form 6-K filed by the Company with the SEC on April 30, 2007.

 

**PART        III**

 

**ITEM        15. CONTROLS AND PROCEDURES**

         

 

The Chief Executive        Officer and Chief Financial Officer of the Company, after evaluating the effectiveness of        the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and        15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of        the end of the period covered by this annual report, have concluded that the        Company’s disclosure controls and procedures as of December 31, 2007 are ineffective        because we identified a material weakness in our internal control over financial reporting        as described below.

 

        MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL        REPORTING

 

Management of the        Company is responsible for establishing and maintaining adequate internal control over        financial reporting. Internal control over financial reporting is a process designed by, or        under the supervision of, the Company’s President and Chief Executive Officer and the        Chief Financial Officer and effected by the Board of Directors, management and other        personnel to provide reasonable assurance regarding the reliability of financial reporting        and the preparation of financial statements for external purposes in accordance with        Canadian Generally Accepted Accounting Principles (“GAAP”), and reconciled to        U.S. GAAP. It includes those policies and procedures that pertain to the maintenance of        records that in reasonable detail accurately and fairly reflect the transactions and        dispositions of assets of the Company, provide reasonable assurance that transactions are        recorded as necessary to permit preparation of financial statements in accordance with GAAP        and that receipts and expenditures are made only in accordance with authorization of        management and the Board of Directors, and that prevention or timely detection of the        unauthorized acquisition, use or disposition of the Company’s assets that could have        a material effect on the annual or interim financial statements of the Company, is        assured.

 

Management assessed the        effectiveness of internal control over financial reporting as at December 31, 2007.        Management based its assessment on criteria established in “Internal Control-        Integrated Framework” issued by the Committee of Sponsoring Organizations of the        Treadway Commission (“COSO”). Based on this assessment, management concluded        that, as of December 31, 2007, internal control over financial reporting was not effective        as a result of the material weaknesses described below.

 

|   | 68 |
|--------|----|

 

----

 

A material weakness is a        deficiency, or combination of deficiencies, in internal control over financial reporting,        such that there is a reasonable possibility that a material misstatement of the annual        financial statements will not be prevented or detected on a timely basis. In connection        with management’s assessment of the our internal control over financial reporting        referred to above, management has identified the following material weaknesses in the        Company’s internal control over financial reporting as of December 31,        2007:

 

| 1) | The Company did not maintain sufficient personnel with an                    appropriate level of technical accounting knowledge, experience, and training                    in the application of GAAP commensurate with the Company’s complexity and                    its financial accounting and reporting requirements. This control deficiency is                    pervasive in nature and specifically resulted in the Company recording material                    adjustments in connection with the application of Canadian Institute of                    Chartered Accountants (“CICA”) Handbook (“HB”) Section                    3465, “Accounting for Income Taxes” to the future income taxes,                    income taxes payable, and income tax expense lines, including the future tax                    impact of intangible assets arising from the purchase of such assets and a                    business combination, in the December 31, 2007 consolidated financial                    statements. This control deficiency also resulted in material adjustments to                    the December 31, 2007 preliminary consolidated financial statements in                    connection with the recording of a contingent liability and the application of                    CICA HB Section 3855, “Financial Instruments – Recognition and                    Measurement”, where certain embedded derivatives were not recorded.                    Further, there is a reasonable possibility that material misstatements of the                    consolidated financial statements including disclosures will not be prevented                    or detected on a timely basis as a result. |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| 2) | The Company’s control activities and oversight and review                    procedures designed to monitor the effectiveness of control activities of a                    foreign location were ineffective. Specifically, as a result of this control                    deficiency the Company recorded material adjustments in accrued liabilities,                    operating expenses, capital assets and depreciation expense in our preliminary                    2007 consolidated financial statements. The identified errors were corrected                    prior to the finalization of those financial statements. Further, there is a                    reasonable possibility that material misstatements of the consolidated                    financial statements including disclosures will not be prevented or detected on                    a timely basis as a result. |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| 3) | The Company did not design procedures to ensure detailed reviews                    and verification of inputs related to the analysis of accounts or transactions                    and schedules supporting financial statement amounts and notes. Specifically,                    this control deficiency, which is pervasive in nature, contributed to the                    actual misstatements identified above and various immaterial adjustments to the                    preliminary notes and to earnings per share and minority interest. Further,                    there is a reasonable possibility that material misstatements of the                    consolidated financial statements including disclosures will not be prevented                    or detected on a timely basis as a result. |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Our independent        registered public accounting firm, KPMG LLP, has audited the effectiveness of our internal        control over financial reporting as of December 31, 2007, as stated in its report,        which appears on page F-3 of this annual report.

 

CHANGES IN INTERNAL        CONTROLS

 

There have been no        changes in our “internal control over financial reporting” that occurred during        the year ended December 31, 2007 that have materially affected or are reasonable likely to        materially affect our internal control over financial reporting.

 

|   | 69 |
|--------|----|

 

----

 

Subsequent to December        31, 2007, the Chief Executive Officer was replaced by Brian Hadfield, an existing member of        our Board of Directors.

 

Furthermore, management        has begun to address the material weaknesses discussed above.

 

The relocation of the        Company’s head office to Dublin, Ireland was carried out to allow senior management        to be closer to customers and major markets and to simplify the structure of the Company        where possible.  During this process, retention of key financial staff in Toronto has        been difficult.  In addition, the Company relocated the gaming servers owned by its        licensees to a new jurisdiction for the first time, which was a major undertaking for the        Company.  These facts, along with significant movements in the exchange rates against        the U.S. dollar, specifically the U.S. dollar and Canadian Dollar, during the year,        contributed to weaknesses in the tax calculation process in various        jurisdictions. 

 

The Company has hired a        Director of Income Tax, a new Financial Controller as well as other personnel with an        appropriate level of technical accounting knowledge and experience in the application of        GAAP to manage the process of centralizing accounting functions in Dublin, and has taken        steps to simplify its intercompany structure to ensure that these material weaknesses will        not recur.

 

**ITEM        16A. AUDIT COMMITTEE FINANCIAL EXPERT**

 

Thomas Byrne and Stephen        Freedhoff are members of the Audit Committee of the Company’s Board of Directors, who        both qualify as an “audit committee financial expert” based on their education        and experience. Both Messrs. Byrne and Freedhoff are independent, as that term is defined        by the NASDAQ listing standards applicable to our Company.

 

The SEC has indicated        that the designation of Messrs. Byrne and Freedhoff as an audit committee financial expert        does not make them an “expert” for any purpose, impose any duties, obligations        or liability on them that are greater than those imposed on members of the Audit Committee        and Board of Directors who do not carry this designation or affect the duties, obligations        or liability of any other member of the Audit Committee. Descriptions of Messrs. Byrne and        Freedhoff’s business experience are incorporated herein by reference to page 39 of        this annual report.

 

**ITEM        16B. CODE OF ETHICS**

 

Our Board of Directors        has adopted a Code of Ethics applicable to our Chief Executive Officer, our Company’s        principal executive officer, and the Chief Financial Officer, our Company’s principal        financial and accounting officer, and employees, with the goal of promoting the highest        moral, legal and ethical standards and conduct within our Company. A copy of the Code of        Ethics is incorporated herein by reference to Exhibit 4.10 of this annual        report

Copies of this Code of        Ethics are available without charge upon request by contacting the Company’s investor        relations department: by mail at our office, 55 St. Clair Avenue West, 3rd        Floor, Toronto, Ontario, Canada, M4V 2Y7; by telephone at 416-545-1455; or by email        atinvestor.relations@cryptologic.com.        The Code of Ethics is also posted on the Company’s web site at        www.cryptologic.com.

 

 

|   | 70 |
|--------|----|

 

----

 

 

**ITEM        16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

         

The Audit Committee has        reviewed the nature and amount of the non-audit services provided to the Company by KPMG        LLP to ensure auditor independence. Fees paid to KPMG LLP for audit and non-audit services        in the last two fiscal years are outlined in the following table:

         

| **Years ended December 31,**

(In thousands of U.S. dollars) | **2007**   | 2006   |
|--------------------------------------------------------------|------------|--------|
| Audit Fees                                                   | **$1,174** | $505   |
| Audit-Related Fees                                           | **--**     | $109   |
| Tax Fees                                                     | **$1,818** | $372   |
| All Other Fees                                               | **$53**    | $34    |
| Total:                                                       | **$3,045** | $1,020 |

 

*Audit        Fees*

Audit fees were for        professional services rendered for the audits of the Company’s consolidated financial        statements and subsidiary companies, the review of interim financial statements, the review        of accounting disclosure requirements regarding other business activities and review of        documents filed with U.S., Canadian and U.K. securities regulatory authorities including        documents relating to the Company’s reorganization to Ireland.

 

*Audit-Related        Fees*

 

Audit-related fees were        for advisory services related to Sarbanes-Oxley (Section 404).

 

*Tax        Fees*

 

Tax fees were for tax        compliance, tax advice and tax planning. These services included the preparation and review        of corporate tax returns, assistance with tax audits and transfer pricing matters,        expatriate advisory services as well as advisory services relating to the Company’s        reorganization to Ireland, federal, provincial and international tax compliance for customs        and duties, and regarding common forms of domestic and international taxation (i.e. income        tax, VAT, GST and excise taxes).

 

*All Other        Fees*

 

Other fees were for        services other than audit fees, audit-related fees and tax fees as described above. These        services included probity checks of employees and licensees.

         

*Pre-Approval Policies        and Procedures*

 

The Company’s        Audit Committee has direct communications channels with internal personnel responsible for        financial statement preparation and with external auditors, and has concluded that the        provision of services other than audit services is compatible with maintaining the        auditors’ independence. The Audit Committee monitors audit functions and the        preparation of financial statements, and meets with external auditors independent of        management. The Audit Committee has adopted a policy regarding its pre-approval of all        audit and permissible non-audit services provided by the independent auditors. The policy        gives guidance to the Company’s management as to the specific types of services that        have been pre-approved. The Company’s senior management periodically provides the        Audit Committee with a summary of services provided by the independent auditors in        accordance with the pre-approval policy. For the year ended December 31, 2007, none of the        audit, tax and other fees described above were an exception to the Audit Committee’s        pre-approval policy.

|   | 71 |
|--------|----|

 

----

 

**ITEM        16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT        COMMITTEES**

 

Not        applicable.

**ITEM        16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED        PURCHASERS**

         

Not        applicable.

 

**ITEM        17. FINANCIAL STATEMENTS**

         

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

         

| Consolidated Financial Statements                    — Years Ended December 31, 2007, 2006 and 2005 | F-1                                                                             |
|-----------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------|
|                                                                                                      | Report of Independent Registered                    Public Accounting Firm      | F-2 |
|                                                                                                      | Report of Independent Registered                    Public Accounting Firm      | F-3 |
|                                                                                                      | Consolidated Balance                    Sheets                                  | F-5 |
|                                                                                                      | Consolidated Statements of Earnings                    and Comprehensive Income | F-6 |
|                                                                                                      | Consolidated Statements of Retained                    Earnings                 | F-7 |
|                                                                                                      | Consolidated Statements of Cash                    Flows                        | F-8 |
|                                                                                                      | Notes to Consolidated Financial                    Statements                   | F-9 |

         

**ITEM        18. FINANCIAL STATEMENTS**

 

Not        applicable.

 

 

 

|   | 72 |
|--------|----|

 

----

 

 

**ITEM        19.        EXHIBITS**                                                                                                                                                                            

         

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

| 1.1  | Memorandum of                    Association of CryptoLogic Limited                                                                                                                                                             |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.2  | Articles of                    Association of CryptoLogic Limited                                                                                                                                                               |
| 4.1  | Management                    Information Circular dated April 23, 2007(1)                                                                                                                                                      |
| 4.2  | 2002 Stock                    Option Plan(2)                                                                                                                                                                                    |
| 4.3  | Long-Term                    Incentive Plan                                                                                                                                                                                     |
| 4.4  | Employee Share                    Purchase Plan                                                                                                                                                                                 |
| 4.5  | Agreement dated                    January 8, 2007 between Parbet.com Ltd, Atletico Nordic B.V., WagerLogic                    Limited and CryptoLogic Inc.                                                                     |
| 4.6  | Agreement dated                    June 13, 2007 between 568 Network Inc. and CryptoLogic (Asia Pacific) Pte                    Ltd.                                                                                            |
| 4.7  | Agreement dated                    August 22, 2007 between Media Corporation PLC, Xworks (UK) Limited, Jason                    Drummond, Justin Drummond and Gaming Portals Limited to acquire                    Casino.co.uk |
| 4.8  | Agreement dated                    November 5, 2007 between Mikoishi (Asia Pacific) Pte Ltd. and CryptoLogic (Asia                    Pacific) Pte Ltd.                                                                         |
| 4.9  | Office Lease                    Agreements for Toronto, Canada                                                                                                                                                                  |
| 4.10 | Code of                    Ethics                                                                                                                                                                                               |
| 4.11 | Employment                    Agreement dated February 27, 2008 between CryptoLogic Limited and Brian                    Hadfield                                                                                               |
| 4.12 | Employment                    Agreements dated June 1, 2007 between CryptoLogic Limited and Stephen                    Taylor – Dublin                                                                               |
| 4.13 | Employment                    Agreements dated June 1, 2007 between CryptoLogic Limited and Stephen Taylor                    – Toronto                                                                                   |
| 4.14 | Employment                    Agreement dated June 1, 2007 between Westbury Marketing and Stephen                    Taylor                                                                                                     |
| 4.15 | Consulting                    Agreement dated June 1, 2007 between CryptoLogic Limited and Westbury Marketing                    Ltd.                                                                                           |
| 4.16 | Consulting                    Agreement dated June 1, 2007 between Game Pack and Westbury Marketing                    Ltd.                                                                                           |
| 4.17 | Agreement dated May 9, 2008 between Jingle Prize, Inc. and Cryptologic (Asia Pacific) Pte Ltd.                                                                                                                                  |
| 8.1  | List of Subsidiaries of the Company                                                                                                                                                                                             |
| 12.1 | Certification of the President and Chief Executive Officer of                    CryptoLogic Limited pursuant to Section 302 of Sarbanes-Oxley Act of                    2002                                                   |
| 12.2 | Certification of the Chief Financial Officer of CryptoLogic                    Limited pursuant to Section 302 of Sarbanes-Oxley Act of 2002                                                                                    |
| 13.1 | Certification of                    the President and Chief Executive Officer of CryptoLogic Limited pursuant to                    Section 906 of the Sarbanes-Oxley Act of 2002                                               |
| 13.2 | Certification of                    the Chief Financial Officer of CryptoLogic Limited pursuant to Section 906 of                    the Sarbanes-Oxley Act of 2002                                                             |

| (1) | Incorporated by reference to Exhibit 4.1 to the Company’s                    Form 6-K filed with the SEC on April 30, 2007. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------|

| (2) | Incorporated by reference to Exhibit 4.2 to the Company’s                    Form 20-F filed with the SEC on June 13, 2003. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------|

 

 

|   | 73 |
|--------|----|

 

----

 

 

**SCHEDULE II        – VALUATION AND QUALIFYING        ACCOUNTS**                                                                

 

 

| **Accounts Receivable**

**Allowance for Doubtful Accounts** |
|--------------------------------------------------------------|
| Years ended December 31(In US$)                              |
|                                                         |   |   |   |   |
|                                                         | **Balance at Beginning of Year** | **Charged to Expenses** | **Write-Offs Net of Recoveries** | **Balance at**

**End of Year** |
| 2005                                                         | 10,054 |   | (10,054) | -- |
| 2006                                                         | -- | (11,049) |   | 11,049 |
| 2007                                                         | 11,049 |   | (50) | 10,999 |

 

 

|   | 74 |
|--------|----|

 

----

 

 

**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        LIMITED**

         

         

|   | By                                    | /s/ Brian                    Hadfield                                                                                                   |
|--------|---------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | Brian Hadfield                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | President and Chief Executive Officer |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|        |                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |

         

| Date: | May 20, 2008 |
|-------|--------------|

 

 

 

|   | 75 |
|--------|----|

 

 

 

----

         

         

         

         

         

         

         

         

Consolidated Financial        Statements

(In U.S.        dollars)

         

**CRYPTOLOGIC        LIMITED**

(FORMERLY CRYPTOLOGIC        INC.)

         

Years ended December 31,        2007, 2006 and 2005

 

----

**REPORT OF INDEPENDENT        REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of        Directors of CryptoLogic Limited

 

We have audited the        accompanying consolidated balance sheets of CryptoLogic Limited (the "Company") (formerly        CryptoLogic Inc.) and subsidiaries as of December 31, 2007 and 2006 and the related        consolidated statements of earnings and comprehensive income, retained earnings and cash        flows for each of the years in the three-year period ended December 31, 2007. In connection        with our audits of the consolidated financial statements, we also have audited the        consolidated financial statement schedule II. These consolidated financial statements are        the responsibility of the Company's management. Our responsibility is to express an opinion        on these consolidated financial statements based on our audits.

We conducted our audits        in accordance with the standards of the Public Company Accounting Oversight Board (United        States). Those standards require that we plan and perform the audit to obtain reasonable        assurance about whether the financial statements are free of material misstatement. An        audit includes examining, on a test basis, evidence supporting the amounts and disclosures        in the financial statements. An audit also includes assessing the accounting principles        used and significant estimates made by management, as well as evaluating the overall        financial statement presentation. We believe that our audits provide a reasonable basis for        our opinion.

In our opinion, the        consolidated financial statements referred to above present fairly, in all material        respects, the financial position of the Company and subsidiaries as of December 31, 2007        and 2006 and the results of their operations and their cash flows for each of the years in        the three-year period ended December 31, 2007 in conformity with Canadian generally        accepted accounting principles. Also in our opinion, the related financial statement        schedule II, when considered in relation to the basic consolidated financial statements        taken as a whole, presents, fairly, in all material respects, the information set forth        therein.

Canadian generally        accepted accounting principles vary in certain significant respects from U.S. generally        accepted accounting principles. Information relating to the nature and effect of such        differences is presented in note 19 to the consolidated financial        statements.

As discussed in note        1(e) to the financial statements, the Company adopted the recommendations of the Canadian        Institute of Chartered Accountants’ Handbook Section 1530, Comprehensive Income,        Section 3855, Financial Instruments – Recognition and Measurement, Section 3861,        Financial Instruments – Disclosure and Presentation and Section 3251, Equity on        January 1, 2007.

We also have audited, in        accordance with the standards of the Public Company Accounting Oversight Board (United        States), the Company's internal control over financial reporting as of December 31, 2007,        based on the criteria established in Internal Control—Integrated Framework issued by        the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated        March 17, 2008 expressed an adverse opinion on the effectiveness of the Company’s        internal control over financial reporting.

 

/s/ KPMG        LLP

Chartered Accountants,        Licensed Public Accountants

Toronto,        Canada

March 17,        2008

 

F-2

----

**REPORT OF INDEPENDENT        REGISTERED PUBLIC ACCOUNTING FIRM**

 

| To the Board                        of Directors of CryptoLogic Limited |
|-------------------------------------------------------------------------|

 

We have audited        CryptoLogic Limited's (the "Company") (formerly CryptoLogic Inc.) internal control over        financial reporting as of December 31, 2007, based on the criteria established in Internal        Control—Integrated Framework issued by the Committee of Sponsoring Organizations of        the Treadway Commission (“COSO”).The Company's management is responsible for        maintaining effective internal control over financial reporting and for its assessment of        the effectiveness of internal control over financial reporting included in the accompanying        Management’s Report on Internal Control Over Financial Reporting. Our responsibility        is to express an opinion on the Company's internal control over financial reporting based        on our audit.

We conducted our audit        in accordance with the standards of the Public Company Accounting Oversight Board (United        States). Those standards require that we plan and perform the audit to obtain reasonable        assurance about whether effective internal control over financial reporting was maintained        in all material respects. Our audit included obtaining an understanding of internal control        over financial reporting, assessing the risk that a material weakness exists, and testing        and evaluating the design and operating effectiveness of internal control based on the        assessed risk. Our audit also included performing such other procedures as we considered        necessary in the circumstances. We believe that our audit provides a reasonable basis for        our opinion.

A company's internal        control over financial reporting is a process designed to provide reasonable assurance        regarding the reliability of financial reporting and the preparation of financial        statements for external purposes in accordance with generally accepted accounting        principles. A company's internal control over financial reporting includes those policies        and procedures that (1) pertain to the maintenance of records that, in reasonable detail,        accurately and fairly reflect the transactions and dispositions of the assets of the        company; (2) provide reasonable assurance that transactions are recorded as necessary to        permit preparation of financial statements in accordance with generally accepted accounting        principles, and that receipts and expenditures of the company are being made only in        accordance with authorizations of management and directors of the company; and (3) provide        reasonable assurance regarding prevention or timely detection of unauthorized acquisition,        use, or disposition of the company's assets that could have a material effect on the        financial statements.

Because of its inherent        limitations, internal control over financial reporting may not prevent or detect        misstatements. Also, projections of any evaluation of effectiveness to future periods are        subject to the risk that controls may become inadequate because of changes in conditions,        or that the degree of compliance with the policies or procedures may        deteriorate.

A material weakness is a        deficiency, or a combination of deficiencies, in internal control over financial reporting,        such that there is a reasonable possibility that a material misstatement of the        Company’s annual financial statements will not be prevented or detected on a timely        basis. The following material weaknesses have been identified and included in        management’s assessment:

(1) The Company did not        maintain sufficient personnel with an appropriate level of technical accounting knowledge,        experience, and training in the application of generally acceptable accounting principles        (“GAAP”) commensurate with the Company’s complexity and its financial        accounting and reporting requirements.

(2) The Company’s        control activities and oversight and review procedures designed to monitor the        effectiveness of control activities of a foreign location were        ineffective.

(3) The Company did not        design procedures to ensure detailed reviews and verification of inputs related to the        analysis of accounts or transactions and schedules supporting financial statement amounts        and notes.

We also have audited, in        accordance with the standards of the Public Company Accounting Oversight Board (United        States), the consolidated balance sheets of the Company and subsidiaries as of December 31,        2007 and 2006 and the related consolidated statements of earnings and comprehensive income,        retained earnings and cash flows for each of the years in the three-year

 

F-3

----

period ended December        31, 2007. These material weaknesses were considered in determining the nature, timing and        extent of audit tests applied in our audit of the 2007 consolidated financial statements,        and this report does not affect our report dated March 17, 2008 which expressed an        unqualified opinion on those consolidated financial statements.

In our opinion, because        of the effect of the aforementioned material weaknesses on the achievement of the        objectives of the control criteria, the Company has not maintained effective internal        control over financial reporting as of December 31, 2007 based on the criteria established        in Internal Control—Integrated Framework issued by the Committee of Sponsoring        Organizations of the Treadway Commission (COSO).

 

/s/ KPMG        LLP

 

Chartered Accountants,        Licensed Public Accountants

 

Toronto,        Canada

 

March 17,        2008

 

F-4

----

**CryptoLogic        limited**

(FORMERLY CRYPTOLOGIC        INC.)

         

**Consolidated Balance        Sheets**

(In thousands of U.S.        dollars)

         

December 31, 2007 and        2006

----

|                                                                                       | 2007   | 2006   |
|---------------------------------------------------------------------------------------|--------|--------|
| **Assets**                                                                            |   |   |   |  |   |   |  |   |
| Current assets:                                                                       |   |   |  |  |  |  |  |  |
|      Cash and cash                equivalents                |   |   | $ | 55,428 |   | $ | 76,940 |   |
|      Restricted cash                (note 2)                 |   |   |   | 20,576 |   |   | – |   |
|      Security                deposits (note 2)               |   |   |   | 1,500 |   |   | 1,500 |   |
|      Short-term                investments                   |   |   |   | – |   |   | 50,000 |   |
|      Accounts                receivable and other            |   |   |   | 11,357 |   |   | 8,251 |   |
|      Prepaid                expenses                         |   |   |   | 8,312 |   |   | 7,027 |   |
|                                                                                       |
|                                                                                  |   |   |   | 97,173 |   |   | 143,718 |   |
| User funds on deposit (note                3)                                         |   |   |   | 22,317 |   |   | 20,872 |   |
| Capital assets (note                4)                                                |   |   |   | 25,802 |   |   | 18,106 |   |
| Long-term investments (note                5)                                         |   |   |   | 5,326 |   |   | – |   |
| Intangible assets, net of                accumulated amortization of                  |   |   |  |  |  |  |  |  |
|    $1,629                (2006 - $424) (note 6)                        |   |   |   | 14,724 |   |   | 48 |   |
| Goodwill (note                6)                                                      |   |   |   | 5,291 |   |   | 1,776 |   |
|                                                                                       |
|                                                                                  |   |   | $ | 170,633 |   | $ | 184,520 |   |
|                                                                                       |
| **Liabilities and                Shareholders' Equity**                               |   |   |  |  |  |  |  |  |
| Current                liabilities:                                                   |   |   |  |  |  |  |  |  |
|      Accounts                payable and accrued liabilities |   |   | $ | 24,154 |   | $ | 47,766 |   |
|      Income taxes                payable                     |   |   |   | 4,820 |   |   | 2,165 |   |
|                                                                                       |
|                                                                                  |   |   |   | 28,974 |   |   | 49,931 |   |
| User funds held on deposit                (note 3)                                    |   |   |   | 22,317 |   |   | 20,872 |   |
| Future income taxes (note                14)                                          |   |   |   | 345 |   |   | 2,133 |   |
|                                                                                       |
|                                                                                  |   |   |   | 51,636 |   |   | 72,936 |   |
| Minority interest (note                8)                                             |   |   |   | 9,691 |   |   | – |   |
| Shareholders'                equity:                                                  |   |   |  |  |  |  |  |  |
|      Share capital                (note 9)                   |   |   |   | 33,407 |   |   | 29,096 |   |
|      Stock options                (note 10)                  |   |   |   | 5,044 |   |   | 3,631 |   |
|      Retained                earnings                        |   |   |   | 70,855 |   |   | 78,857 |   |
|                                                                                       |
|                                                                                  |   |   |   | 109,306 |   |   | 111,584 |   |
| Commitments and                contingencies (note 11)                                |   |   |  |  |  |  |  |  |
| Canadian and United States                accounting policy differences (note 19)     |   |   |  |  |  |  |  |  |
| Subsequent events (note                20)                                            |   |   |  |  |  |  |  |  |
|                                                                                       |
|                                                                                  |   |   | $ | 170,633 |   | $ | 184,520 |   |
|                                                                                       |

See accompanying        notes to consolidated financial statements.

 

On behalf of the        Board:

         

| /s/ Robert H. Stikeman | Director, Chairman |
|------------------------|--------------------|

| /s/ Brian Hadfield | Director |
|--------------------|----------|

 

F-5

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY CRYPTOLOGIC        INC.)

         

**Consolidated        Statements of Earnings and Comprehensive Income**

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

         

Years ended December 31,        2007, 2006 and 2005

         

         

|                                                                         |
|-------------------------------------------------------------------------|
||
|                                                                    |   |   |   | 2007 |   |   | 2006 |   |   | 2005 |   |
|                                                                         |
| Revenue (note                18)                                        |   |   | $ | 73,659 |   | $ | 104,022 |   | $ | 86,307 |   |
|                                                                         |
| Expenses:                                                               |   |   |
|      Operating                                 |   |   |   | 49,436 |   |   | 64,685 |   |   | 52,658 |   |
|      General and                administrative |   |   |   | 10,166 |   |   | 7,907 |   |   | 7,642 |   |
|      Reorganization                (note 13)   |   |   |   | 5,666 |   |   | 3,700 |   |   | – |   |
|      Software                development       |   |   |   | – |   |   | – |   |   | 3,287 |   |
|      Finance                                   |   |   |   | 550 |   |   | 554 |   |   | 417 |   |
|      Amortization                              |   |   |   | 6,566 |   |   | 4,777 |   |   | 3,894 |   |
|                                                                         |
|                                                                    |   |   |   | 72,384 |   |   | 81,623 |   |   | 67,898 |   |
|                                                                         |
| Earnings before the                undernoted                           |   |   |   | 1,275 |   |   | 22,399 |   |   | 18,409 |   |
| Interest income                                                         |   |   |   | 6,217 |   |   | 7,092 |   |   | 3,627 |   |
|                                                                         |
| Earnings before income taxes                and                         |   |   |
|    minority                interest                      |   |   |   | 7,492 |   |   | 29,491 |   |   | 22,036 |   |
|                                                                         |
| Income taxes (recovery)                (note 14):                       |   |   |
|      Current                                   |   |   |   | 4,056 |   |   | 4,957 |   |   | 935 |   |
|      Future                                    |   |   |   | (3,063 | ) |   | (278 | ) |   | 571 |   |
|                                                                         |
|                                                                    |   |   |   | 993 |   |   | 4,679 |   |   | 1,506 |   |
|                                                                         |
| Earnings before minority                interest                        |   |   |   | 6,499 |   |   | 24,812 |   |   | 20,530 |   |
| Minority interest (note                8)                               |   |   |   | 971 |   |   | – |   |   | – |   |
|                                                                         |
| Net earnings and                comprehensive income                    |   |   | $ | 5,528 |   | $ | 24,812 |   | $ | 20,530 |   |
|                                                                         |
| Earnings per common share                (note 12):                     |   |   |
|      Basic                                     |   |   | $ | 0.47 |   | $ | 1.83 |   | $ | 1.51 |   |
|      Diluted                                   |   |   |   | 0.47 |   |   | 1.81 |   |   | 1.46 |   |
|                                                                         |

See accompanying notes        to consolidated financial statements.

 

F-6

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY CRYPTOLOGIC        INC.)

         

**Consolidated        Statements of Retained Earnings**

(In thousands of U.S.        dollars)

         

Years ended December 31,        2007, 2006 and 2005

         

|                                                                |        |        |        |
|----------------------------------------------------------------|--------|--------|--------|
|                                                                |
|                                                           |   |   |   | 2007 |   |   | 2006 |   |   | 2005 |   |
|                                                                |
| Retained earnings,                    beginning of year        |   |   | $      | 78,857 |   | $ | 59,891 |   | $ | 50,593 |   |
| Net earnings                                                   |   |   |   | 5,528 |   |   | 24,812 |   |   | 20,530 |   |
| Dividends paid,                    excluding those paid to     |   |   |
|    CEC                    shareholders          |   |   |   | (6,408 | ) |   | (5,846 | ) |   | (2,984 | ) |
| Reduction due to                    minority interest (note 8) |   |   |   | (7,122 | ) |   | – |   |   | – |   |
| Excess of purchase price                    of treasury        |   |   |
|    shares                    over stated value  |   |   |   | – |   |   | – |   |   | (8,248 | ) |
|                                                                |
| Retained earnings, end                    of year              |   |   | $      | 70,855 |   | $ | 78,857 |   | $ | 59,891 |   |
|                                                                |

 

See accompanying notes        to consolidated financial statements.

 

F-7

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY CRYPTOLOGIC        INC.)

         

**Consolidated        Statements of Cash Flows**

(In thousands of U.S.        dollars)

         

Years ended December 31,        2007, 2006 and 2005

         

|                                                                                                                   |        |        |        |
|-------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|                                                                                                                   |
|                                                                                                              |   |   |   | 2007 |   |   | 2006 |   |   | 2005 |   |
|                                                                                                                   |
| Cash flows from (used                    in) operating activities:                                                |   |   |
|      Net                    earnings                                                     |   |   | $      | 5,528 |   | $ | 24,812 |   | $ | 20,530 |   |
|      Adjustments                    to reconcile earnings to cash                        |   |   |
|        provided                    by (used in) operating activities:          |   |   |
|          Amortization                                                |   |   |   | 6,566 |   |   | 4,777 |   |   | 3,894 |   |
|          Future                    income taxes                      |   |   |   | (3,063 | ) |   | (278 | ) |   | 571 |   |
|          Minority                    interest                        |   |   |   | 971 |   |   | – |   |   | – |   |
|          Stock                    options                            |   |   |   | 3,714 |   |   | 2,255 |   |   | 1,807 |   |
|                                                                                                                   |
|                                                                                                              |   |   |   | 13,716 |   |   | 31,566 |   |   | 26,802 |   |
|      Change in                    operating assets and liabilities:                      |   |   |
|          Accounts                    receivable and other            |   |   |   | (3,106 | ) |   | 378 |   |   | (2,142 | ) |
|          Prepaid                    expenses                         |   |   |   | (1,285 | ) |   | (2,412 | ) |   | (2,861 | ) |
|          Accounts                    payable and accrued liabilities |   |   |   | (23,612 | ) |   | 10,271 |   |   | 7,439 |   |
|          Income                    taxes payable                     |   |   |   | 2,402 |   |   | 851 |   |   | (17 | ) |
|          Security                    deposits                        |   |   |   | – |   |   | – |   |   | 5,500 |   |
|                                                                                                                   |
|                                                                                                              |   |   |   | (11,885 | ) |   | 40,654 |   |   | 34,721 |   |
| Cash flows from (used                    in) financing activities:                                                |   |   |
|      Issue of                    capital stock                                           |   |   |   | 3,878 |   |   | 3,138 |   |   | 4,986 |   |
|      Repurchase                    of capital stock                                      |   |   |   | – |   |   | – |   |   | (9,201 | ) |
|      Dividends                    paid, including those paid to                          |   |   |
|        CEC                    shareholders                                     |   |   |   | (6,678 | ) |   | (5,846 | ) |   | (2,984 | ) |
|                                                                                                                   |
|                                                                                                              |   |   |   | (2,800 | ) |   | (2,708 | ) |   | (7,199 | ) |
|                                                                                                                   |
| Cash flows from (used                    in) investing activities:                                                |   |   |
|      Cash paid                    for Casino.co.uk                                       |   |   |   | (6,098 | ) |   | – |   |   | – |   |
|      Cash paid                    for acquisition of Parbet.com                          |   |   |   | (11,770 | ) |   | – |   |   | – |   |
|      Purchase of                    capital assets                                       |   |   |   | (13,057 | ) |   | (8,640 | ) |   | (8,850 | ) |
|      Purchase of                    long-term investments                                |   |   |   | (5,326 | ) |   | – |   |   | – |   |
|      Increase in                    restricted cash                                      |   |   |   | (20,576 | ) |   | – |   |   | – |   |
|      Proceeds                    from sale of (purchases of)                             |   |   |
|        short-term                    investments                               |   |   |   | 50,000 |   |   | (46,786 | ) |   | 32,566 |   |
|                                                                                                                   |
|                                                                                                              |   |   |   | (6,827 | ) |   | (55,426 | ) |   | 23,716 |   |
|                                                                                                                   |
| Increase (decrease) in                    cash and                                                                |   |   |
|    cash                    equivalents                                                             |   |   |   | (21,512 | ) |   | (17,480 | ) |   | 51,238 |   |
| Cash and cash                    equivalents, beginning of year                                                   |   |   |   | 76,940 |   |   | 94,420 |   |   | 43,182 |   |
|                                                                                                                   |
| Cash and cash                    equivalents, end of year                                                         |   |   | $      | 55,428 |   | $ | 76,940 |   | $ | 94,420 |   |
|                                                                                                                   |
| Supplemental cash flow                    information:                                                            |   |   |
|      Income                    taxes paid                                                |   |   | $      | 1,842 |   | $ | 4,208 |   | $ | 951 |   |
|      Interest                    received                                                |   |   |   | 6,243 |   |   | 6,626 |   |   | 3,830 |   |
|      Non-cash                    portion of options exercised                            |   |   |   | 1,883 |   |   | 787 |   |   | 962 |   |
|                                                                                                                   |

See accompanying notes        to consolidated financial statements.

 

F-8

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

CryptoLogic Limited and        its subsidiaries (the "Company") is a provider of commerce-enabling technology, permitting        secure, reliable, high-speed and private financial transactions over the Internet. The        Company provides a comprehensive solution including software, network operations,        administrative and marketing consulting services to licensed gaming operators. The Company        earns substantially all of its revenue from hosting and service arrangements for the        operation of on-line casino and poker games on behalf of licensed casinos. Substantially        all of the Company's revenue is earned in U.S. dollars, British pounds and Euros from        licensees located outside of North America. Revenue from the top seven licensees        constituted 79% (2006 - 84%; 2005 - 90%) of revenue. The Company's functional currency is        the United States dollar and, consequently, it measures and reports its results in U.S.        dollars.

Pursuant to a business        reorganization implemented by way of an Ontario, Canada Superior Court of Justice court        approved plan of arrangement (the "Arrangement") and approved by the shareholders on May        24, 2007, CryptoLogic Limited acquired control over all of the issued and outstanding        common shares of CryptoLogic Inc., an Ontario company, which through the Arrangement,        became an indirect subsidiary of CryptoLogic Limited. As part of the Arrangement,        CryptoLogic Limited issued either an equivalent amount of its common shares or, in the case        of taxable Canadian residents, exchangeable shares of CryptoLogic Exchange Corporation        ("CEC"), an indirect subsidiary of CryptoLogic Limited. The CEC shares are, as nearly as        practicable, the economic equivalent of CryptoLogic Limited shares. These CEC shares        participate equally in voting and dividends with the shareholders of the Company. No        additional shares of CEC will be issued after June 1, 2007.

For accounting purposes,        the Arrangement has been accounted for using the continuity of interest method, which        recognizes CryptoLogic Limited as the successor entity to CryptoLogic Inc. Accordingly,        these consolidated financial statements reflect the financial position, results of        operations and cash flows as if the Company has always carried on the business formerly        carried on by CryptoLogic Inc. and its subsidiaries, with all assets and liabilities        recorded at the carrying values of CryptoLogic Inc. The interest held by CEC shareholders        has been presented as a minority interest in these consolidated financial statements, as        required under Canadian GAAP (note 8).

 

F-9

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **1.** | **Significant accounting policies:** |
|--------|--------------------------------------|

The consolidated        financial statements are prepared in accordance with Canadian generally accepted accounting        principles ("GAAP"). Note 19 describes and reconciles the significant measurement        differences between Canadian and U.S. GAAP affecting the accompanying consolidated        financial statements. 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 upon        consolidation.

|   | (b) | Revenue recognition: |
|--------|-----|----------------------|

The Company earns its        revenue primarily from hosting and services arrangements related to the design and        operation of casino and poker sites on the internet on behalf of licensed operators. Other        sources of revenue are fees associated with customization of the software for a specific        licensee and commerce-based transactions.

Revenue from software        hosting to licensees is recognized as the services are performed, on a daily basis, at the        time of the gaming transactions, pursuant to the agreements with the licensees in which the        Company participates in a pro rata share of the daily gaming profits, net of certain shared        expenses, including costs such as promotion costs. In addition, the Company receives a        standard monthly fee for the provision of hosting and related services.

Revenue from the initial        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 hosting and services        agreements.

Interest income is        recognized on an accrual basis.

 

F-10

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

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

|   | (c) | Cash and cash equivalents: |
|--------|-----|----------------------------|

Cash and cash        equivalents include highly liquid investments with original maturity dates of 90 days or        less. At December 31, 2007, cash and cash equivalents are stated at fair value (note 1(e));        at December 31, 2006, cash and cash equivalents are stated at cost, which approximates        market value.

|   | (d) | Short-term investments: |
|--------|-----|-------------------------|

Short-term investments        include highly liquid investments (primarily certificates of deposit and government paper)        with original maturity dates between 3 and 12 months and are stated at fair value at        December 31, 2007. At December 31, 2006, short-term investments were stated at cost which        approximated market value.

|   | (e) | Financial instruments: |
|--------|-----|------------------------|

Effective January 1,        2007, the Company adopted the recommendations of The Canadian Institute of Chartered        Accountants' ("CICA") Handbook Section 1530, Comprehensive Income ("Section 1530"); Section        3855, Financial Instruments - Recognition and Measurement ("Section 3855"); Section 3861,        Financial Instruments - Disclosure and Presentation ("Section 3861"); and Section        3251, Equity ("Section 3251"). These sections provide standards for recognition,        measurement, disclosure and presentation of financial assets, financial liabilities and        non-financial derivatives. Section 1530 provides standards for the reporting and        presentation of comprehensive income, which represents the change in equity from        transactions and other events and circumstances from non-owner sources. Other comprehensive        income refers to items recognized in comprehensive income that are excluded from net income        calculated in accordance with Canadian GAAP. The impact of adopting the accounting for        financial instruments did not have a material impact on the Company's results of        operations.

 

F-11

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

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

Upon adoption of the new        standards on January 1, 2007, the Company classified all cash, cash equivalents, short-term        investments and user funds on deposit as held-for-trading assets, which are measured at        fair value and the changes in fair value are recognized in earnings. Long-term investments        are classified as available-for-sale assets which are measured at fair value. The changes        in fair value of long-term investments, if any, will be recognized in other comprehensive        income. Transaction costs related to financial assets and financial liabilities that are        designated as held-for-trading are expensed as incurred, transaction costs related to        available-for-sale assets are included in the carrying value of the asset, and transaction        costs related to all other financial assets and financial liabilities are recognized over        the life of the instrument using the effective interest method. Accounts receivable and        other are classified as loans and receivables and measured at amortized cost. Accounts        payable and accrued liabilities and user funds held on deposit are classified as other        financial liabilities and are measured at amortized cost using the effective interest        method. The Company did not have held-to-maturity instruments during the year ended        December 31, 2007 and no available for sale instruments as of January 1,        2007.

Section 3855 requires        the Company to identify derivatives instruments embedded in non-derivative contracts        ("Embedded Derivatives") that require separation from the host contract and measure those        Embedded Derivatives at fair value. Subsequent changes in fair value of Embedded        Derivatives are recognized in earnings in the year the change occurs. The Company did not        identify any material Embedded Derivatives that are required to be separated from the host        contract as of January 1, 2007.

|   | (f) | Capital assets: |
|--------|-----|-----------------|

Capital assets are        stated at cost less accumulated amortization. Once an asset is put into use, amortization        is based on the estimated useful lives of the assets using the following methods and annual        rates:

|                                                                                                                   |        |        |
|-------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                   |
|            Asset                                           |   |   | Basis |   |   |   | Rate       |   |
|                                                                                                                   |
|            Computer                equipment               |   |   | Diminishing                balance |   |   |   | 40% |  |
|            Office                furniture and equipment   |   |   | Diminishing                balance |   |   |   | 25% |  |
|            Computer                software and licenses   |   |   | Straight line |   |   |   | 3 - 5 years |   |
|            Capitalized                software development |   |   | Straight line |   |   |   | 5 years |   |
|            Leasehold                improvements           |   |   | Straight line |   |   |   | Term of Lease |   |
|                                                                                                                   |

F-12

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

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

|   | (g) | Software development: |
|--------|-----|-----------------------|

Costs related to the        development of software are expensed as incurred unless such costs meet the criteria for        capitalization under Canadian GAAP. The Company capitalizes certain computer software        development costs incurred for products designed for internal use. Capitalized software        development costs are included in capital assets.

|   | (h) | Provision for jackpots: |
|--------|-----|-------------------------|

Several of the Company's        licensees participate in progressive jackpot games. Each time a progressive jackpot game is        played, a preset amount is added to a cumulative jackpot for that specific game. The        Company is liable for funding the jackpot wins from the pool of funds collected and accrues        the jackpot amount for all games on a monthly basis. The accrual for the jackpot at the        consolidated balance sheet dates is included in accounts payable and accrued        liabilities.

During 2007, the Company        performed an analysis of the accumulation of the funds in the jackpot and a statistical        analysis of the amounts required to address jackpot payouts. Consequently, the Company        revised its estimated liability based on this analysis. This change of estimate resulted in        the reduction of the liability for jackpot accrual and a corresponding increase in revenue        of $4,473.

At December 31, 2007,        accounts payable and accrued liabilities include $4,480 (2006 - $18,694; 2005 - $9,782) in        jackpot provisions.

|   | (i) | Income taxes: |
|--------|-----|---------------|

The Company uses the        asset and liability method of accounting for income taxes. Future income 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 carry forwards. Future income 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 income tax assets and liabilities of a change in        tax rates is recognized in earnings in the year that includes the enactment or substantive        enactment date.

 

F-13

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

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

|   | (j) | Stock-based compensation: |
|--------|-----|---------------------------|

|   | (i) | Stock options: |
|--------|-----|----------------|

The Company has a stock        option plan for directors, officers and other key employees. The Company applies the fair        value method to all grants of stock options. Stock option grants are accounted for as        capital transactions at the time of the grant and are reflected as stock options in        shareholders' equity. The fair value of options granted is estimated at the date of grant        using the Black-Scholes option pricing model incorporating assumptions regarding risk-free        interest rates, dividend yield, volatility factor of the expected market price of the        Company's stock and the expected life of the options. The estimated fair value of the        options is recorded in the consolidated statements of earnings as stock compensation        expense over the options' vesting periods. Consideration paid, along with the corresponding        stock compensation expense recorded, upon the exercise of stock options are credited to        share capital.

|   | (ii) | Long-term incentive plan: |
|--------|------|---------------------------|

Since January 1, 2005,        the Company has offered long-term incentive plans for its officers and directors (the        "Plans"). The Plans provide for the granting of performance share units to retain certain        individuals and reward participants for achieving various targets including but not limited        to the growth in the Company's earnings per share, and share price, with vesting generally        over a three-year performance period. When the performance and vesting criteria are met,        the awards are settled in cash. The liability for these awards is recognized if the Company        determines that it is probable that the targets of the Plans will be achieved and are        included in accounts payable and accrued liabilities on the consolidated balance        sheets.

Changes in this        liability, which arise from fluctuations in the Company's stock price and estimated future        diluted earnings per share, are recorded in operating costs over the vesting        period.

 

F-14

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

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

|   | (k) | Foreign currency translation: |
|--------|-----|-------------------------------|

Monetary items        denominated in currencies 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 and related        amortization are translated at rates of exchange in effect when the assets were acquired or        obligations incurred. Revenue and expenses other than amortization are translated at rates        in effect at the time of the transactions. Foreign exchange gains and losses are included        in the consolidated statements of earnings.

|   | (l) | Intangible assets: |
|--------|-----|--------------------|

Intangible assets        consist of customer lists and domain names acquired and are carried at cost less        accumulated amortization. Intangible assets are amortized on a straight-line basis over the        useful lives of the respective assets as follows:

         

         

|        | Customer lists | 3 - 7 years |
|--------|----------------|-------------|
|   | Brand name     | 12 years    |

|   | Domain names | 12 years |
|--------|--------------|----------|

         

         

|   | (m) | 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.

 

F-15

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **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 exceeds its carrying amount, goodwill 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 the reporting unit exceeds its fair value, in        which case, the implied fair value of the 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 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 consolidated statements of        earnings.

For the years ended        December 31, 2007, 2006 and 2005, the Company assessed impairment of goodwill and has        determined that there was no impairment in value.

|   | (n) | Earnings per common share: |
|--------|-----|----------------------------|

Shares of CEC are        participating securities and, accordingly, the two class method is used. The two class        method determines earnings per share for the Company's common shares and CEC shares        according to dividends declared and participation rights in undistributed earnings, which        in the case of the Company are equal. The Company uses the treasury stock method in        computing diluted earnings per common share. 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 common share. It assumes that any proceeds would        be used to purchase the Company's common shares at the average market        price.

 

F-16

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

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

|   | (o) | Variable interest entities: |
|--------|-----|-----------------------------|

Variable interest        entities ("VIEs") include entities in which holders of the equity investment at risk lack        the characteristics of a controlling financial interest or the equity investment at risk is        not sufficient to permit the entity to finance its activities without additional        subordinated financial support by other parties. Entities meeting these criteria are        consolidated by the primary beneficiary.

Management assessed the        Company's operations and relationships and concluded that there are no VIEs in respect of        which the Company is the primary beneficiary. Accordingly, no VIEs are        consolidated.

|   | (p) | Use of estimates: |
|--------|-----|-------------------|

The preparation of        financial statements requires management to make estimates and assumptions that affect the        reported amounts of assets and liabilities and disclosure of contingent assets and        liabilities, including but not limited to the jackpot provision, the estimated useful lives        of tangible and intangible assets, stock-based compensation, and the reported amounts of        revenue and expenses. Actual amounts could differ from those estimates.

|   | (q) | Long-lived assets: |
|--------|-----|--------------------|

Long-lived assets are        reviewed for impairment whenever events or changes in circumstances indicate that the        carrying amount of such assets may not be recoverable. Determination of recoverability is        based on an estimate of undiscounted future cash flows resulting from the use of the asset        or groups of assets and its eventual disposition. Measurement of any impairment loss for        long-lived assets is based on the amount by which the carrying value exceeds the fair value        of the asset.

|   | (r) | Recent accounting pronouncements: |
|--------|-----|-----------------------------------|

|   | (i) | Handbook Section 1535, Capital Disclosures ("Section 1535"),                        establishes standards for disclosing information about a company's capital                        and how it is managed to enable users of financial statements to evaluate                        the Company's objectives, policies and procedures for managing capital.                        This section is effective for the Company's fiscal year ending December 31,                        2008. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

F-17

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

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

|   | (ii) | Handbook Section 3862, Financial Instruments - Disclosures                        ("Section 3862"), requires disclosure in the financial statements that will                        enable users to evaluate the significance of financial instruments for a                        company's financial position and performance, the nature and extent of                        risks arising from financial instruments to which a company is exposed                        during the period and at the balance sheet date, and how the Company                        manages those risks. This accounting standard is effective for the                        Company's fiscal year ending December 31, 2008. |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (iii) | Handbook Section 3863, Financial Instruments - Presentation                        ("Section 3863"), establishes standards for presentation of financial                        instruments and non-financial derivatives. This section complements the                        existing Handbook Section 3861, Financial Instruments - Disclosure and                        Presentation, and is effective for the Company's fiscal year ending                        December 31, 2008. |
|--------|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (iv) | Handbook Section 3064, Goodwill and Intangible Assets                        ("Section 3064"), which replaces Section 3062, Goodwill and Intangible                        Assets, and Section 3450, Research and Development Costs, establishes                        standards for recognition, measurement and disclosure of goodwill and                        intangible assets. This new standard is effective for the Company's fiscal                        year commencing January 1, 2009. |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

The Company is        evaluating the impact of adopting the above standards on its consolidated financial        statements.

| **2.** | **Security deposits and restricted cash:** |
|--------|--------------------------------------------|

Security deposits and        restricted cash are amounts held by the Company's bank as collateral provided to foreign        banks and payment processors that process deposits and credit card transactions. The        Company was also required to maintain a deposit of $20 million to support a letter of        credit to the Lottery Gaming Authority of Malta to support user funds on deposit. See        note 20 for further information.

 

F-18

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **3.** | **User funds on deposit:** |
|--------|----------------------------|

User funds on deposit        represent amounts deposited by end users of licensees for playing online games. These funds        are treated as deposits of the end users until such games are played.

| **4.** | **Capital assets:** |
|--------|---------------------|

         

|                                                 |
|-------------------------------------------------|
||
|                                                 |
| Computer                equipment               |   |   | $ | 12,736 |   | $ | 7,757 |   | $ | 4,979 |   |
| Office furniture and                equipment   |   |   |   | 1,985 |   |   | 1,013 |   |   | 972 |   |
| Computer software and                licenses   |   |   |   | 9,567 |   |   | 6,932 |   |   | 2,635 |   |
| Capitalized software                development |   |   |   | 14,081 |   |   | – |   |   | 14,081 |   |
| Leasehold                improvements           |   |   |   | 4,029 |   |   | 894 |   |   | 3,135 |   |
|                                                 |
|                                            |   |   | $ | 42,398 |   | $ | 16,596 |   | $ | 25,802 |   |
|                                                 |

         

|                                                 |
|-------------------------------------------------|
||
|                                                 |
| Computer                equipment               |   |   | $ | 10,781 |   | $ | 5,116 |   | $ | 5,665 |   |
| Office furniture and                equipment   |   |   |   | 2,137 |   |   | 738 |   |   | 1,399 |   |
| Computer software and                licenses   |   |   |   | 8,956 |   |   | 5,493 |   |   | 3,463 |   |
| Capitalized software                development |   |   |   | 4,602 |   |   | – |   |   | 4,602 |   |
| Leasehold                improvements           |   |   |   | 4,134 |   |   | 1,157 |   |   | 2,977 |   |
|                                                 |
|                                            |   |   | $ | 30,610 |   | $ | 12,504 |   | $ | 18,106 |   |
|                                                 |

Amortization expense of        capital assets during the year was $5,361 (2006 - $4,748; 2005 - $3,863).

During 2007, there were        no changes in the estimated useful lives of computer equipment and office furniture and        equipment. In 2006, a change in the estimated useful lives of computer equipment and office        furniture and equipment resulted in additional amortization expense of        $681.

During 2005, the Company        determined that certain software being developed no longer met the criteria for        capitalization. As a result of this decision, the Company expensed $2,744 of software        development costs incurred in 2005. Together with severances of $543, the Company took a        total charge against earnings of $3,287 in 2005.

 

F-19

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **5.** | **Long-term investments:** |
|--------|----------------------------|

In June 2007, the        Company acquired a 19.4% ownership interest in 568 Network Inc. ("568 Inc."), a        privately held company, for $1,068. 568 Inc. is a developer and distributor of online        casual games to the Chinese market. In exchange for cash consideration, the Company        received preference shares with voting rights, that are redeemable at the option of the        Company at any time at par, and provide the ability to appoint members of the board of        directors. These preference shares have dividend rights similar to common shares but under        certain circumstances may entitle the Company to repayment of capital in priority to any        other class of shares. Under the terms of the agreement, the Company is required to make        additional investments in 568 Inc. of up to $350 should 568 Inc. achieve certain financial        targets. This investment is designated as available-for-sale and accordingly is carried at        fair market value, which is the redemption amount. The Company also has the option to        increase its ownership interest to a controlling position in 568 Inc. in the future. In        January 2008, the Company made a further investment by way of a $250 convertible        loan.

In November 2007, the        Company acquired a 12.7% ownership interest in Mikoishi (Asia Pacific) Pte Ltd.        ("Mikoishi"), a privately held company, for cash consideration of $4,258. Mikoishi is a        developer and marketer of gaming products for the mobile computing markets and is located        in Singapore. The preference shares have voting and dividend rights similar to common        shares but under certain circumstances may entitle the Company to repayment of capital in        priority to any other class of shares. Unless specified performance criteria are not met,        the Company is required to increase its ownership position with additional cash investments        up to $4,000. This investment is designated as available-for-sale and is carried at cost as        the fair market value is not readily available.

| **6.** | **Goodwill and intangible assets:** |
|--------|-------------------------------------|

In January 2007, the        Company acquired the poker brand and customer list of Parbet.com. The total cash        consideration paid was $11,770, with $11,746 allocated to the brand and $1,332 allocated to        the customer list. The Company also recorded a future income tax liability of $1,308. The        brand is being amortized over 12 years and the customer list over 5 years. During the year,        the Company recorded $1,042 of amortization associated with the intangible        assets.

 

F-20

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **6.** | **Goodwill and intangible assets                        (continued):** |
|--------|------------------------------------------------------------------------|

On August 22, 2007, the        Company acquired 100% of the assets and operations of Casino.co.uk, a gaming portal, for a        purchase price of $6,098, including $182 related to the costs of acquisition. Additional        consideration of up to $1,275 may be payable if certain performance criteria are met. The        Company has included their results in its consolidated results of operations since the date        of acquisition. The acquisition is accounted for as a business combination using the        purchase method of accounting and the Company has allocated $1,323 of the purchase price to        the brand name, $1,630 to the customer lists and $3,515 to goodwill. The Company also        recorded a future income tax liability of $370. The brand name and the customer list are        being amortized over their estimated useful lives of 12 years and 7 years, respectively.        During the year, the Company recorded $115 of amortization associated with the intangible        assets.

Intangible assets also        consist of other customer lists and domain names. At December 31, 2007 and 2006, other        customer lists with a cost of $315 had been fully amortized. At December 31, 2007,        other domain names with a cost of $157 had been fully amortized (2006 - net book value        of $48).

| **7.** | **Credit facilities:** |
|--------|------------------------|

The Company has an        operating credit facility with a Canadian chartered bank in the amount of $3,000. No amount        has been utilized under this line during 2007 and 2006.

| **8.** | **Minority interest:** |
|--------|------------------------|

As part of the        Arrangement, taxable Canadian residents received exchangeable shares of CEC, an indirect        subsidiary of CryptoLogic Limited. The CEC shares are, as nearly as practicable, the        economic equivalent of CryptoLogic Limited shares. As a result of the Arrangement, a total        of 12.6 million and 1.3 million shares of the Company and CEC were issued,        respectively.

 

F-21

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **8.** | **Minority interest (continued):** |
|--------|------------------------------------|

The shares issued by CEC        are considered a non-controlling interest of the Company for accounting purposes and,        consequently, a proportional amount of the Company's shareholders' equity was recorded        separately as minority interest on the consolidated balance sheets. Accordingly, on June 1,        2007, minority interest of $10,800 was recorded in the accompanying consolidated balance        sheet. A similar proportional share of the net earnings associated with subsidiaries        directly or indirectly owned by CEC is included in the consolidated statements of earnings        as minority interest. At December 31, 2007, the net loss of the subsidiaries not owned by        CEC totalled $4,500 and was not included in the minority interest calculation. In addition,        dividends paid to CEC shareholders reduce minority interest on the consolidated balance        sheets.

For accounting purposes,        when CEC shares are exchanged, the proportional share of the minority interest recorded on        the consolidated balance sheet is reduced and share capital increased based on the pro-rata        number of shares exchanged to the total number of CEC shares outstanding. Since June 1,        2007, a total of 218,000 CEC shares have been exchanged for the Company's        shares.

 

F-22

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **9.** | **Share capital:** |
|--------|--------------------|

Authorized:

Unlimited common        shares

         

Issued and        outstanding:

         

|                                                                                                                 |
|-----------------------------------------------------------------------------------------------------------------|
||
||
|                                                                                                                 |
||
|        Cryptologic                Inc.:                                      |   |   |   |  |   |   |  |   |   |  |   |   |  |   |
|            Balance,                December 31, 2005     |   |   |   | 13,322 |   | $ | 25,103 |   | $ | 68 |   | $ | 25,171 |   |
|            Exercise                of stock options      |   |   |   | 319 |   |   | 3,925 |   |   | – |   |   | 3,925 |   |
|                                                                                                                 |
|            Balance,                December 31, 2006     |   |   |   | 13,641 |   |   | 29,028 |   |   | 68 |   |   | 29,096 |   |
|            Exercise                of stock options to   |   |   |   |  |   |  |  |  |  |  |  |  |  |  |
|               May                31, 2007 |   |   |   | 262 |   |   | 4,975 |   |   | – |   |   | 4,975 |   |
|                                                                                                                 |
|            Balance,                May 31, 2007          |   |   |   | 13,903 |   |   | 34,003 |   |   | 68 |   |   | 34,071 |   |
|        Cryptologic                Limited:                                   |   |   |  |  |  |  |  |  |  |  |  |  |  |  |
|            Impact                of reorganization (a)   |   |   |   | (1,333 | ) |   | (3,260 | ) |   | – |   |   | (3,260 | ) |
|            Shares                exchanged (a)           |   |   |   | 218 |   |   | 1,810 |   |   | – |   |   | 1,810 |   |
|            Exercise                of stock options from |   |   |   |  |   |  |  |  |  |  |  |  |  |  |
|               June                1, 2007 |   |   |   | 25 |   |   | 786 |   |   | – |   |   | 786 |   |
|                                                                                                                 |
|                                                                                                            |   |   |   | 12,813 |   | $ | 33,339 |   | $ | 68 |   | $ | 33,407 |   |
|                                                                                                                 |

|   | (a) | The Company acquired control over all of the issued and                        outstanding common shares of CryptoLogic Inc., an Ontario company, which                        through the Arrangement became an indirect wholly owned subsidiary of                        CryptoLogic Limited. As consideration for the acquisition, CryptoLogic                        Limited issued either an equivalent amount of its common shares or, in the                        case of taxable Canadian residents, exchangeable shares of CEC, an indirect                        subsidiary of the Company. The CEC shares can be exchanged by the holders                        for an equal number of CryptoLogic Limited common shares at any time. These                        CEC shares have all the economic and voting rights of CryptoLogic Limited                        shares. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

F-23

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **9.** | **Share capital (continued):** |
|--------|--------------------------------|

As a result of the        reorganization, a total of 12.6 million and 1.3 million shares of CryptoLogic Limited and        CEC were issued, respectively. Since then, a total of 218,000 shares of CEC have been        exchanged, with the remaining 1.1 million shares of CEC being reflected as minority        interest as at December 31, 2007.

On June 1, 2014, the        Company will redeem all but not less than all of the then outstanding CEC shares for an        amount per share equal to the redemption price, which amount will be satisfied through the        issuance and delivery of one CryptoLogic Limited common share for each CEC share.        CryptoLogic Limited has issued a special voting share to a third party trustee, the purpose        of which is to provide holders of CEC shares with the right to vote on the Company's        matters. This share has been recorded in the share capital of the accompanying consolidated        balance sheet at December 31, 2007.

|   | (b) | Normal course issuer bid: |
|--------|-----|---------------------------|

During 2007, 2006 and        2005 under normal course issuer bids, the Board of Directors approved the repurchase and        cancellation of up to the following number of shares, representing 10% of the outstanding        common shares at that time:

|                                                                 |
|-----------------------------------------------------------------|
||
|                                                                 |
||
|                                                                 |
| September 23,                2004 to                            |   |   |   |  |   |   |  |   |   |  |   |   |  |     |
|      September 22,                2005 |   |   |   | 1,250,000 |   |   | – |   |   | – |   |   | 270,500 |   |
| September 28, 2005                to                            |   |   |  |  |  |  |  |  |  |  |  |  |  |  |
|      September 27,                2006 |   |   |   | 1,340,000 |   |   | – |   |   | – |   |   | 239,200 |   |
| September 29, 2006,                to                           |   |   |  |  |  |  |  |  |  |  |  |  |  |  |
|      September 28,                2007 |   |   |   | 1,350,000 |   |   | – |   |   | – |   |   | – |   |
| November 14, 2007                to                             |   |   |  |  |  |  |  |  |  |  |  |  |  |  |
|      November 13,                2008  |   |   |   | 1,281,000 |   |   | – |   |   | – |   |   | – |   |
|                                                                 |

CryptoLogic Inc.        repurchased and cancelled 509,700 common shares during 2005 for a total cost of $9,201, of        which $8,248, representing the excess of purchase price over stated value, was charged to        retained earnings.

 

F-24

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **9.** | **Share capital (continued):** |
|--------|--------------------------------|

In September 2006, the        Board of Directors approved the renewal of the above share purchase plan, under a normal        course issuer bid, to repurchase and cancel up to 1,350,000 of CryptoLogic Inc.'s        outstanding common shares for the period commencing September 29, 2006 and ending        September 28, 2007. This plan was transferred to CryptoLogic Limited as part of the        Arrangement. The Company did not make any purchases under its 2006/2007        bid.

In November 2007, the        Board of Directors approved the renewal of the above share purchase plan, under a normal        course issuer bid, to repurchase and cancel up to 1,281,000 of the Company's outstanding        common shares for the period commencing November 14, 2007 and ending November 13,        2008. As at December 31, 2007, the Company had not repurchased any shares from the renewed        normal course issuer bid.

| **10.** | **Stock-based compensation:** |
|---------|-------------------------------|

|   | (a) | Stock option plan: |
|--------|-----|--------------------|

Under the stock option        plan, the Company may grant options to directors, officers and other key employees to        purchase common shares. All outstanding options of CryptoLogic Inc. as of the date of        Arrangement were fully assumed by CryptoLogic Limited under the same terms and conditions        as originally granted by CryptoLogic Inc. Under the plan, a maximum of 3,900,000 common        shares may be issued. The exercise price of the options may not be less than the market        value of the underlying common shares on the date of grant. The Company does not grant        stock options with an exercise price below the market value at the date of grant. There are        109,412 (2006 - 781,350; 2005 - 351,695) common shares available to be issued under the        stock option plan as at December 31, 2007. Options typically vest over a period of        three or four years, as determined at the date of grant, and the term of the options may        not exceed five years.

 

F-25

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **10.** | **Stock-based compensation (continued):** |
|---------|-------------------------------------------|

Details of stock option        transactions are as follows:

|                                                    |
|----------------------------------------------------|
||
|                                                    |
||
|                                                    |
||
| Options                outstanding,                |   |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |   |  |   |
|    beginning                of year |   |   |   | 1,006,584 |   | $ | 21.35 |   |   | 1,105,073 |   | $ | 17.59 |   |   | 1,427,661 |   | $ | 13.75 |   |
| Granted                                            |   |   |   | 896,500 |   |   | 26.35 |   |   | 387,300 |   |   | 24.89 |   |   | 337,250 |   |   | 25.93 |   |
| Exercised                                          |   |   |   | (286,997 | ) |   | 15.71 |   |   | (318,834 | ) |   | 11.28 |   |   | (498,102 | ) |   | 11.42 |   |
| Forfeited                                          |   |   |   | (224,562 | ) |   | 25.16 |   |   | (166,955 | ) |   | 23.90 |   |   | (161,736 | ) |   | 20.43 |   |
|                                                    |
| Options                outstanding,                |   |   |
|    end of                year       |   |   |   | 1,391,525 |   |   | 25.13 |   |   | 1,006,584 |   |   | 21.35 |   |   | 1,105,073 |   |   | 17.59 |   |
|                                                    |
| Options                exercisable,                |   |   |
|    end of                year       |   |   |   | 331,894 |   | $ | 24.65 |   |   | 295,105 |   | $ | 19.83 |   |   | 340,841 |   | $ | 15.79 |   |
|                                                    |

|                               |
|-------------------------------|
||
|                               |
||
||
|                               |
||
|                               |
| $5.00 -                $10.00 |   |   |   | 8,500 |   |   | 0.28 |   | $ | 8.36 |   |   | 8,500 |   | $ | 8.36 |   |
| $10.01-$15.00                 |   |   |   | 7,750 |   |   | 0.82 |   |   | 14.11 |   |   | 7,750 |   |   | 14.11 |   |
| $15.01-$20.00                 |   |   |   | 300,250 |   |   | 3.77 |   |   | 18.26 |   |   | 55,875 |   |   | 17.52 |   |
| $20.01-$25.00                 |   |   |   | 276,275 |   |   | 3.22 |   |   | 23.62 |   |   | 76,269 |   |   | 23.43 |   |
| $25.01-$30.00                 |   |   |   | 793,750 |   |   | 3.97 |   |   | 28.50 |   |   | 181,000 |   |   | 28.24 |   |
| $30.01-$35.00                 |   |   |   | 5,000 |   |   | 2.13 |   |   | 30.85 |   |   | 2,500 |   |   | 30.80 |   |
|                               |
|                               |   |   |   | 1,391,525 |   |   | 3.73 |   |   | 25.13 |   |   | 331,894 |   |   | 24.65 |   |
|                               |

         

F-26

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **10.** | **Stock-based compensation (continued):** |
|---------|-------------------------------------------|

The Company expenses the        cost of all stock option grants issued on or after January 1, 2003, determined using the        fair value method. The estimated fair value of the options is recorded over the periods        that the options vest. The fair value of options granted were estimated using the        Black-Scholes option pricing model with the following weighted average        assumptions:

|                                                  |
|--------------------------------------------------|
|                                             |   |   |   | 2007 |   |   | 2006 |   |   | 2005 |   |
|                                                  |
| Dividend yield                                   |   |   |   | 1.90% |  |   | 2.00% |  |   | 0.75% |  |
| Risk-free interest                rate           |   |   |   | 4.07% |  |   | 4.25% |  |   | 3.25% |  |
| Expected                volatility               |   |   |   | 52.0% |  |   | 55.00% |  |   | 50.00% |  |
| Expected life of options in                years |   |   |   | 3 |   |   | 5 |   |   | 5 |   |
|                                                  |

The weighted average        fair value of options granted during 2007 was $7.89 (2006 - $9.98; 2005 -        $9.49).

Included in operating        costs is the cost of stock options in the amount of $2,732 (2006 - $2,255; 2005 -        $1,807). Included in reorganization costs is the cost of stock options in the amount of        $982 (2006 - nil; 2005 - nil).

For the year ended        December 31, 2002, no compensation cost was recorded on the grant of stock options during        that year. In accordance with the transitional provisions additional pro forma disclosure        is provided as if the fair value method of accounting had been used to account for these        stock options. The fair value of options granted in 2002 was determined using the        Black-Scholes option pricing model, using the following weighted average        assumptions:

|                                                  |
|--------------------------------------------------|
| Dividend                yield                    |   |   |   | 0.00% |  |
| Risk-free interest                rate           |   |   |   | 2.00% |  |
| Expected                volatility               |   |   |   | 100.00% |  |
| Expected life of options in                years |   |   |   | 5 |   |
|                                                  |

         

F-27

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **10.** | **Stock-based compensation (continued):** |
|---------|-------------------------------------------|

Had compensation expense        been determined based on the fair value of the employee stock option awards for 2002 grants        at the grant dates in accordance with the CICA recommendations, the Company's net earnings        and earnings per share for 2007 would not have been impacted as all 2002 grants were fully        vested prior to January 1, 2007. The pro forma impact for the years ended December 31, 2006        and 2005 were as follows:

|                                           |
|-------------------------------------------|
||
|                                           |
||
|                                           |
| Net                earnings               |   |   | $ | 24,812 |   | $ | 24,437 |   | $ | 20,530 |   | $ | 19,988 |   |
|                                           |
| Earnings per common                share: |   |   |  |  |  |  |  |  |  |  |  |  |  |  |
|     Basic             |   |   | $ | 1.83 |   | $ | 1.80 |   | $ | 1.51 |   | $ | 1.47 |   |
|     Diluted           |   |   |   | 1.81 |   |   | 1.78 |   |   | 1.46 |   |   | 1.42 |   |
|                                           |

For stock options issued        in 2002, the compensation cost for the year ended December 31, 2006 would have been $375        (2005 - $542).

|   | (b) | Long-term incentive plan: |
|--------|-----|---------------------------|

During the year, the        Company expensed $155 (2006 - $2,028; 2005 - $430) in costs related to units awarded under        its long-term incentive plan, of which nil (2006 - $346) is included in reorganization        expense as a result of accelerated vesting for certain employees with termination        agreements.

 

F-28

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **11.** | **Commitments and contingencies:** |
|---------|------------------------------------|

|   | (a) | The Company has operating lease agreements for premises                        expiring at various periods up to July 2014. The future minimum annual                        rental payments on the operating leases are as follows: |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

         

         

|   | 2008 | $ | 2,478 |
|--------|------|---|-------|

|   | 2009 | 2,003 |
|--------|------|-------|

|   | 2010 | 1,893 |
|--------|------|-------|

|   | 2011 | 1,894 |
|--------|------|-------|

|   | 2012 | 1,896 |
|--------|------|-------|

|   | Thereafter | 4,844 |
|--------|------------|-------|

         

         

|   | (b) | The Company has guaranteed minimum payments and purchase                        commitments for certain intellectual property rights up to 2009: |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------|

         

         

|   | 2008 | $ | 2,265           |
|--------|------|---|-----------------|
|        | 2009 |   |   375 |

         

|   | (c) | The Company and its subsidiaries are involved in certain                        claims and litigation arising out of the ordinary course and conduct of                        business, including intellectual property matters. Management assesses such                        claims and, if considered likely to result in material exposure and where                        the amount of the claim is quantifiable, provisions for loss are made based                        on management's assessment of the likely outcome. Management does not                        provide for claims that are considered unlikely to result in a significant                        loss, claims for which the outcome is not determinable or claims where the                        amount of the loss cannot be reasonably estimated. Any settlements or                        awards under such claims are provided for when reasonably determinable.                        During 2007, the Company determined its accrual of $2,000 for certain                        contingencies was no longer required, increasing revenue by a corresponding                        amount. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

F-29

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **12.** | **Earnings per common share:** |
|---------|--------------------------------|

Earnings per share are        calculated using the two-class method, whereby common shares of the Company and the fully        participating exchangeable common shares of CEC are used to determine the weighted average        number of shares outstanding for both basic and diluted earnings per        share.

The earnings        attributable to the common shares in calculating the basic and diluted earnings per share        is as follows:

|                                                       |
|-------------------------------------------------------|
|                                                  |   |   |   | 2007 |   |   | 2006 |   |   | 2005 |   |
|                                                       |
| Earnings attributable to                common shares |   |   | $ | 5,528 |   | $ | 24,812 |   | $ | 20,530 |   |
| Earnings attributable to CEC                shares    |   |   |   | 971 |   |   | – |   |   | – |   |
|                                                       |
| Earnings before minority                interest      |   |   | $ | 6,499 |   | $ | 24,812 |   | $ | 20,530 |   |
|                                                       |

The denominator used in        calculating basic and diluted earnings per common share is calculated as        follows:

         

|                                                                     |
|---------------------------------------------------------------------|
|                                                                |   |   |   | 2007 |   |   | 2006 |   |   | 2005 |   |
|                                                                     |
| Weighted average number of                common                    |   |   |  |  |  |  |  |  |  |  |  |
|     shares outstanding -                basic   |   |   |   | 13,223 |   |   | 13,558 |   |   | 13,588 |   |
| Add weighted average impact                of CEC                   |   |   |  |  |  |  |  |  |  |  |  |
|     issued during                reorganization |   |   |   | 668 |   |   | – |   |   | – |   |
|                                                                     |
| Total weighted average                number of shares              |   |   |  |  |  |  |  |  |  |  |  |
|     outstanding -                basic          |   |   |   | 13,891 |   |   | 13,558 |   |   | 13,588 |   |
| Add dilutive                options                                 |   |   |   | 16 |   |   | 173 |   |   | 479 |   |
|                                                                     |
| Total weighted average                number of shares              |   |   |  |  |  |  |  |  |  |  |  |
|     outstanding -                diluted        |   |   |   | 13,907 |   |   | 13,731 |   |   | 14,067 |   |
|                                                                     |

Basic and diluted        earnings per common share are as follows:

         

|                                           |
|-------------------------------------------|
|                                      |   |   |   | 2007 |   |   | 2006 |   |   | 2005 |   |
|                                           |
| Earnings per common                share: |   |   |  |  |  |  |  |  |  |  |  |
|     Basic             |   |   | $ | 0.47 |   | $ | 1.83 |   | $ | 1.51 |   |
|     Diluted           |   |   |   | 0.47 |   |   | 1.81 |   |   | 1.46 |   |
|                                           |

         

F-30

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **12.** | **Earnings per common share (continued):** |
|---------|--------------------------------------------|

Options to purchase        755,971 common shares (2006 - 193,625; 2005 - 54,338) were excluded from the computation of        diluted earnings per share as the exercise price exceeded the average market price of        common shares for the reporting year.

| **13.** | **Reorganization:** |
|---------|---------------------|

On September 25, 2006,        the Company announced a plan to move the corporate head office to Ireland in 2007 to be        located in a gaming friendly environment. This move was completed in 2007. Costs incurred        during 2007 were $5,666 (2006 - $3,700; 2005 - nil) largely related to professional fees,        search fees, relocation and employee severance.

|                                                                                 |
|---------------------------------------------------------------------------------|
| Accrual,                December 31, 2005                                       |   |   |   | $          – |   |
| Professional                fees                                                |   |   |   | 1,257 |   |
| Employee                severance                                               |   |   |   | 1,942 |   |
| Employee relocation and                recruitment                              |   |   |   | 501 |   |
|                                                                                 |
|                                                                            |   |   |   | 3,700 |   |
| Payments                                                                        |   |   |   | (1,466 | ) |
|                                                                                 |
| Included in accounts payable                and                                 |   |   |  |  |  |
|     accrued liabilities                at December 31, 2006 |   |   |   | 2,234 |   |
| Professional                fees                                                |   |   |   | 3,276 |   |
| Employee                severance                                               |   |   |   | 587 |   |
| Employee recruitment and                relocation                              |   |   |   | 1,803 |   |
|                                                                                 |
|                                                                            |   |   |   | 5,666 |   |
|                                                                                 |
|                                                                            |   |   |   | 7,900 |   |
| Payments                                                                        |   |   |   | (7,685 | ) |
|                                                                                 |
| Included in accounts payable                and                                 |   |   |  |  |  |
|     accrued liabilities                at December 31, 2007 |   |   |   | $       215 |   |
|                                                                                 |

         

The Company expects all        reorganization costs to be paid during the next financial year.

 

F-31

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **14.** | **Income taxes:** |
|---------|-------------------|

As described in the        preamble to the notes, pursuant to a business reorganization implemented by way of the        Arrangement and approved by the shareholders on May 24, 2007, the Company acquired control        over all of the issued and outstanding common shares of CryptoLogic Inc., an Ontario        company, which through the Arrangement became an indirect subsidiary of the Company, a        Guernesy company with tax residence in the Republic of Ireland.

The income tax provision        differs from the amount which would be obtained by applying the Irish statutory income tax        rate to the earnings before income taxes. The following explains the major        differences:

|                                                                                                                                                                      |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                 |   |   |   | 2007 |   |   | 2006 |   |   | 2005 |   |
|                                                                                                                                                                      |
| Earnings before income                taxes                                                                                                                          |   |   | $ | 7,492 |   | $ | 29,491 |   | $ | 22,036 |   |
|                                                                                                                                                                      |
| Income taxes at statutory                rate of 22.34%:                                                                                                             |   |   |  |  |  |  |  |  |  |  |  |
|     (2006 - 36.12%; 2005                - 36.12%) (a)                                                                                            |   |   | $ | 1,674 |   | $ | 10,652 |   | $ | 7,960 |   |
| Increase (decrease) in                income taxes                                                                                                                   |   |   |  |  |  |  |  |  |  |  |  |
|     resulting                from:                                                                                                               |   |   |  |  |  |  |  |  |  |  |  |
|         Differences                in effective income tax                                                                   |   |   |  |  |  |  |  |  |  |  |  |
|             rates                in foreign jurisdictions                                                |   |   |   | 823 |   |   | (7,227 | ) |   | (4,213 | ) |
|         Permanent                differences:                                                                                |   |   |  |  |  |  |  |  |  |  |  |
|                                Net benefit of foreign                exchange                  |   |   |  |  |  |  |  |  |  |  |  |
|                                    gains not                subject to tax |   |   |   | (1,584 | ) |   | – |   |   | – |   |
|                                Non-deductible items                                            |   |   |   | 1,402 |   |   | 1,286 |   |   | 1,084 |   |
|                                Net benefit of matters                resolved                  |   |   |  |  |  |  |  |  |  |  |  |
|                                    in the                year              |   |   |   | (1,314 | ) |   | – |   |   | – |   |
|                                Increase (decrease) in                valuation                 |   |   |  |  |  |  |  |  |  |  |  |
|                                                   allowance                |   |   |   | 178 |   |   | (119 | ) |   | (502 | ) |
|                                Tax benefit of non-capital                income                |   |   |  |  |  |  |  |  |  |  |  |
|                                    tax loss                carryback       |   |   |   | – |   |   | – |   |   | (1,041 | ) |
|                                Tax benefit of non-capital                income                |   |   |  |  |  |  |  |  |  |  |  |
|                                    tax loss                carryforward    |   |   |   | – |   |   | – |   |   | (1,942 | ) |
|                                Other items                                                     |   |   |   | (186 | ) |   | 87 |   |   | 160 |   |
|                                                                                                                                                                      |
| Income tax                expense                                                                                                                                    |   |   | $ | 993 |   | $ | 4,679 |   | $ | 1,506 |   |
|                                                                                                                                                                      |

         

|   | (a) | As the Company moved its headquarters from Canada to Ireland                        with effect from June 1, 2007, the statutory rate of 22.34% reflects an                        average of a 36.12% statutory rate in Canada for five months and a 12.50%                        statutory rate in Ireland for seven months. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

F-32

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **14.** | **Income taxes (continued):** |
|---------|-------------------------------|

The tax effects of        temporary differences that give rise to significant portions of the future income tax        assets and future income tax liabilities at December 31, 2007 and 2006 are as        follows:

|                                                                                   |   |   |   | 2007    |   |   | 2006    |   |
|----------------------------------------------------------------------------------------|--------|--------|--------|---------|--------|--------|---------|--------|
|                                                                                        |
| Future income tax                assets:                                               |   |   |        |         |        |        |         |        |
|      Long-term                incentive plan                  |   |   | $      | 379     |   | $      | 319     |   |
|      Non-capital                income tax loss carryforwards |   |   |   | 228     |   |   | – |   |
|      Unrealized                foreign exchange loss          |   |   |   | 955     |   |   | – |   |
|      Leasehold                inducements                     |   |   |   | 411     |   |   | 537     |   |
|      Accrued                liabilities                       |   |   |   | 362     |   |   | 702     |   |
|                                                                                        |
|                                                                                   |   |   |   | 2,335   |   |   | 1,558   |   |
| Valuation                allowance                                                     |   |   |   | (242    | )      |   | (64     | )      |
|                                                                                        |
|                                                                                   |   |   |   | 2,093   |   |   | 1,494   |   |
| Future income tax                liabilities:                                          |   |   |        |         |        |        |         |        |
|      Capital                assets                            |   |   |   | (356    | )      |   | (695    | )      |
|      Unrealized                foreign exchange gains         |   |   |   | (680    | )      |   | (2,395  | )      |
|      Intangible                assets                         |   |   |   | (1,402  | )      |   | – |   |
|      Other                                                    |   |   |   | – |   |   | (537    | )      |
|                                                                                        |
|                                                                                   |   |   |   | (2,438  | )      |   | (3,627  | )      |
|                                                                                        |
| Net future income tax                liabilities                                       |   |   | $      | (345    | )      | $      | (2,133  | )      |
|                                                                                        |

CryptoLogic Limited        losses of $580 (2006 - nil) and losses of the subsidiaries of $1,280 (2006 - nil)        carryforward indefinitely. The tax losses of a Canadian subsidiary of $78 (2006 - nil)        expire in 2027.

The Company's federal        income tax returns for the years ended December 31, 2003 and December 31, 2004 are        under examination by the Canadian Revenue Agency.

The Company has a        valuation allowance of $242 as of December 31, 2007 to reduce future income tax assets        to the amount that is more likely than not to be realized in future periods. In evaluating        the Company's ability to recover its future income tax assets, the Company considers all        available positive and negative evidence, including operating results, ongoing tax planning        and forecasts of future taxable income on a jurisdiction by jurisdiction        basis.

 

F-33

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **15.** | **Related party transactions:** |
|---------|---------------------------------|

In the normal course of        operations, the Company engages the services of a law firm in which a member of the Board        of Directors is a partner. Fees paid to this firm were $935 in 2007 (2006 - $653; 2005 -        $589). As at December 31, 2007, there was $85 outstanding (2006 - $35; 2005 -        $589).

The Company also paid        $292 to a second law firm in which another of its Board of Directors is a partner. As at        December 31, 2007, there were no amounts outstanding. There were no comparable amounts paid        or outstanding for the years ended December 31, 2006 and 2005 for the second law        firm.

In 2006, the Company        purchased, in the normal course of operations, software from another company in which a        former officer of the Company had a personal interest. Payments to this officer in 2006        relating to this transaction amounted to $43 (2005 - $145). There were no transactions with        this party in 2007.

| **16.** | **Foreign exchange:** |
|---------|-----------------------|

In 2007, the Company        recognized a total foreign exchange gain of $682 (2006 - foreign exchange gain of $574;        2005 - foreign exchange loss of $1,761), which is recorded as an operating expense in the        accompanying consolidated statements of earnings.

| **17.** | **Financial instruments:** |
|---------|----------------------------|

Financial instruments        that potentially expose the Company to a concentration of credit risk, interest rate and        foreign exchange risk consist principally of cash and cash equivalents and short-term        investments. The Company manages credit risk by investing in cash equivalents and        short-term investments rated as A and R1 or above.

The Company does not        believe that the results of operations or cash flows would be affected to any significant        degree by a sudden change in market interest rates relative to interest rates on the        investments, owing to the short-term nature of the investments.

 

F-34

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **17.** | **Financial instruments (continued):** |
|---------|----------------------------------------|

The Company believes its        exposure to foreign exchange risk is to a large degree naturally hedged. The Company may        engage from time to time in currency hedging, although no hedging has been done in 2007,        2006 and 2005.

The weighted average        effective interest rate on short-term investments as at December 31, 2007 is 5.03% (2006 -        5.30%; 2005 - 4.20%).

The related interest        income or expense and gains and losses for financial assets classified as held-for-trading        are included as interest income in the accompanying consolidated statements of earnings.        Interest income or expense relating to loans and receivables and other financial        liabilities are included in operating expenses in the accompanying consolidated statements        of earnings.

| **18.** | **Revenue:** |
|---------|--------------|

The Company provides a        comprehensive solution including software, network operations, administrative and marketing        consulting services to licensed gaming operators that allows licensees to provide online        casino and poker games and considers this activity to be one reportable segment. Revenue        from these offerings for online casino and poker games in 2007 was $49,457 (2006 - $59,211;        2005 - $52,998) and $19,523 (2006 - $33,934; 2005 - $27,013), respectively. Revenue        from other sources was $4,679 (2006 - $10,877; 2005 - $6,296).

| **19.** | **Differences between Canadian and United States generally                        accepted accounting principles:** |
|---------|---------------------------------------------------------------------------------------------------------------------|

The significant        measurement differences between Canadian and U.S. GAAP affecting the consolidated financial        statements, as noted above, are as follows:

|                                                                                                      |
|------------------------------------------------------------------------------------------------------|
|                                                                                                 |   |   |   | 2007 |   |   | 2006 |   |   | 2005 |   |
|                                                                                                      |
|        Earnings                based on Canadian GAAP             |   |   | $ | 5,528 |   | $ | 24,812 |   | $ | 20,530 |   |
|        Adjustment                for stock-based compensation (a) |   |   |   | 112 |   |   | 824 |   |   | – |   |
|                                                                                                      |
|        Earnings                based on U.S. GAAP                 |   |   | $ | 5,640 |   | $ | 25,636 |   | $ | 20,530 |   |
|                                                                                                      |

         

F-35

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **19.** | **Differences between Canadian and United States generally                        accepted accounting principles (continued):** |
|---------|---------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                        |
|--------------------------------------------------------------------------------------------------------|
|                                                                                                   |   |   |   | 2007 |   |   | 2006 |   |   | 2005 |   |
|                                                                                                        |
|        Earnings                per common share based on U.S. GAAP: |   |   |   |  |   |  |  |  |  |  |  |
|            Basic                                |   |   | $ | 0.48 |   | $ | 1.89 |   | $ | 1.51 |   |
|            Diluted                              |   |   |   | 0.48 |   |   | 1.87 |   |   | 1.46 |   |
|                                                                                                        |

|   | (a) | On January 1, 2006, the Company adopted, on a modified                        prospective basis, FASB Statement No. 123 (revised 2004), Share-Based                        Payment ("FAS 123(R)"), for new awards granted on or after this date under                        the Company's stock option and long-term incentive plans and for the                        unvested portion of existing awards on January 1, 2006. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (i) | Stock options: |
|--------|-----|----------------|

Under Canadian GAAP, the        Company does not estimate forfeitures in determining the expense to be recognized over the        service period and forfeitures are accounted for as they occur. FAS 123(R) requires an        entity to estimate the number of options for which the requisite service is expected to be        rendered.

On January 1, 2006, the        Company estimated the number of outstanding options for which the requisite service is not        expected to be rendered. Amounts recorded as compensation cost in earlier years for options        outstanding at January 1, 2006 for which requisite service is not expected to be rendered        have been eliminated and recognized in earnings as the cumulative effect of a change in        accounting principle on January 1, 2006.

The cumulative effects        of adopting FAS 123(R) on January 1, 2006 and the 2006 U.S. GAAP stock-based compensation        adjustment were $601 and $223, respectively. These amounts were quantified using a weighted        average forfeiture rate assumption of 27%. For 2007 the estimated weighted average        forfeiture rate is 19%, resulting in a U.S. GAAP stock-based compensation adjustment of        $112.

 

F-36

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **19.** | **Differences between Canadian and United States generally                        accepted accounting principles (continued):** |
|---------|---------------------------------------------------------------------------------------------------------------------------------|

|   | (ii) | Long-term incentive plan: |
|--------|------|---------------------------|

Under Canadian GAAP, the        Company uses an intrinsic value-based method to record compensation expense for liability        classified awards. FAS 123(R) requires the use of a fair value-based method, rather        than an intrinsic value-based method, to measure and record compensation expense for these        awards. The Company has determined there is no material difference between the intrinsic        value and the fair value of the units awarded under its long-term incentive        plan.

|   | (b) | Income taxes: |
|--------|-----|---------------|

In June 2006, the        Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting        for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 ("FIN 48"),        which clarifies the accounting for uncertainty in income tax positions. This interpretation        requires that the Company recognize in its financial statements the impact of a tax        position if that position is more likely than not of being sustained on audit, based on the        technical merits of the position. The provisions of FIN 48 became effective for the Company        on January 1, 2007, with the cumulative effect of the change in accounting principle,        if any, recorded as an adjustment to opening retained earnings. The impact of adopting FIN        48 did not have a material impact on the Company's financial position, cash flows and        results of operations.

|   | (c) | Financial instruments: |
|--------|-----|------------------------|

Effective January 1,        2007, the Company adopted the new Canadian GAAP reporting standards for financial        instruments of Handbook Section 1530, Section 3855, Section 3861 and Section        3251.

 

F-37

----

**CRYPTOLOGIC        LIMITED**

(FORMERLY 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,        2007, 2006 and 2005

----

| **19.** | **Differences between Canadian and United States generally                        accepted accounting principles (continued):** |
|---------|---------------------------------------------------------------------------------------------------------------------------------|

As a result, under        Canadian GAAP, the Company has classified all cash, cash equivalents, short-term        investments and user funds on deposits as held-for-trading assets, which are measured at        fair value. Under United States GAAP, cash, cash equivalents, short-term investments and        user funds on deposit would not be classified as held-for-trading assets. Cash, cash        equivalents, and short-term investments are measured at cost plus accrued interest and user        funds on deposit are measured at the redemption amount. The Company has determined that        there is no material difference between the fair value and the cost plus accrued interest        or redemption amounts for these financial assets under United States        GAAP.

Furthermore, under        Canadian GAAP the Company has classified long-term investments as available-for-sale, which        are measured at fair value. These long-term investments do not satisfy the requirements        under FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity        Securities ("FAS 115") to be classified as available-for-sale, and therefore, these        long-term investments are measured at cost under United States GAAP. The Company has        determined that there is no material difference between the fair value and the cost of the        long-term investments.

| **20.** | **Subsequent events:** |
|---------|------------------------|

In January 2008, the        Company made a further investment in 568 Networks Inc. by way of a $250 convertible        loan.

In January 2008, the        Company entered into an agreement with Jingle Prize, Inc., a leading developer of online        games located in Asia, to invest up to a $2,500 if certain performance criteria are        met.

In January 2008, the        Company entered into an agreement to invest $645 for a minority interest in Mobilebus Inc.,        a Korean game developer.

In 2008, the terms of        the guarantee required by the Lottery Gaming Authority of Malta were amended, reducing the        letter of credit from $20 million to $5 million.

 

F-38

 

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