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(CRYPTOLOGIC INC FRONT COVER)




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(CORPORATE PROFILE) CryptoLogic Inc. is a leading software and services provider to the worldwide Internet gaming market. The Companys proprietary technologies enable secure, high-speed financial transactions over the Internet, and its leadership in regulatory compliance makes it one of very few companies with gaming software that is certified to strict standards similar to land-based gaming. WagerLogic Limited, a
wholly-owned subsidiary of CryptoLogic, is responsible for the
licensing of its gaming software and services to an internationally-recognized blue chip customer base. In addition to a broad
product portfolio of more than 80 casino games, multi-player bingo
and player-to-player poker. WagerLogic offers integrated e-cash management and customer care services in multiple currencies and multiple languages for a total online gaming solution. CryptoLogics common
shares trade on the Toronto Stock Exchange (symbol: CRY), the Nasdaq
National Market (symbol: CRYP) and the main Market of the London Stock Exchange (symbol: CRP). (FINANCIAL HIGHLIGHTS) (BAR CHARTS) CryptoLogic continues a track
record of positive operating profit, a strong balance sheet and solid
margins. Since inception in 1996, the company has generated approximately US$110 million in cash from operations. (1)Refer to EBITDA note in
Managements Discussion and Analysis page 18.




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(PLAY THE WORLD) WITH THE LEADING ONLINE
GAMING SOFTWARE DEVELOPER EXPERIENCED CryptoLogic is the pioneer in the global e-gaming industry. Since
inception in 1996, our software has processed more than US$16 billion in wagers
for over 1.7 million players in 240 countries. We have consistently generated
positive operating profit, healthy cash flow and maintained strong cash
reserves. Our return on equity in 2003 was 21%. In 2003, we became one of the
few software companies to declare a regular quarterly cash dividend. TRUSTED CryptoLogic is the largest public online gaming software company in the
world. We have established a reputation based on trust, financial strength and
innovation. We work with the best in gaming an enviable roster of international
blue chip, brand name customers. LEADER We are a market leader in online gaming. We are a leader in regulatory
compliance. We have long advocated regulation as the best solution for safe,
secure and responsible use of this form of entertainment. We are licensed and
one of a few companies in the world whose gaming software is
government-approved in multiple tier-one(2) jurisdictions. This means that
our gaming software is subject to extensive independent third-party testing and
certified to comparable stringent standards as land-based gaming. VISIONARY We deliver complete, market-driven product and service solutions,
which enable our licensees to build some of the most profitable gaming sites on
the Web. We create value by enhancing player loyalty. We increase revenue by
offering expanded choice and convenience. Our comprehensive offering appeals to
broad segments of growing gaming audiences worldwide. We offer our customers
more than just exciting new technology. We service a vast global market that
grew to US$5.7(3) billion in 2003, yet that figure represents just over 2% of
land-based gaming revenue. (GAMING COMPARE PICTURE) (2)
Tier-One jurisdiction is defined by CryptoLogic as a jurisdiction that
applies regulatory standards for online gaming comparable to land-based gaming. (3) Source:
See page 6. CRYPTOLOGIC ANNUAL REPORT 2003 1




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(A YEAR OF ACCOMPLISHMENTS) New agreements with William Hill,
Littlewoods Gaming, ukbetting. We strengthened key
relationships and international growth. William Hill and
Littlewoods Gaming, two distinguished UK customers, renegotiated and extended
their multi-year agreements for both online casino and poker. New licensee,
ukbetting, the UKs largest independent sports content provider, also launched
both our casino and poker offerings in the latter half of the year. Licensed and certified in Alderney CryptoLogic reinforced our regulatory leadership by becoming licensed and
having our software independently certified in Alderney, and enabling The Ritz
Club London Online, a prominent UK licensee, to migrate its online casino
operation to one of the worlds most regulated jurisdictions. Listing on the London Stock
Exchanges Main Market CryptoLogics shares began trading on the London Stock Exchanges Main Market
in September 2003. The listing highlights our strong UK presence of operations
and customers, provides access to a broader global shareholder base, and
enhances our profile in a major market that is favourable to online gaming. Increased poker and bingo
revenue New online poker and bingo offerings have achieved meaningful returns, growing
to over 10% of revenue from less than 1% in 2002. Our poker software already
powers one of the top 10 poker rooms on the Web, and positions CryptoLogic as a
market leader in this emerging, high-growth game segment. (2004 OBJECTIVES)  1
    
    Continue growth in operating profits and cash generation2
    
    Sign 2 substantial international licensees3
    
    Expand product and service offering4
    
    Achieve 60% of licensees revenue from international sources5
    
    Grow online poker to 15% of total revenue6
    
    Raise profile with UK investors7
    
    Target selective acquisitions CRYPTOLOGIC ANNUAL REPORT 2003 2




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(DEAR FELLOW SHAREHOLDERS) CryptoLogic delivered a year of strong performance in 2003. We achieved our
objectives and strengthened our market leadership. By diversifying both our
products and geographic markets, we generated record revenue and strong
profits. We expanded our game suite, honed our blue chip client base and invested
in strict regulatory certification. The result: a solid business model that
delivers a blend of traditional economic fundamentals while capitalizing on the
tremendous potential of the global online gaming industry. Our positive
momentum provides a strong foundation for 2004, as we continue to invest in our
future. Interactive gaming continues to be one of the fastest-growing segments of
the new economy. It is forecast to reach US$7.5 billion in revenue in 2004, up
from US$5.7 billion last year, according to River City Group. Yet this forecast
will constitute just over 3% of global land-based gaming revenue, suggesting
vast market potential. Having said that, online gaming is a developing industry
that is characterized by an evolving legislative landscape, and increasing
competition. Industry growth is being driven by large, emerging game segments, strong
brands and a growing number of tier-one (2) international jurisdictions,
which embrace Internet gaming. Online gaming is about trust  trusted Focused Strategy,
Successfully Executed Our notable successes in 2003 were a direct result of
our focused, disciplined execution of our three strategic priorities: 1) international
growth; 2) market-driven solutions; and 3)
regulatory leadership. CRYPTOLOGIC ANNUAL REPORT 2003 3




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2003 SCORECARD  1
    
    Continuing operating profitability and cash generation
    
    Achieved 28% revenue growth; 22%* earnings
growth
    
    Attained over US$44 million in working capital
    
    Declared Companys first-ever quarterly dividend2
    
    Sign new international brand name licensees
    
    Signed two new global customers including ukbetting plc
    
    Renegotiated and extended multi-year contracts
with major UK licensees, William Hill and
Littlewoods Gaming3
    
    Higher licensees revenue from international sources
    
    Over 55% of licensees revenue derived from
international markets, up from approximately
40% in 20024
    
    Gain license and certification in Alderney
    
    Achieved license and certification in Alderney,
enabling Ritz Club London Online to launch in this strictly regulated market
    
    CryptoLogic is one of the worlds few software
providers certified in multiple tier-one (2)
jurisdictions  In committing to this clear growth plan, we emphasize ROE, or what we
call return on effort, in everything we do. In other words, our time and
resources are committed to those strategic activities and opportunities that
generate the most value and return for our Company, our customers and our
investors. We are presented weekly, if not daily, with new and exciting
opportunities. We clearly cannot embark on all of them. ROE becomes a guiding
principle in all our decision-making. I shall address each of our three imperatives in turn. 1. International Growth and Diversification CryptoLogics first imperative is
to sustain key sources of revenue and maximize profitability through
international growth. The growing geographic diversification of our business
reflects our slogan of Play the World. The result: revenue from our licensees international markets grew to over
55% of overall revenue, up from approximately 40% in 2002. We enjoyed
particular success in the UK, reaching 30% of total revenue. To date, more than 1.7 million players from 240 countries worldwide have
wagered more than US$16 billion  over US$5.5 billion
in 2003 alone  on
software developed by CryptoLogic through an impressive roster of our blue chip
clients. *Before non-recurring special charge in 2002.(2) Tier-One jurisdiction refer to page 3. CRYPTOLOGIC ANNUAL REPORT 2003 4




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2003 SCORECARD  5
    
    Grow both bingo and poker to more than 10% of total revenue
    
    Poker and bingo together grew to over 10% of revenue, up from under 1% in 2002
    
    Six major licensees offer our online poker product6
    
    Add new payment options
    
    Launched new e-check/debit methods (Neteller InstaCash, Citadel), easier integration with our
Web Ecash, expanded fraud controls (third-party
address/credit card verifications, negative
databases) and enhanced player usability7
    
    Expand features and functionality of gaming offerings and services
    
    Released 10 new choices of popular casino games
including a potential million-dollar progressive slot
    
    Released single/private table poker tournament
feature; Bingo integrated with slots8
    
    Consider a London Stock Exchange listing
    
    Listed and began trading on the London Stock
Exchanges Main Market in September 20039
    
    Consider selective acquisitions
    
    Reviewed and assessed a range of prospects with
a focus on accretive opportunities, in line with strategic plan  In keeping with our return on effort approach, we have revised our
target of new licensees from four to two
new substantial customers a year. We continue to focus on leading brand name
customers to capitalize on major overseas markets that offer the best prospects
for online gaming. We are committed to increasing the profitability of our
existing and new customers by offering complementary products and services. To this end, we renegotiated and extended agreements with existing key
licensees  William Hill and Littlewoods Gaming, two household gaming brands in
the UK  for both online casino and online poker through CryptoLogics
subsidiary, WagerLogic Limited. New international clients included ukbetting, which launched both our
casino and poker offerings in 2003. ukbetting is the largest independent sports
content provider in the UK. Shortly after the year-end, Betfair, the worlds
leading brand in online betting exchanges, also chose WagerLogic to facilitate
its expansion into the burgeoning online player-to-player poker segment. These new and expanded global name-brand relationships are indicative of
our quality versus quantity emphasis, which is integral to our success. International
markets  Europe and the UK in particularare providing
attractive growth opportunities. Our global view for 2004 is to continue to
grow our strong UK presence and capitalize on emerging opportunities in Europe.
While Asia offers large market potential, fragmented legislation and no single
popular payment form mean higher barriers to entry. We will continue to pursue
Asian opportunities that meet our return on effort principle. CRYPTOLOGIC ANNUAL REPORT 2003 5




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(BAR CHART) Source: World Lottery Association, Christiansen Capital/River City Group, Bear
Stearns, CryptoLogic Estimates. * Based on revenue, not handle or wager, in 2002. 2. Market-Driven Solutions Our second stated priority is to diversify our
products. It is more than offering the latest technology. In todays
increasingly competitive and sophisticated online gaming environment,
CryptoLogics product strategy is both research-based and opportunity-driven,
focused on market-oriented innovation that creates value and drives incremental
revenue. Our most recent poker and bingo products are in keeping with this
approach, which enable our licensees to participate in these emerging and
lucrative, high growth game areas. Weve seen growth in both bingo and poker,
but more particularly in poker. In just over one year, these two products
together rose to over 10% of 2003 revenue. This compares to under 1% in 2002. Online casino continues to be a core business for CryptoLogic. Ongoing
introduction of new themes and variations of popular slot and casino table
games such as a potential million-dollar progressive slot, and our integrated
bingo/slot offering are creating marketing opportunities for our licensees. New
games re-energize players, and therefore, enhance licensees bottom line and
ours. With more than 1,800 gaming sites, Internet gaming is truly a global and
transparent marketplace where players can easily move from one virtual
destination to another. CryptoLogic recognizes that competition has moved to
the back-end. In other words, our gaming solutions and services must
emphasize marketing and enhancing customer care to strengthen relationships
with our customers and their players. In a market of heightened competition, the key to our customers success
centers on acquiring new players, retaining existing players and re-activating
lapsed players. We provide our licensees with localized products in multiple
currencies and multiple languages, enhanced data mining capability, reporting
tools, expanded fraud control features and improving customer support
 all to
help our licensees better understand and more effectively target and respond to
players around the globe in order to grow more profitable online operations. (3)Source: See page 7. 6




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(WORLDWIDE INTERNET GAMING) (GAMING REVENUE CHART) Source: Christiansen
Capital/River City Group 2004. Industry growth is being
driven by large, emerging game segments, strong brands
and a growing number of tier-one(2)
international jurisdictions, which embrace
online gaming. CryptoLogic is working with the best international names in
land-based and online gaming. The majority of online players
today about 60%
are located in foreign markets. We are capitalizing on the most profitable
markets  Europe and the UK in particular, and the flourishing online poker area
which provide attractive growth opportunities.  Our product strategy will continue to center on developing poker, and
growing our share of this flourishing market segment. The rollout of new and
enhanced games and services that are both market and profit-driven remain a
vital priority. 3. Regulatory Leadership Third, CryptoLogics regulatory leadership continues to be core to our strategy
and long term future. We have long advocated regulation to foster a
transparent, trustworthy and enduring industry. We have invested millions of
dollars in our software and compliance commitments to meet the standards of the
highest regulated jurisdictions around the world. CryptoLogic is one of the few
software providers in the world whose gaming software is government-approved in
multiple tier-one(2) jurisdictions such as Alderney and the Isle of Man,
which enhances both our credibility and marketability. During the year, we were awarded a license and software certification in
Alderney  one of the worlds well recognized and strictly regulated online
jurisdictions whose requirements are consistent with land-based standards.
Software certification requires intensive government probity of our Company,
our directors, officers and senior management, as well as rigorous independent
third-party testing of our software. Our certification in Alderney enabled The
Ritz Club London Online, a prominent UK customer, to migrate its online casino
to this world-leading jurisdiction. Many governments are seeing the value of regulating our industry to
protect and benefit all participants. By contrast, US prohibition efforts
persist, albeit haltingly and
inconsistently, thereby creating conflicting agendas among major interest
groups. Our business plan does not factor on clarity in this market in the near
future. Rather, until there is definitive resolution, we are focused on the
most profitable global markets that embrace Internet gaming. In fact, the UK is emerging as the global centre for regulated interactive
gaming. In the UK, gaming is an accepted form of entertainment  a way of life.
The British government has drafted online gaming legislation to ensure a fair,
well-regulated and commercially viable marketplace. CryptoLogic has sought
opportunities to contribute to policy makers and industry associations
throughout this process. We have prepared submissions in response to regulatory
proposals, and engaged in constructive dialogue with supervisory bodies. We
shall continue to offer our expertise to assist in the development of policies
that will shape the future of global e-gaming. In order to ensure a strong and visible presence within this
industry-recognized centre for online gaming, CryptoLogic listed on the London
Stock Exchanges Main Market in September 2003. This listing highlights our
considerable UK presence, notable by our local operations and prominent UK
customers. It also gives us access to a broader shareholder base in a
gaming-friendly jurisdiction. Our commitment to the highest level of compliance and transparency to
leading the trend for responsible online gaming, remain unwavering. We will
continue to proactively adopt regulatory practices and conduct our business
with the same stringency as our land-based colleagues, setting the highest bar
among our peers. (2) Tier-One jurisdiction refer to page 3. CRYPTOLOGIC ANNUAL REPORT 2003 7




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Performance-Driven Our financial performance is a clear indicator of the effectiveness of our
strategy. In 2004, we will continue to build on all that we have accomplished
last year. We will stay the course, with a commitment to deliver a superior
return on effort in all areas of our business. The online gaming market is seeing increasing competition and inherent
margin pressures. There is also a trend toward consolidation, and as is the
case in other sectors, the strong will survive  and prosper. In order to
thrive, we have refined our focus to fewer, higher-quality clients, honing our
customer base from 21 to 11 at the year-end by our choice. Going forward, we will continue to be selective about new licensees,
targeting prospects with international brand strength, marketing might and a
customer base with leveragability. In addition, we will seek clients that
represent significant revenue and organic growth potential for CryptoLogic. Strength In Numbers As a result of consistent operating profits and healthy cash flow, in 2003 we
became one of the few software companies in the world to declare a quarterly
dividend. We have the financial flexibility to fund our growth for the long
term, while sharing our successes with shareholders. Last years performance makes a strong statement to the strength of our
strategy and demonstrates increasing momentum. We generated record revenue and
strong earnings  revenue up by 28% with earnings rising 22%*. Over US$44 million in working capital gives us a competitive advantage to
capitalize on opportunities that present themselves in 2004, and assures
customers and players alike that we are financially sound. While we are in a
position to actively seek acquisitions, we will only consider those prospects
that are accretive, and in line with our long term vision. 2004  And Beyond I am particularly proud of our strong, performance-driven management team, who,
together with all of our committed employees, delivered in spades in 2003. I
extend my sincere appreciation for the dedication of our employees, the loyalty
of our valued customers and the support of our shareholders over the past year.
Integrity is the compass of our good governance  along with a culture that
places an extremely high value on accountability and long term growth. I am
confident that by continuing to execute well, we will Play the World as a
global leader in one of the fastest growing markets on the Internet
 while
striving to reward stakeholders with industry-leading returns. Respectfully, -s- LEWIS N. ROSE Lewis N. Rose President and Chief
Executive Officer
 * Before non-recurring charge in 2002. CRYPTOLOGIC ANNUAL REPORT 2003 8




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(CHAIRMANS MESSAGE) As Board Members, our responsibility is to serve the best interest of
shareholders. We perform our duties with a commitment to sound corporate
governance. In May 2003, a new Board of six Directors was elected at the annual
meeting, five serving for the first time, and four of whom are unrelated.
During the remainder of the year, we met on 14 occasions to address the
business of the Company. The Board initiated the first-ever dividend policy for
the Company, and laid down criteria for potential future acquisitions. The Board also participated at length in the Companys strategic planning,
which focuses on enhancing the quality of software and service provided to
licensees through the Companys subsidiary, WagerLogic Limited. In the course of our service, we instilled new governance procedures in
keeping with rising regulatory requirements, and investor expectations, to
codify the mandates of the Board and committees, and procedures to be utilized
during their meetings. We adopted a disciplined disclosure policy and strict
insider trading rules. We concluded the listing on the London Stock Exchange,
and achieved government certification in Alderney  consistent with our
commitment to the highest transparency. The Board carefully reviewed Managements performance and their
initiatives to enhance the Companys market position. We deliberated
extensively
on the compensation levels and the methodology used in compensating senior
executives and staff. We are pleased with the results of the first year of this Boards
activity, and the supervisory role that the Board has demonstrated over the
Company and Management. We believe that this will serve the Company and its
stakeholders well in the years ahead. We will continue to conduct our business
with integrity and acuity in our service as Board Members of CryptoLogic. -s- ROBERT H. STIKEMAN Robert H. StikemanChairman CRYPTOLOGIC ANNUAL REPORT 2003 9




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(INTERNATIONAL DIVERSIFICATION) Internet gaming is truly a global business, and one of the fastest growth
markets in the new economy. CryptoLogic is capitalizing on the vast, inherent
reach of the Internet to achieve profitable growth and success on the global
stage. Our strategy of international diversification focuses on those overseas
markets that provide the most upside potential. A Global Opportunity Today, online gaming is just over 2% of an estimated US$222 billion(4)
worldwide land-based gaming market, representing significant potential. Our
industry is predicted to generate revenues of US$7.5 billion in 2004 according
to Christiansen Capital. This growth is expected to be most dramatic in global
markets. US regulatory uncertainties persist, and have shifted the playing
field to the international stage. Over 60% of online gaming players in the
industry are located in foreign markets, up from 40% in 2001. CryptoLogic has emphasized this international view as reflected in the
geographic composition of our licensees revenue. More than half now comes
from overseas sources. Playing The World CryptoLogic is achieving worldwide reach through the localization of our
products and services. International players are enjoying the ease of our games
in the worlds most popular languages  English, Spanish, French, German,
Italian, Japanese and Chinese  and currencies  available in US Dollars, British
Pounds and Euros. As a result, our licensees have attracted players from 240
countries around the world. CryptoLogics international expansion centers on those markets, which are
regulated and embrace online gaming. The UK in particular, Europe and Asia hold
exciting potential for further growth. The Best in UK Gaming The United Kingdom, where gambling is a widely accepted form of entertainment,
is emerging as a world-class centre for online gaming. It has one of the
highest per-capita gambling rates among European countries. Greater
liberalization of UK gambling laws within a regulated environment is inspiring
consumer trust and fuelling market expansion. (4) Source:
See page 6. CRYPTOLOGIC ANNUAL REPORT 2003 10




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(SPOTLIGHT ON EUROPE) (BAR CHART) Source: Christiansen
Capital 2002. British gaming companies recognized early the online opportunity to extend
their brands worldwide, and drive business expansion. To that end, CryptoLogic is working with some of the best
names in UK gaming. This growth region now accounts for 30% of overall
revenue. William Hill, The Ritz Club London Online, Littlewoods Gaming, ukbetting
and InterCasino are prominent UK land-based and online operators utilizing our
gaming software to build strong, market-leading Internet businesses, and drive
incremental growth. Subsequent
to the year-end, Betfair  the world-leading brand in betting
exchanges  also agreed to use our proven online poker solution. Betfair has
revolutionized the global and UK online sports wagering industries with its
online betting exchange service, and retains a 90% share of this growing
multi-billion-dollar market. Our poker solution
offers Betfair the opportunity to further consolidate its leadership in the
online gaming market by offering a new player-to-player wagering product
to its global customer base. There remains plenty of room for growth in the UK. A move to regulated
interactive gaming, the propensity to game, and higher interconnectivity are
creating expanding opportunities. Europe on the Horizon After the UK, European countries such as Spain, Germany, France, Austria and
Denmark are some of the largest gaming markets with emerging growth prospects.
CryptoLogics Euro offering and multi-currency integrated games are gaining
increasing popularity as our licensees expand into Europe. The large Asian market is under-served. In a recent survey, over
40% of Internet users in China say that they play online games. Asia is a
tremendous opportunity, but it is easier said than done due to fragmented
legislation and limited international credit cards. We are seeing
encouraging traction in Japan, although China is slower to develop given
the absence of Internet-based payment options. Continued Expansion CryptoLogic continues to Play the World in 2004. Our near-term targets are
to add selective large international licensees, actively market our current
seven languages and three currencies, introduce new games that are regionally
or culturally specific, and enhance foreign payment options. We will focus on
those markets that embrace online gaming to facilitate profitable global
expansion. CRYPTOLOGIC ANNUAL REPORT 2003 11




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(MARKET-DRIVEN SOLUTIONS) As the industry matures and the competition for players has increased, online
gaming is growing into a sophisticated business. Today, players want more than
the newest products, they seek the best jackpots, promotions and customer
service. As such, our second stated priority is to deliver comprehensive,
market-responsive gaming solutions through our licensing subsidiary, WagerLogic
Limited, that develop broader gaming audiences worldwide and drive increased
revenue for our licensees. (BAR CHART) Source: PokerPulse February 2004. Player-Responsive Games
Casino gaming is where we built our reputation as a
pioneer, and we continue as a world leader. To increase awareness among our
licensees players, we introduced a succession of new casino product themes and
variations throughout 2003. We released more than 10 new choices of the most popular casino games,
giving players more chances and ways to win. Bonus packs included Single Deck
and Multi-Split Blackjack, an enhanced European Roulette, and an exciting new
series of 9-Line slots. Big jackpots are a huge marketing draw. Our progressive games offer
fast-growing bonus jackpots that build more rapidly as more people play. In
2003, we introduced a
multi-currency Blackjack jackpot game, raising the stakes in this classic
favourite, as well as a potential million-dollar progressive slot. Market-Responsive Product
Diversification
We leveraged our strength in casino
by expanding into the large, untapped gaming verticals of bingo and poker. By
offering players a broader range of games, we encourage crossover play that
multiplies revenue potential. For example, the demographic of a sports bettor
is similar to a poker player. Today, six major licensees use our poker solution
and are benefiting from increased player traffic and revenue growth. 12




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(SPOTLIGHT ON POKER) The most compelling story of 2003 is the spectacular rise in popularity
of online poker. Poker has grown more than nine-fold in the past year. With an
estimated annual run rate approaching US$1 (5) billion, theres still lots
more room for growth. CryptoLogics online poker has quickly
earned a market-leading position, and already powers one of the top ten poker rooms on the Web.
We will continue to capitalize on the tremendous potential this game has to
offer. Multi-Currency Software: (MULTI-CURRENCY) All
signs indicate that online poker is still in its infancy. While casino
continues to offer tremendous potential, poker is where online casinos were
several years ago. Internet poker is growing exponentially, and now exceeds
over 15% of the global online gaming market. Its not just todays online
players who are enjoying poker. Were also attracting the broader recreational
and more traditional land-based players. This, in turn, is fuelling market
expansion. In just over a year, our poker software has established a world-leading
position. We currently power one of the largest poker rooms on the Web. We are
proud to already be ranked among the top ten poker sites, which account for 90%
of the entire market. Were also seeing growth in our recent bingo offering. In fact, we
identified an opportunity to integrate slots with our bingo game, which is also
driving a meaningful rise in slot revenue. Customer-Responsive Solutions Online gaming is becoming an increasingly
sophisticated and competitive marketplace. Successful operators will be those
which build a large, loyal player community that returns often to enjoy an
exciting and evolving gaming experience. To that end, CryptoLogic is expanding
our back-office expertise to help licensees to better market and respond to
their players, and ultimately increase the profitability of their online
business. A wealth of player information can be gathered and mined to enhance a
players experience. We are providing more relationship management tools and
reporting options, complemented by around the clock, multi-lingual customer
service  all focused on attracting, retaining and re-activating players. And
we continue to expand our payment offering for greater choice and convenience
 making it easier to play anywhere in the world. New games energize players. The benefits include attracting more players,
generating higher wagers and longer play time. We remain committed to providing
one of the most comprehensive suites of products  games that are innovative,
proven, and market-oriented that deliver engaging online entertainment to
players, and enhance financial results for both us and our customers. (5) Source: See page 12. CRYPTOLOGIC ANNUAL REPORT 2003 13




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(REGULATORY LEADERSHIP) CryptoLogic has long advocated a responsible and regulated gaming approach.
The success of Internet gaming will be to embrace regulation, which will foster
a transparent, credible and growing market. To that end, our regulatory
commitment is an essential component of our strategy. At the Regulatory Forefront Our market is experiencing marked growth. Online
gaming has become a multi-billion-dollar global marketplace, validated by the
growing entry of sizeable, international brand name operators. As governments
come to terms with online gaming and establish specific rules of conduct,
market forces prevail. As a result, policymakers around the world are taking
notice and, more specifically, recognizing the need to update legislation to
catch up and capitalize on the global advancement of Internet gaming. According to River City Group, over 70 jurisdictions worldwide have some
form of Internet gaming regulation in place but legislative inconsistencies
exist. Early on, CryptoLogic embraced a regulatory strategy to continuously
seek compliance to the strictest standards. CryptoLogic is at the regulatory forefront. We are one of the worlds few
software gaming companies able to offer
current and future licensees a choice of multiple regulated markets
 Alderney
and the Isle of Man. These British Isle jurisdictions are among the first to
set controls for online gaming similar to high land-based standards. As the
global movement to regulate the industry gains steam, our premier regulatory
status means a clear competitive advantage for us today and tomorrow. UK Leads the Way While maintaining a watchful eye on the United States, where legislative
uncertainties persist at various government levels, CryptoLogic continues to
pursue business activities in countries with clear regulatory
mandates 
regions with an optimum return on effort for our stakeholders. The United Kingdom is leading the way, and is recognized as the epicentre
for online gaming. The British government is actively developing policies to
establish a world-class regulatory regime that promotes integrity and
responsibility, provides consumer protection and generates incremental tax
revenue. Given CryptoLogics experience and acceptance in highly regulated
jurisdictions, we will continue to seek opportunities to contribute to the
legislative process as it moves forward in the UK. Indeed, our compliance
with increasing regulation around the world is likely the single most important
factor determining the speed of growth of our industry. Indeed, the UK is
positioning itself as the preferred regulated jurisdiction, and has drafted
online gaming legislation to ensure a fair, responsible and commercially viable
marketplace. The aim is to enact the new law by 2005, and establish a fully
operational regime by 2006. CryptoLogics regulatory leadership puts us in an
enviable position as regulation proliferates worldwide. 14




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(SPOTLIGHT ON THE UK) Alderney and the Isle of Man stringent standards provides us with an excellent
platform into a regulated UK market. CryptoLogics recent listing on the London Stock Exchange further
supports our commitment to the highest level of transparency and
compliance. The UK regulatory advancement is also prompting the European Commission to
look at harmonizing online gaming within the European Union and encouraging a
truly free cross-border market. Fit and Proper Test CryptoLogic actively invests significant time and money to achieve government
approval as a fit and proper software provider to the most rigorous
standards. We open ourselves to extensive probity review to ensure the
integrity of our Company and key personnel. As well, our software is reviewed
and certified by government-accredited, independent testing organizations that
audit our software to ensure fair and responsible gaming. Our customers are among the worlds premier names in online and land-based
gaming. They depend on us for software their players can trust. Our commitment to regulatory leadership is a key differentiator for
CryptoLogic and an asset in attracting our blue chip, land-based customers. We
welcome the light to shine on the industry to allow it to thrive in a regulated
and licensed environment. Our regulatory strategy will continue to support this
proactive stance. (PLAY THE WORLD) Worldwide Regulation:
Jurisdictions with varying forms of online wagering North
America
    
    Russia
    
    AustralasiaCalifornia, USA
    
    Kalmykia
    
    ACT, AustraliaFile Hills,
    
    
    
    Cook IslandsSaskatchewan,
    
    Europe
    
    New South Wales,Canada
    
    Aland Islands,
    
    AustraliaKahnawake, Canada
    
    Finland
    
    New ZealandLac Vieux Desert, USA
    
    Alderney
    
    Norfolk Island,Louisiana, USA
    
    Austria
    
    AustraliaOregon, USA
    
    Belgium
    
    Northern Territory,Pennsylvania, USA
    
    Denmark
    
    AustraliaSix Nations,
    
    Estonia
    
    PalauOntario, Canada
    
    Faroe Islands,
    
    Queensland, AustraliaDenmark
    
    Solomon IslandsCentral America
    
    Finland
    
    Tasmania, AustraliaBelize
    
    France
    
    The PhilippinesCosta Rica
    
    Germany
    
    VanuatuNicaragua
    
    Gibraltar
    
    Victoria, AustraliaPanama
    
    Iceland
    
    Western Australia,Ireland
    
    AustraliaSouth America
    
    Isle of ManArgentina
    
    Liechtenstein
    
    The Far EastRio de Janeiro, Brazil
    
    Malta
    
    CagayanSanta Catarina, Brazil
    
    Norway
    
    Economic ZoneVenezuela
    
    Sark
    
    Hong KongScotland
    
    KoreaCaribbean
    
    Slovakia
    
    MacauAntigua & Barbuda
    
    Spain
    
    TaiwanCuracao,
    
    Sweden
    
    VietnamNetherlands Antilles
    
    United KingdomDominicaDominican RepublicGrenada
    
    AfricaJamaica
    
    AnjouanSt. Kitts and Nevis
    
    LiberiaSt. Vincent
    
    MauritiusTrinidad
    
    Western Cape,US Virgin Islands
    
    South Africa
 Source: River City Group 2004. CRYPTOLOGIC ANNUAL REPORT 2003 15




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(MANAGEMENTS DISCUSSION AND ANALYSIS)  James A. RyanChief Financial Officer  CRYPTOLOGIC HAS BEEN
SUCCESSFULLY GROWING REVENUE,
EARNINGS AND GENERATING
POSITIVE CASH FLOW.
WE REMAIN ALERT TO
FURTHER OPPORTUNITIES
TO INCREASE SHAREHOLDER
VALUE, WHILE MANAGING
EXPENDITURES TO PRODUCE
APPROPRIATE RETURNS. CRYPTOLOGIC ANNUAL REPORT 2003 16




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MANAGEMENTS DISCUSSION & ANALYSIS The following section of the Annual Report contains managements discussion and
analysis (MD&A) of CryptoLogics consolidated results of operations and
financial condition for the year ended December 31, 2003 in comparison with the
year ended December 31, 2002, and should be read in conjunction with the
audited consolidated financial statements and accompanying notes. This MD&A has
been prepared as of the date of the auditors report for the 2003 financial
year. CryptoLogic and our subsidiaries are referred to collectively as
CryptoLogic, the Company, we, us and our throughout the annual report
and MD&A, unless otherwise specified. All currency amounts are in US dollars, unless otherwise indicated. BUSINESS OVERVIEW CryptoLogic is a pioneer and a global leader in the Internet gaming software
industry. We are the largest publicly traded online gaming software company
with operations located in Canada, the United Kingdom and Cyprus that provide
licensing, marketing, e-cash management and customer support services for our
Internet gaming software to third-party gaming operators around the world. CryptoLogics Internet gaming software and related proprietary e-commerce
technology and support services enable secure, reliable, efficient and rapid
financial transactions over the Internet. Since inception in 1996, our software
has processed in excess of US$16 billion in wagers for more than 1.7 million
players in 240 countries worldwide. The Companys gaming solution is comprised
of a total suite of more than 80 Internet-based casino, multi-player bingo and
player-to-player poker games in multiple languages (English, Spanish, Japanese,
Chinese, French, German, Italian) and multiple currencies (US Dollars, British
Pound Sterling and Euros) with an integrated e-cash management system and 24/7
customer support. WagerLogic Limited (WagerLogic), a wholly-owned subsidiary, is
responsible for the licensing of our software products and services to an
internationally-recognized blue chip client base. As at December 31, 2003, we
had 11 licensees located around the world including brand name and land-based
gaming organizations in the UK, who hold Internet gaming licenses issued by
governments where the licensees are domiciled, principally in the Netherlands
Antilles and Alderney, in the British Isles. Substantially all of CryptoLogics revenue is of a recurring nature.
WagerLogics licensees pay an ongoing fee for the licensing and support of our
software, calculated as a percentage of each licensees level of activity.
Additional revenues are derived from the provision of software customization,
e-cash processing and advertising services. Historically, we experience
seasonality with slower sales in the third quarter, as the use of the Internet
is not as strong in the summer months when players tend to spend less time
indoors and at their computers. Typically, our first and fourth quarters
(during the winter and fall seasons) are our strongest revenue periods. CryptoLogics growth rates in 2003 were significantly stronger than 2002.
The year 2002 was affected by industry challenges, internal corporate
reorganization and a significant write-down of an investment. Positive
performance in 2003 demonstrates that we have fortified our core business,
while achieving growth in international markets and new product areas. We are
mindful that while online gaming continues to grow rapidly, regulatory
uncertainty remains, and heightened competition is creating margin pressures.
This is why we are and will continue to invest in our business in 2004 through
product diversification, enhancement of our services and regulatory compliance.
The increased costs associated with these investments are expected to drive our
long term growth. We remain focused on product diversification in order to leverage our core
competency in online casino gaming to expand into large, emerging lucrative
game segments such as poker and bingo that will drive incremental revenue. The
online poker market, in particular, is exhibiting dramatic growth, and offers
excellent prospects for CryptoLogic. Given the absence of legislative clarity in the US, near-term
opportunities for online gaming continue to be largely outside North America.
Our international strategy will continue to focus on investing in and
capitalizing on our relationships with leading, international brand name
licensees in foreign markets that are embracing Internet gaming and
representing attractive growth potential. CRYPTOLOGIC ANNUAL REPORT 2003 17




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MANAGEMENTS DISCUSSION & ANALYSIS STRATEGY CryptoLogics management has outlined a focused strategy of global market and
product expansion to advance our long term growth. As a result, we are growing
revenues, building long term customer relationships with some of the most
trusted gaming companies in the world, and producing cash earnings in light of a developing and
challenging business environment.  Our strategy is based on three core imperatives:1.
    
    International Diversification  by sustaining key sources of revenue and
maximizing profitability through international growth with existing and
new customers;2.
    
    Market-Oriented Solutions  by enhancing our product offering to create
value for customers and drive incremental revenue; and3.
    
    Regulatory Leadership  through our commitment to the highest standards
of transparency and regulatory compliance. Strategic Performance Measures CryptoLogic is focused on delivering profitable growth, positive cash flow and
improving returns. The following table sets out key financial performance
indicators as measures of our progress against our stated objectives: (In thousands of US dollars, except per share data)
    
    2003
    
    2002
    
    2001Income StatementRevenue
    
    $
    44,211
    
    
    $
    34,427
    
    
    $
    43,550EBITDA(1)
    
    $
    11,496
    
    
    $
    8,609
    
    
    $
    17,422Earnings
    
    $
    9,441
    
    
    $
    7,728
    *
    
    $
    18,078Fully Diluted EPS
    
    $
    0.75
    
    
    $
    0.60
    *
    
    $
    1.21Financial PositionCash Flow From Operating Activities
    
    $
    38,700
    
    
    $
    9,431
    
    
    $
    18,123Total Cash
    
    $
    67,307
    
    
    $
    40,257
    
    
    $
    56,359Working Capital
    
    $
    44,733
    
    
    $
    35,812
    
    
    $
    54,283Dividend per Share
    
    $
    0.03
    
    
    
    
    
    
    
    Value MeasureReturn on Equity
    
    
    21
    %
    
    
    18
    %*
    
    
    31
    %
 *Before non-recurring special charge in 2002.  (1)
    
    Management believes that EBITDA (earnings before interest, taxes,
depreciation and amortization) is a useful supplemental measure of
performance. However, EBITDA is not a recognized earnings measure under
generally accepted accounting principles (GAAP) and does not have a
standardized meaning. Therefore, EBITDA may not be comparable to
similar measures presented by other companies. EBITDA is reconciled to earnings as follows: (In thousands of US dollars)
    
    2003
    
    2002
    
    2001Earnings (loss)
    
    $
    9,441
    
    
    $
    (2,129
    )
    
    $
    18,078Income taxes (recovery)
    
    
    1,213
    
    
    
    (82
    )
    
    
    1,206Special charge
    
    
    
    
    
    
    10,506
    
    
    
    Interest and other income
    
    
    (691
    )
    
    
    (672
    )
    
    
    (2,215
    )Amortization
    
    
    1,533
    
    
    
    986
    
    
    
    353EBITDA
    
    $
    11,496
    
    
    $
    8,609
    
    
    $
    17,422
 Overview of Results CryptoLogics focused execution of our three-pronged strategy of international
diversification, product expansion and regulatory commitment is translating
into strong top- and bottom-line performance, and contributing to our financial
strength. As a result, we have fortified our core business, re-established a
positive revenue and earnings trend, and focused on creating opportunities for
growth in what continues to be a challenging and maturing online gaming
industry. Revenue for 2003 achieved a new historic high, up 28% to $44.2 million,
from $34.4 million in 2002. EBITDA(1) for 2003 increased by 34% to $11.5
million
from $8.6 million in 2002. Earnings in 2003 grew by 22% with diluted earnings
per share rising to $0.75, compared with $0.60 before the special charge in
2002. The strong gains in 2003 reflected the growth of international business
with existing and new customers and incremental revenue from new games, most
notably online poker, while we continued to make essential strategic
investments in these business areas to maintain this forward momentum. 2003
earnings were lower compared with 2001, reflecting higher expenditures
associated with product and services development and compliance initiatives
essential to remain competitive and grow our business. CRYPTOLOGIC ANNUAL REPORT 2003 18




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MANAGEMENTS DISCUSSION & ANALYSIS 97% of CryptoLogics revenue is of a recurring nature and was generated
from long term software licensing and services contracts that generally extend
three to five years. Our top five licensees accounted for approximately 93% of
our 2003 revenue, reflecting our honed focus of building long-standing
relationships with a key number of premium international brand customers with
whom we work to grow sustainable and increasingly profitable online businesses.
Heading into 2004, we have either renegotiated and extended or recently signed
our major customers to multi-year and generally exclusive agreements, which
provide us with a measure of stability in our forward-looking revenue stream. We continued to strengthen our balance sheet in 2003. Cash, cash
equivalents and short term investments grew to $67.3 million including security
deposits of $6.6 million. Working capital increased to $44.7 million. Consistent positive cash
generation has given us the financial flexibility to adopt a quarterly dividend
policy this year - the first in the Companys history. Given the ongoing legislative uncertainty in the US, foreign markets
continue to present the best near-term growth opportunities. We are making
measurable progress. More than 55% of our licensees revenue was derived from
international sources this year, up from approximately 40% in 2002, and 30% in
2001. This positive trend was principally attributed to the increasing revenue
contribution of our major UK and European-oriented licensees. CryptoLogics extension of our game offering from casino into new emerging
game areas of poker and bingo is producing encouraging results. After just over
one year in the market, the Companys poker product is becoming a significant
revenue source, generating, alongside the bingo product, more than 10% of total
revenue in 2003. This is an increase from less than 1% in the year prior. In
particular, we expect poker to continue to increase as a percentage of revenue
as a result of further enhancements to our poker offering and increasing growth
from our poker licensees that are participating in this large, high-growth game
segment. Ongoing investment in key areas  specifically related to international
business development, increased marketing, new product and services development
and regulatory compliance  has enabled CryptoLogic to deliver positive
financial results with respect to increasing year-over-year revenue and
earnings per share. Increased expenditures will continue to be necessary to
sustain our business and build for long term growth, although they are expected
to remain fairly consistent to 2003 levels as a percentage of revenue. (BAR CHART) (BAR CHART) Our expenditures are classified into four categories: operating costs,
general and administrative, finance and amortization:  
    
    Operating costs comprise software development and support costs that
include all personnel and equity compensation costs for employee stock
options, licensee support and customer service costs, as well as
compliance-related expenditures.
    
    General and administrative costs include overhead and administrative
costs, travel expenses and professional fees relating to our business
development, infrastructure and public company listings.
    
    Finance costs include bank charges and fees for bank drafts and letters
of credit. All letters of credit are secured by cash deposits. These cash
deposits are classified as security deposits on our balance sheet.
    
    Amortization costs are based on the estimated useful lives of the assets
and include the amortization of our investments in computer equipment,
software and software licenses to support our business activities. CRYPTOLOGIC ANNUAL REPORT 2003 19




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MANAGEMENTS DISCUSSION & ANALYSIS For the years ended December 31
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % of(In thousands of US dollars, except per share data)
    
    2003
    
    Revenue
    
    2002
    
    Revenue
    
    2001
    
    RevenueRevenue
    
    $
    44,211
    
    
    
    100
    %
    
    $
    34,427
    
    
    
    100
    %
    
    $
    43,550
    
    
    
    100
    %ExpensesOperating costs
    
    
    27,204
    
    
    
    61.5
    %
    
    
    19,439
    
    
    
    56.5
    %
    
    
    21,978
    
    
    
    50.5
    %General and administrative
    
    
    5,161
    
    
    
    11.7
    %
    
    
    5,914
    
    
    
    17.2
    %
    
    
    3,818
    
    
    
    8.8
    %Finance
    
    
    350
    
    
    
    0.8
    %
    
    
    465
    
    
    
    1.3
    %
    
    
    332
    
    
    
    0.7
    %Amortization
    
    
    1,533
    
    
    
    3.5
    %
    
    
    986
    
    
    
    2.9
    %
    
    
    353
    
    
    
    0.8
    %34,248
    
    
    
    77.5
    %
    
    
    26,804
    
    
    
    77.9
    %
    
    
    26,481
    
    
    
    60.8
    %Earnings from operations
    
    
    9,963
    
    
    
    22.5
    %
    
    
    7,623
    
    
    
    22.1
    %
    
    
    17,069
    
    
    
    39.2
    %Interest and other income
    
    
    691
    
    
    
    1.6
    %
    
    
    672
    
    
    
    2.0
    %
    
    
    2,215
    
    
    
    5.1
    %Earnings before undernoted
    
    
    10,654
    
    
    
    24.1
    %
    
    
    8,295
    
    
    
    24.1
    %
    
    
    19,284
    
    
    
    44.3
    %Special charge
    
    
    
    
    
    
    0
    %
    
    
    (10,506
    )
    
    
    (30.5
    %)
    
    
    
    
    
    
    0
    %Earnings (loss) before taxes
    
    
    10,654
    
    
    
    24.1
    %
    
    
    (2,211
    )
    
    
    (6.4
    %)
    
    
    19,284
    
    
    
    44.3
    %Income taxes (recovery)
    
    
    1,213
    
    
    
    2.7
    %
    
    
    (82
    )
    
    
    (0.2
    %)
    
    
    1,206
    
    
    
    2.8
    %Earnings (loss)
    
    $
    9,441
    
    
    
    21.4
    %
    
    $
    (2,129
    )
    
    
    (6.2
    %)
    
    $
    18,078
    
    
    
    41.5
    %EBITDA(1)
    
    $
    11,496
    
    
    
    26
    %
    
    $
    8,609
    
    
    
    25
    %
    
    $
    17,422
    
    
    
    40.0
    %Total assets
    
    $
    86,066
    
    
    
    
    
    
    $
    52,530
    
    
    
    
    
    
    $
    68,445Dividend per share
    
    $
    0.03
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 (1)Refer to EBITDA note on page 18. (BAR CHARTS) Since inception in 1996, the Companys software has processed in excess ofUS$16 billion
in secure online wagers for more than 1.7 million players in 240 countries worldwide. RESULTS OF OPERATIONS Revenue Revenue in 2003 increased by 28% to $44.2 million, up from $34.4 million in
2002. CryptoLogic generated record high annual results and progressively
stronger quarterly performance due to the growing businesses of existing
customers, increasing contribution from new licensees, and incremental revenue
from new games. Specific factors included greater international penetration
from UK and European-oriented customers, expanded choice and ease of payment
options, growing traction of poker and bingo, increased revenue flow from new
casino games, and successful marketing initiatives. CRYPTOLOGIC ANNUAL REPORT 2003 20




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MANAGEMENTS DISCUSSION & ANALYSIS CryptoLogics poker and bingo applications grew to account for more than
10% of total revenue, up from less than 1% in fiscal 2002. As well, we
continued to see a positive trend in international penetration. For 2003, licensees revenue from
international markets exceeded 55% of total revenue, up from approximately 40%
in fiscal 2002. 30% of our licensees overall revenue was derived from the UK,
a solid and growing market that is expected to be government regulated for
online gaming in 2006. We anticipate that the UKs move towards regulation will
provide us with a strategic advantage as we already have the sophisticated
compliance procedures in place to meet regulatory obligations in
tier-one(2)
jurisdictions where we are presently licensed and certified. Expenses The Companys expenditures are classified into four categories: operating
costs, general and administrative, finance and amortization. Total expenses
amounted to $34.2 million in 2003, compared to $26.8* million in 2002.
Increased costs in 2003 compared to 2002 and 2001 were consistent with our
planned expenditures in important areas of our business  with particular
emphasis on international business development, increased marketing, product
and services development and regulatory compliance  to remain competitive and
support long term growth. Total expenses in 2003 versus 2002, before the
non-recurring special charge, remained relatively consistent as a percentage of
revenue  a trend that is expected to continue as we continue to invest in our
business while managing expenses in proportion to revenue growth. Operating Costs Operating costs increased to $27.2 million in 2003, compared with $19.4 million
in 2002. Higher costs are related to ongoing expenditures directed at new games
and services development, heightened marketing, regulatory initiatives,
international business development, increased processing fees associated with a
growing business, and expanding our e-cash application as well as the added
expense associated with employee stock options. Development costs are expensed as incurred unless costs meet the criteria
for deferral and amortization under generally accepted accounting principles. In 2003, CryptoLogic adopted the amended recommendations of the Canadian
Institute of Chartered Accountants with respect to accounting for stock-based
compensation and other stock-based payments. For options granted on or after
January 1, 2003, the Company is required to expense the fair value of the
options grant to employees over the vesting period of the options. Such
costs are included in operating costs. As a result, our financial statements
for the year ended December 31, 2003 accounted for a stock option expense of
$0.4 million based on 823,980 stock options, subject to vesting over a maximum
of 4 years. This translated into an earnings impact of $0.03 per diluted share
in 2003. Subsequent years will reflect the accumulated impact of options
granted as of 2003 and thereafter. (BAR CHART) *Before non-recurring special charge in 2002. In an increasingly competitive and sophisticated marketplace, innovation,
customer responsiveness and commitment to compliance efforts are vital as
reflected in our employee segmentation. Accordingly, we have augmented our
staffing to 175 people by year end, more than 80% of whom continue to be
dedicated to development, compliance, sales, marketing and customer support. We
anticipate a rise in future headcount, particularly in product development, as
we continue to invest in expanding our software and services to remain
competitive and drive revenue growth. General and Administrative Costs General and administrative (G&A) expenses
declined moderately to $5.2 million for the year, compared with $5.9 million in
2002. The decrease was principally attributed to a reduction in professional
fees, telecommunications and travel costs. Finance Costs Finance costs include bank charges and fees for bank drafts and letters of
credit. All letters of credit are secured by cash deposits, which are included
in security deposits on our balance sheet. These costs declined to $0.35
million in 2003, compared with $0.47 million in 2002. The decrease was due to
the reduction in the value of letters of credit issued to payment processors
during the year. Finance costs over the past two years have been negligible,
representing approximately 1% of revenue. (2) Tier-One jurisdiction refer to page 3. CRYPTOLOGIC ANNUAL REPORT 2003 21




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MANAGEMENTS DISCUSSION & ANALYSIS (PIE CHARTS) Amortization Amortization expense rose during the year to $1.5 million, compared with $1.0
million in 2002. The increase reflected increased investment in computer
equipment, software and software licenses. Amortization expense is expected to
continue to grow in absolute terms, but remain relatively consistent as a
percentage of revenue. EBITDA(1) EBITDA(1) for fiscal 2003 rose 34% to $11.5 million, compared with $8.6 million
last year. EBITDA(1) margin remained at a solid level, rising to 26% as a
percentage of revenue, compared with 25% in 2002. This reflected the efficient
management of expenditures in proportion to revenue generation to remain
competitive and to produce appropriate returns for sustainable growth. EBITDA(1) for fiscal 2003 was down compared to 2001 due to increased
investments in key areas of the business in response to an increasingly
competitive and sophisticated marketplace. (BAR CHART) Interest and Other Income Interest and other income rose slightly to $0.69 million in 2003, compared to
$0.67 million in the previous year due to a higher cash position, net of a
lower interest rate environment in 2003 as compared to 2002. Income Taxes Income taxes for the year grew to $1.2 million, compared with a $0.08 million
tax recovery in fiscal 2002. The tax recovery last year resulted from the
special charge recorded in the second quarter of 2002. The increase this year
was primarily attributed to the generation of higher pre-tax profits. Earnings Earnings for the year improved by 22% to $9.4 million, compared with $7.7
million before the non-recurring special charge in 2002. After the special
charge, there was a net loss of $2.1 million in 2002. On a fully diluted basis,
earnings per share rose considerably to $0.75 in 2003 versus $0.60 in 2002
before the special charge, and a loss per diluted share of $0.17 after the
special charge. Improved 2003 earnings, compared with 2002, were attributed to managing
expenses in proportion to revenue growth. While we continue to invest in
strategic areas to grow our business, the Companys solid bottom line results
reflect our focus on making the right investments to produce appropriate
returns. Earnings in 2003 were lower compared to 2001 due to higher expenditures
essential to remain competitive and grow revenue. Return on Equity 2003
    
    2002
    
    2001Return on equity
    
    
    21
    %
    
    
    18
    %*
    
    
    31
    %
 *Before non-recurring special charge in 2002. CryptoLogic continues to generate solid
operating profits and returns. Quarterly Results The Companys operating results vary on a quarterly basis due to the seasonal
nature of the online gaming industry. Historically, sales are slower in the
third quarter, as the use of the Internet is not as strong in the summer
months, when players tend to spend less time indoors and at their computers.
Typically, our first and fourth quarters (during the winter and fall seasons)
are our strongest revenue periods. (1) Refer to EBITDA note on page 18. CRYPTOLOGIC ANNUAL REPORT 2003 22




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MANAGEMENTS DISCUSSION & ANALYSIS The upward trend and substantial
year-over-year quarterly growth recorded in 2003 reflected stabilizing of the
Companys core online casino business and re-establishing positive revenue and
earnings momentum in contrast to the previous year being one of the toughest
years to date for both the industry and the Company. 2002 revenues were
impacted by both the restrictive use of certain US credit cards being faced by
the entire industry  which continues to be an industry issue, although the
Company is addressing this with new payment alternatives and increased focus on
international growth  as well as internal corporate reorganization including
management changes. In 2003, attention was given to sustaining our key sources of revenue and
making considerable investment
in important areas  such as international business development, increased
marketing initiatives, regulatory compliance, specifically related to our
Alderney certification, new product development and enhancements and expanding
payment options  that are vital to CryptoLogics long term growth. We will
continue to invest in our business and build on this strong base in 2004. The following tables set out selected unaudited financial information of
the Company on a consolidated basis for the last eight quarters. 2003 quarterly
results have been restated to reflect the adoption of the amended
recommendations of the Canadian Institute of Chartered Accounts with respect to
accounting for stock-based compensation and other stock-based payments. Summary of Quarterly Results Fiscal 2003 Quarters(6)
    
    First
    
    Second
    
    Third
    
    Fourth
    
    Annual(In thousands of US dollars, except per share data)Revenue
    
    $
    8,901
    
    
    $
    10,826
    
    
    $
    10,944
    
    
    $
    13,540
    
    
    $
    44,211Stock option expense
    
    
    58
    
    
    
    105
    
    
    
    127
    
    
    
    148
    
    
    
    438Interest income
    
    
    161
    
    
    
    174
    
    
    
    196
    
    
    
    160
    
    
    
    691Earnings
    
    
    1,773
    
    
    
    2,478
    
    
    
    2,157
    
    
    
    3,033
    
    
    
    9,441Before stock option expense:Basic earnings per share
    
    $
    0.15
    
    
    $
    0.21
    
    
    $
    0.19
    
    
    $
    0.26
    
    
    $
    0.81Diluted earnings per share
    
    $
    0.15
    
    
    $
    0.21
    
    
    $
    0.18
    
    
    $
    0.25
    
    
    $
    0.78After stock option expense:Basic earnings per share
    
    $
    0.15
    
    
    $
    0.20
    
    
    $
    0.18
    
    
    $
    0.25
    
    
    $
    0.77Diluted earnings per share
    
    $
    0.15
    
    
    $
    0.20
    
    
    $
    0.17
    
    
    $
    0.23
    
    
    $
    0.75Basic weighted average number of
shares (000s)
    
    
    12,206
    
    
    
    12,237
    
    
    
    12,256
    
    
    
    12,280
    
    
    
    12,245Diluted weighted average number of
shares (000s)
    
    
    12,216
    
    
    
    12,395
    
    
    
    12,696
    
    
    
    12,972
    
    
    
    12,604
 (6)Fiscal 2003 results have been restated for the retroactive adoption of the
stock option expense. Fiscal 2002 Quarters
    
    First
    
    Second
    
    Third
    
    Fourth
    
    Annual(In thousands of US dollars, except per share data)Revenue
    
    $
    8,664
    
    
    $
    8,890
    
    
    $
    8,004
    
    
    $
    8,869
    
    
    $
    34,427Interest and other income
    
    
    175
    
    
    
    151
    
    
    
    164
    
    
    
    182
    
    
    
    672Net income before special charge
    
    
    2,204
    
    
    
    2,031
    
    
    
    1,302
    
    
    
    2,191
    
    
    
    7,728Earnings (loss)
    
    
    2,204
    
    
    
    (7,826
    )
    
    
    1,302
    
    
    
    2,191
    
    
    
    (2,129
    )Before special charge, net of tax:Basic earnings per share
    
    $
    0.18
    
    
    $
    0.17
    
    
    $
    0.11
    
    
    $
    0.18
    
    
    $
    0.63Diluted earnings per share
    
    $
    0.16
    
    
    $
    0.16
    
    
    $
    0.11
    
    
    $
    0.18
    
    
    $
    0.60After special charge, net of tax:Basic earnings (loss) per share
    
    $
    0.18
    
    
    $
    (0.65
    )
    
    $
    0.11
    
    
    $
    0.18
    
    
    $
    (0.17
    )Diluted earnings (loss) per share
    
    $
    0.16
    
    
    $
    (0.65
    )
    
    $
    0.11
    
    
    $
    0.18
    
    
    $
    (0.17
    )Basic weighted average number of
shares (000s)
    
    
    12,210
    
    
    
    12,092
    
    
    
    12,317
    
    
    
    12,211
    
    
    
    12,257Diluted weighted average number of
shares (000s)
    
    
    13,569
    
    
    
    13,100
    
    
    
    12,338
    
    
    
    12,211
    
    
    
    12,879
 CRYPTOLOGIC ANNUAL REPORT 2003 23




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MANAGEMENTS DISCUSSION & ANALYSIS LIQUIDITY AND CAPITAL RESOURCES Operating Activities CryptoLogic has consistently maintained a strong cash base to fund working
capital needs, strategic initiatives and synergistic acquisitions. This
positive trend continued in 2003. As of December 31, 2003, total cash had grown to $67.3 million or $5.34
per diluted share, which comprised cash and cash equivalents, short term
investments, and including security deposits of $6.6 million. We maintain cash
on deposits as security granted to foreign banks and payment processors that
process deposit and credit card transactions on our behalf. Working capital increased to $44.7 million or $3.55 per diluted share in
2003. Working capital in 2002 declined compared to 2001 largely due to cash
used to repurchase the Companys common shares through Normal Course and
Substantial Issuer Bids and lower earnings in 2002. Operating cash flow in 2003 was $38.7 million, compared with $9.4 million
in fiscal 2002. Cash generated from operations in 2003 comprised of $11.4
million of cash generated from earnings and $27.3 million from changes in
working capital. Working capital changes were attributed primarily to lower security
deposits pledged to payment processors, increased income taxes resulting from
higher earnings, extended payment of licensees payables, a growing jackpot
accrual associated with the introduction of new jackpot games and an increased
chargeback provision as a result of higher player deposits during the year.
Chargebacks are any deposit transaction credited to a players account that is
later reversed or repudiated. In 2003, security deposits reduced to $6.6 million, compared with $15.7
million in 2002, due to a decline in reserve requirements to processors. As a result of the growing strength of CryptoLogics business, there was
an increase in accounts payable and accrued liabilities by $17.5 million
compared to the end of 2002. The increase was primarily attributed to:  1.
    
    renegotiated frequency of payments to licensees, which
extended timing of payables;2.
    
    a rising jackpot provision for prizes not yet won and new
progressive games;3.
    
    an increase in our chargeback provision due to higher
exposure relating to increased user funds held on
deposit  a sign of a growing business; and4.
    
    an increase in trade payables and accruals associated
with the growth of the Company. (BAR CHART) *Includes security deposits. (BAR CHART) Separately, user funds held on deposit rose significantly to $9.4 million
in 2003 from $3.8 million in 2002, and reflected the continued strength of our
licensees online gaming businesses. This number is expected to decline in
subsequent quarters as one of our major licensees has assumed operation of its
own e-cash system. CryptoLogic has no debt and believes that our working capital is
sufficient for our present requirements. We expect foreseeable cash needs to be
funded through existing cash resources, unutilized debt capacity, and operating
cash flow. Financing Activities A net cash outlay of $0.4 million was utilized for financing activities in
2003, which related to our listing on the London Stock Exchange, the payment of
the Companys first ever dividend of $0.03 per share, net of cash flow from the
exercise of stock options. CRYPTOLOGIC ANNUAL REPORT 2003 24




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MANAGEMENTS DISCUSSION & ANALYSIS Given consistent operating profit, healthy cash flow and a strong balance
sheet, CryptoLogics Board of Directors approved a regular quarterly dividend
in September 2003. The inaugural dividend of $0.03 per share was paid on
November 24, 2003 to shareholders of record as at November 17, 2003. Each
future quarterly dividend is subject to Board approval based on our financial
results for that period. During 2002, a large portion of operating cash flow was used to fund the
repurchase and cancellation of 1.3 million common shares through Normal Course
and Substantial Issuer Bids, which share buy back programs were not utilized in
2003. Investing Activities Investing activities used cash of $7.9 million in 2003. The majority of this
amount stemmed from $5.9 million invested in short term money market
instruments and corporate bonds in order to generate a higher level of interest
income, and $2.6 million invested in new capital assets. As well, the sale of
our non-core interest in HIP Interactive Corp. added $0.7 million to cash flow. The decline in investing activities over 2002 was largely related to the
change in short term money market investments and a $6.4 million write-off in
2002 of various corporate investments. The following table summarizes our outstanding cash commitments as of December
31, 2004: Less than
    
    1-3
    
    4-5
    
    After 5(In thousands of US dollars)
    
    Total
    
    1 year
    
    years
    
    years
    
    yearsLong term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Facility leases
    
    $
    2,049
    
    
    $
    982
    
    
    $
    999
    
    
    $
    68
    
    
    
    Purchase obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other long term liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total outstanding cash commitments
    
    $
    2,049
    
    
    $
    982
    
    
    $
    999
    
    
    $
    68
    
    
    
    
 RESEARCH AND DEVELOPMENT We make significant investments in research and development to keep pace and
remain competitive with technology advancements and product evolution in the
global online gaming market. Accordingly, over 50% of the Companys
workforce is comprised of research and development personnel. CRITICAL ACCOUNTING POLICIES The Companys accounting policies are specified in the notes to our financial
statements, in particular note 1. CHANGES IN ACCOUNTING POLICIES On December 18, 2003, the Canadian Accounting Standards Board (AcSB) announced
that effective January 1, 2004, public companies will be required to expense
all stock-based compensation awards (including stock options). For fiscal 2003,
we adopted these amended recommendations with respect to accounting for
stock-based compensation and other stock-based payments as noted earlier. Further details of the above new standard and other recent accounting
pronouncements are addressed in the notes to the Companys financial
statements, in particular note 1. OFF-BALANCE SHEET ARRANGEMENTS The Company enters into forward foreign exchange contracts to manage our
exposure to currency fluctuations. The forward foreign exchange contracts are
marked to market and the resulting net gain or loss is recognized in operating
costs in the statement of earnings. RISKS AND UNCERTAINTIES CryptoLogic operates 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. In addition, readers should carefully review the risk
factors described in the Annual Information Form the Company files with various
Securities Commissions. CRYPTOLOGIC ANNUAL REPORT 2003 25




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MANAGEMENTS DISCUSSION & ANALYSIS Industry Risks Government Regulation The Company and our licensees are subject to applicable laws in the
jurisdictions in which they operate. At the present time, our licensees are
authorized to operate by governments in two jurisdictions, Alderney and the
Netherlands Antilles. Some jurisdictions have introduced regulations attempting
to restrict or prohibit Internet gaming, while other jurisdictions have taken
the position that Internet gaming is legal and/or have adopted or are in the
process of considering legislation to regulate Internet gaming. Currently, the UK is establishing a regulated market for online gaming.
The Isle of Man and Alderney  both in the British Isles  are already fully
regulated environments for Internet gaming, based on high standards consistent
with land-based gaming. The British government is currently drafting
legislation to create a regulated and licensed jurisdiction for Internet
gaming. Opposing views are developing in Europe. Some European countries,
including Italy, Germany and Holland where there are state-owned monopolies,
are taking action aimed at banning foreign online gaming operators. Such
actions by these member states are in contrast with a recent favourably-viewed
ruling from the European Court of Justice and has prompted the European
Commission to look at creating new legislation that could harmonize online
gaming within the EU, in line with the ECs goal to encourage a free and open
cross-border market. 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.
However, legislation and legal action designed to restrict or prohibit Internet
gaming may be adopted in the future in the United States or other
jurisdictions. Future decisions may have a material impact on our operations and
financial results. Existing legislation, including US federal and state
statutes, have been and could continue to be construed to prohibit or restrict
gaming through the use of the Internet, and there is a risk governmental
authorities may view us or our licensees as having violated such statutes.
Therefore, there is a risk that legal proceedings could be initiated against
us, our licensees, Internet service providers, credit card processors and
others involved in the Internet gaming industry. This 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 key executives. Such proceedings could have a material adverse
effect on our business, revenues, operating results and financial condition. Given the legislative uncertainty particularly in the US, we are focused
on increasing our international diversification in global markets that embrace
online gaming. Nevertheless, there can be no assurances that additional
legislation or the burdens associated with complying with them will not be
proposed and passed in the United States or in other potentially relevant
jurisdictions to legislate or regulate various aspects of the Internet or the
Internet gaming industry. Credit Card Processing Since December 2001, certain financial institutions in the United States ceased
to accept online gaming transactions through their credit cards due to the
uncertainty regarding the legal status of Internet gaming in that country. This
event has had a negative impact on the Internet gaming industry as a whole, on
our licensees, and on the Company, as evidenced by lower revenues in 2002.
There can be no assurance that other financial institutions or credit card
issuers in the United States and/or other countries will not enact additional
restrictions. Such developments would have a material adverse effect on our
business, revenues, operating results and financial condition. However, this
risk may be mitigated with ongoing expansion of the Companys alternate payment
solutions. E-commerce Law In addition to regulations pertaining specifically to online gaming, we may
become subject to any number of laws and regulations that may be adopted with
respect to the Internet and electronic commerce. As well, current laws, which
predate or are incompatible with Internet commerce, may be enforced in a manner
that restricts the electronic commerce market. However, the application of such
pre-existing Canadian, US and international laws regulating communications or
commerce in the context of the Internet and electronic commerce is uncertain. Moreover, it may take years to determine the extent to which existing laws
relating to issues such as intellectual property ownership and infringement,
libel and personal privacy are applicable to the Internet. 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. CRYPTOLOGIC ANNUAL REPORT 2003 26




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MANAGEMENTS DISCUSSION & ANALYSIS The adoption of new laws or regulations relating to the Internet, or
particular applications or interpretations of existing laws, could decrease the
growth in the use of the Internet, decrease the demand for our products and
services, increase our cost of doing business or could otherwise have a
material adverse affect on our business, revenues, operating results and
financial condition. Business Risks E-commerce Adoption The success of our electronic commerce services will depend in large part on
the widespread adoption of the Internet for commercial transactions. The
marketplace for electronic commerce is in the development stage, and is subject
to frequent and rapid technological changes. It is not possible to fully
predict any trend and therefore any eventual impact on our operations and
financial results. Internet Viability and Infrastructure 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 could lose its viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of Internet
activity or due to increased government regulation. If critical issues
concerning the commercial use of the Internet are not favourably resolved
(including security, reliability, cost, ease of use, accessibility and quality
of service), if the necessary infrastructure is not developed, if the Internet
is no longer a viable commercial marketplace, or if other technologies and
technological devices eclipse the Internet as a viable channel, this may
negatively affect the growth of Internet usage, and our business, revenues,
financial condition and operating results will be materially adversely
affected, and we may be forced to cease operations. End-users of our software depend on Internet service providers, online
service providers and gaming site operators for access to the Internet gaming
sites operated by our licensees and their competitors. Many of these services
have experienced service outages in the past and could experience service
outages, delays and other
difficulties due to system failures unrelated to our systems or our licensees.
Our licensees may lose customers as a result of delays or interruption in
service, including delays or interruptions relating to high volumes of traffic
or technological problems, which could materially adversely affect our
business, revenues, operating results and financial condition. Market Demand Both the Internet and Internet gaming industries are relatively new industries
that continue to rapidly evolve and are characterized by an increasing number
of market entrants. The demand and acceptance for new products and services are
subject to a high level of uncertainty. There can be no assurance that gaming
on the Internet will become widespread. Substantially all of our revenues to date have been derived from the
licensing of our Internet gaming software and the support of our associated
services through our licensing subsidiary. If the market fails to develop,
develops more slowly than
expected, or becomes saturated with competitors or competitive products or
if our services do not achieve market acceptance, our business, revenues,
operating results and financial condition could be materially adversely
affected. Security 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/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 effect on our business, revenue,
operating results and financial condition. CRYPTOLOGIC ANNUAL REPORT 2003 27




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MANAGEMENTS DISCUSSION & ANALYSIS Reliance on Other Parties Our electronic commerce product relies on Internet Service Providers (ISPs) to
allow our licensees customers and servers to communicate with each other. If
all of the ISPs experienced service interruptions, it would prevent
communication over the Internet and would impair our ability to carry on
business. Our ability to process e-commerce transactions depends on bank processing
and credit card systems. In order to prepare for system problems, we have
system redundancies and are in the process of implementing a formal disaster
recovery plan. Nevertheless, any system failure, including network, software or
hardware failure, which causes a delay or interruption in our e-commerce
services could have a material adverse effect on our business, revenues,
operating results and financial condition. Competition 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. 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 ECash software and services, be used in
connection with their payment mechanisms. The barriers to entry into most Internet markets are relatively low,
making them accessible to a wide number of entities and individuals. We believe
the principal competitive factors in our industry that create certain barriers
to entry include reputation, technology, financial stability and resources,
proven track record, regulatory compliance, independent oversight and
transparency of business practices. While these barriers will limit those able
to enter the market, it is most likely that several new competitors may be
established in the near future, in addition to our known competitors. Increased competition from current and future competitors has and will
result in price reductions and reduced margins, or could result in the loss of
market share, any of which could materially adversely affect our business,
revenues, operating results and financial condition. Dependence on Licensees In fiscal 2003, our top 5 licensees accounted for
approximately 93% of our total revenue, a similar concentration to 2002,
although representing a different mix of licensees. In addition, a large
majority of key licensees operate from one licensing jurisdiction. The loss of
one or more of these key licensees or their license in their respective
jurisdiction could have a material adverse effect on our business, revenues,
operating results and financial condition. Chargebacks As a result of increasing player deposit levels, we are subject to higher
exposure to chargebacks. Chargebacks are any deposit transaction credited to a
users account that is later reversed or repudiated by that end user. While the
Company has a provision for chargebacks and fines related thereto, this factor
could have a material adverse effect on our business, revenues, operating
results and financial conditions. Foreign Operations A significant portion of our revenues is derived from licensing and support
fees in foreign countries. The Company and our licensees are subject to local
laws and regulations in those jurisdictions in which they operate. While some
jurisdictions have introduced regulations designed to restrict Internet gaming,
others have demonstrated acceptance of such activities. Currently, more than 70
jurisdictions worldwide regulate or are in the process of legalizing some form
of Internet gaming according to the River City Group, a consultancy group that
provides research to the interactive gaming industry. 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. CRYPTOLOGIC ANNUAL REPORT 2003 28




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MANAGEMENTS DISCUSSION & ANALYSIS In addition, 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 consequences and tax
risks. Changes in the political and economic stability, regulatory and taxation
structures, and the interpretation thereof, of jurisdictions in which we or our
subsidiaries operate, and in which our licensees customers are located could
have a material adverse effect on our business, revenues, operating results and
financial condition. Our ability to expand our business in certain countries will require
modification of our products, particularly domestic language and currency
support. Once a licensee has posted its gaming site on the Internet, the site
is available to users around the world. However, there can be no assurance that we will be able to sustain or
increase revenue derived from international operations or that we will be able
to penetrate linguistic, cultural or other barriers to new foreign markets. Foreign Exchange Our financial results are reported in US currency, which is subject to
fluctuations in respect of the currencies of the countries in which we operate,
including US dollars, British pound sterling, 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 utilize a hedging
program to mitigate our currency risks, but there can be no assurance that we
will not experience currency losses in the future, which could have a material
adverse effect on our business, revenues, operating results and financial
condition. Legal Proceedings We, and certain of our subsidiaries, are 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. Moreover, from time to time, third parties have asserted and may continue
to assert patent, trademark, copyright and other intellectual property rights
to technologies that we presently use and consider important. There can be no
assurance that the assertion of such claims will not result in litigation or
that we would prevail in such litigation or be able to obtain a license for the
use of any infringed intellectual property from a third party or, if such a
license is required, that it would be available on terms acceptable to us. Intellectual Property We rely on a combination of laws and contractual provisions to establish and
protect our rights in our software and proprietary technology. We believe that
much of our competitive position is dependent upon our ability to protect our
proprietary technology. We generally enter into non-disclosure and invention
agreements with employees, licensees, consultants and customers, and
historically have restricted access to our software products source codes. We
regard our source codes as proprietary information, and attempt to protect the
source code versions of our products as trade secrets and unpublished
copyrighted works. Despite our precautions and measures implemented to protect
against such attempts, unauthorized parties may have or could in the future
copy or otherwise reverse engineer portions of our products or otherwise obtain
and use information that we regard as proprietary. At the present time, we do not possess any patent or copyright
registrations in Canada, the United States or any other jurisdiction. However,
our Company and subsidiaries have trademarks in certain jurisdictions and are
in the process of applying for further trademark registrations, which would
provide such protection in relevant jurisdictions. Certain provisions of our
license agreements, including provisions protecting against unauthorized use,
transfer and disclosure, may be unenforceable 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 well known in the Internet gaming industry.
Accordingly, our competitive position could be affected if our name was
misappropriated and our reputation in any way compromised. There can be no assurance that the steps we have taken to protect our
proprietary rights will be adequate to deter misappropriation of our technology
or independent development by others of technologies that are substantially
equivalent or superior to our technology. Any misappropriation of our name,
technology or development of competitive technologies could have a material
adverse effect on our business, revenues, operating results and financial
condition. CRYPTOLOGIC ANNUAL REPORT 2003 29




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MANAGEMENTS DISCUSSION & ANALYSIS Hiring and Retaining Employees Our future success is dependent on the retention of certain
key management and technical personnel. The loss of
them or the inability to attract and retain highly qualified
staff and advisors could have a material adverse effect
on our business, revenues, operating results and financial
condition. Managing Growth 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, 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. Future Acquisitions and Investments As part of our business strategy, we may
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 common risks, including the difficulty of
assimilating the operations and personnel of the acquired businesses; the
potential disruption of management from our business; the inability of
management to maximize the financial and strategic position of our Company or
returns from the investment or acquired businesses; the maintenance of uniform
standards, controls, procedures and policies; and the impairment of
relationships with employees and clients as a result of and integration of the
investment, acquisition or new management personnel. Stock Volatility The market price of our common shares has experienced significant fluctuations
and may continue to fluctuate significantly. The market price of our common
shares may be adversely affected by various factors affecting us and our competitors, such
as proposed Internet gaming legislation or enforcement of existing laws, the
announcement of new products or enhancements, innovation, 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 industries. 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. Although our common shares are listed and traded on the Toronto Stock
Exchange, the Nasdaq National 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 and an investment in our common shares may be difficult to
realize. OUTLOOK CryptoLogic has been successfully growing revenue, earnings and generating
positive cash flow. We will continue our focused strategy of international
expansion and new product introductions and diversification, which is producing
solid financial performance in light of a challenging business environment. Accordingly, Management is maintaining a disciplined and cautiously
optimistic outlook. Increasing competition will reduce future margins from our
licensees, and the online gaming industry continues to face an uncertain US
market. Therefore, global market development, heightened marketing, expanding
payment options, innovation and regulatory investment will continue to be the
emphasis for CryptoLogic in our commitment to drive long term, sustainable
growth and deliver value to shareholders. Globally, the Internet gaming industry is forecasted to continue to grow
steadily and is expected to exceed $7.5(3) billion in 2004. Large, emerging
game segments such as poker offer strong promise, and are already generating an
annual run rate of over $890(5) million or in excess of 15% of the global
online gaming market. We anticipate that our revenues will continue to
progressively diversify by customer, geography and products. New games and new
customers are expected to continue to gain traction and contribute favourably
to our financial performance. (3) Source: See
page 7. (5) Source: See
page 12.
 CRYPTOLOGIC ANNUAL REPORT 2003 30




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MANAGEMENTS DISCUSSION & ANALYSIS In 2003, we expanded our game suite with
a new series of casino games, slots integrated with bingo, and enhanced our
e-cash application for more choice and convenience. New game introductions and
enhancements including increased investment in our core development business,
and more localized products and functionality that are both market and
profit-driven will continue to be important to our agenda for 2004. We will
also invest in advancing our back-office solutions including customer
relationship management tools that will help our licensees attract, retain and
re-activate players to meet the ever more sophisticated demands of our market. We achieved encouraging results in the relatively young bingo and poker
markets, and these areas continue to promise increasing player acceptance. In
2003, our poker and bingo contributed more than 10% towards revenue, up from
under 1% in 2002. While bingo is earlier in its product cycle for the industry,
poker grew exponentially in the past year, and continues to gain popularity
with existing and new players. Management anticipates an even larger percentage
of revenue generation from our poker offering alone, and our target is to reach
15% in 2004. Our global strategy continues to bear favourable results. More than 55% of
our licensees revenue was derived from international markets, up from
approximately 40% last year. Geographic diversification should continue during
2004 through organic growth from existing international licensees, and the ramp
up of new customers. As well, we will continue to capitalize on opportunities in underdeveloped
geographies, specifically in Europe and Asia. We are targeting that our
licensees revenue from international sources will rise to 60%. As part of our strategy to improve profitability, we emphasize quality
over quantity of clients, which has proven the right course as evidenced in our
2003 performance. During the year, CryptoLogic rationalized and reduced our
client roster from 21 to 11 by our design, to focus on those customers with the
brands, the player base, the resources and potential to be major forces in the
long term. Our objective is to maintain this honed approach, and target only
two similarly well-branded large international clients in 2004. We reinforced our strong foothold in the UK with a listing on the London
Stock Exchange in September of 2003. We will work to raise our profile and
investor base in that gaming-friendly jurisdiction. Also, as the UK government
proceeds toward a regulated environment for online gaming, we will continue to
stress investment in our compliance efforts, which is of strategic importance
for our long term future as more jurisdictions move to regulate interactive
gaming. With increasing industry consolidation, acquisition possibilities will
also be carefully considered to accelerate our growth plans. Going forward, we
are squarely focused on staying our current strategic course, and remain alert
to further opportunities to increase shareholder value, while managing
expenditures to produce appropriate returns. CRYPTOLOGIC ANNUAL REPORT 2003 31




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FINANCIAL STATEMENTS (MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING) The accompanying consolidated financial statements of CryptoLogic Inc. and all
of the information in this Annual Report are the responsibility of Management
and have been approved by the Board of Directors. The consolidated financial statements have been prepared by Management in
accordance with Canadian generally accepted accounting principles. These
statements include some amounts that are based on best estimates and judgment.
Management has determined such amounts on a reasonable basis in order to ensure
that the financial statements are presented fairly, in all material respects.
Financial information used elsewhere in the Annual Report is consistent with
that in the financial statements. CryptoLogics policy is to maintain systems of internal accounting and
administrative controls of high quality, consistent with reasonable cost. Such
systems are designed to provide reasonable assurance that the financial
information is relevant, accurate and reliable and that the Companys assets
are appropriately accounted for and adequately safeguarded. The Board of Directors is responsible for ensuring that Management
fulfills its responsibilities for financial reporting and is ultimately
responsible for approving the financial statements. The Board carries out
this responsibility principally through its Audit Committee. The Audit Committee is appointed by the Board and is comprised of a

majority of outside Directors. The committee meets periodically with Management
and the external auditors to discuss internal controls over the financial
reporting process, auditing matters and financial reporting issues to satisfy
itself that each party is properly discharging its responsibilities. The Audit
Committee reviews the Companys annual consolidated financial statements, the
external auditors report and other information in the Annual Report. The
committee reports its findings to the Board for consideration by the Board when
it approves the financial statements for issuance to the shareholders. On behalf of the shareholders, the financial statements have been
audited by KPMG LLP, the external auditors, in accordance with Canadian
generally accepted auditing standards. KPMG LLP has full and free access to
the Audit Committee. -s- LEWIS N. ROSE
    

-s- JAMES A. RYANLewis N. Rose
    
    James A. RyanPresident and CEO
    
    Chief Financial Officer
 CRYPTOLOGIC ANNUAL REPORT 2003 32




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FINANCIAL STATEMENTS (AUDITOR'S REPORT TO THE SHAREHOLDERS) We have audited the consolidated balance sheets of CryptoLogic Inc. as at
December 31, 2003 and 2002 and the consolidated statements of earnings,
retained earnings and cash flows for the years then ended. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the Company as
at December 31, 2003 and 2002 and the results of its operations and its
cash flows for the years then ended in accordance with Canadian generally
accepted accounting principles. (KPMG LLP LOGOChartered AccountantsToronto, CanadaFebruary 13, 2004
 CRYPTOLOGIC ANNUAL REPORT 2003 33




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##### 



FINANCIAL STATEMENTS (CONSOLIDATED BALANCE SHEETS) (In thousands of US dollars) As at December 31
    
    2003
    
    2002AssetsCurrent assets:Cash and cash equivalents
    
    $
    44,010
    
    
    $
    13,660Security deposits (note 2)
    
    
    6,550
    
    
    
    15,740Short term investments
    
    
    16,747
    
    
    
    10,857Accounts receivable and other (note 3)
    
    
    2,389
    
    
    
    1,660Prepaid expenses
    
    
    1,163
    
    
    
    917Income taxes recoverable
    
    
    
    
    
    
    58370,859
    
    
    
    43,417User funds on deposit
    
    
    9,394
    
    
    
    3,829Investments
    
    
    
    
    
    
    680Capital assets (note 4)
    
    
    3,915
    
    
    
    2,713Intangible assets (note 5)
    
    
    122
    
    
    
    226Goodwill (note 6)
    
    
    1,776
    
    
    
    1,665$
    86,066
    
    
    $
    52,530Liabilities and Shareholders EquityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    25,063
    
    
    $
    7,605Income taxes payable
    
    
    1,063
    
    
    
    26,126
    
    
    
    7,605User funds held on deposit
    
    
    9,394
    
    
    
    3,82935,520
    
    
    
    11,434Shareholders equity:Capital stock (note 7)
    
    
    11,350
    
    
    
    10,720Stock options (note 8)
    
    
    438
    
    
    
    Retained earnings
    
    
    38,758
    
    
    
    30,37650,546
    
    
    
    41,096Commitments and contingencies (note 9)$
    86,066
    
    
    $
    52,530
 See accompanying notes to consolidated financial statements. On behalf of the Board: -s- ROBERT H. STIKEMAN
    
    -s- LEWIS N. ROSERobert H. Stikeman
    
    Lewis N. RoseDirector, Chairman
    
    Director, President and CEO
 CRYPTOLOGIC ANNUAL REPORT 2003 34




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FINANCIAL STATEMENTS (CONSOLIDATED STATEMENTS OF EARNINGS) (In thousands of US dollars, except per share disclosure) Years ended December 31
    
    2003
    
    2002Revenue
    
    $
    44,211
    
    
    $
    34,427Expenses:Operating costs
    
    
    27,204
    
    
    
    19,439General and administrative
    
    
    5,161
    
    
    
    5,914Finance
    
    
    350
    
    
    
    465Amortization
    
    
    1,533
    
    
    
    98634,248
    
    
    
    26,804Earnings before undernoted
    
    
    9,963
    
    
    
    7,623Interest and other income
    
    
    691
    
    
    
    672Special charge (note 10)
    
    
    
    
    
    
    (10,506
    )Earnings (loss) before income taxes
    
    
    10,654
    
    
    
    (2,211
    )Income taxes (recovery) (note 12)
    
    
    1,213
    
    
    
    (82
    )Earnings (loss)
    
    $
    9,441
    
    
    $
    (2,129
    )Earnings (loss) per common share (note 11):Basic
    
    $
    0.77
    
    
    $
    (0.17
    )Diluted
    
    
    0.75
    
    
    
    (0.17
    )
 See accompanying notes to consolidated financial statements. (CONSOLIDATED STATEMENTS OF RETAINED EARNINGS) (In thousands of US dollars)
    
    2003
    
    2002Retained earnings, beginning of year
    
    $
    30,376
    
    
    $
    52,369Earnings (loss)
    
    
    9,441
    
    
    
    (2,129
    )Excess of repurchase price of common shares
over stated value (note 7)
    
    
    
    
    
    
    (19,864
    )Dividends paid
    
    
    (369
    )
    
    
    Registration costs (note 7)
    
    
    (690
    )
    
    
    Retained earnings, end of year
    
    $
    38,758
    
    
    $
    30,376
 See accompanying notes to consolidated financial statements. CRYPTOLOGIC ANNUAL REPORT 2003 35




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FINANCIAL STATEMENTS (CONSOLIDATED STATEMENTS OF CASH FLOWS) (In thousands of US dollars) Years ended December 31
    
    2003
    
    2002Cash flows from (used in) operating activities:Earnings (loss)
    
    $
    9,441
    
    
    $
    (2,129
    )Adjustments
to reconcile earnings (loss) to cash provided by (used in) operating activities:Amortization
    
    
    1,533
    
    
    
    986Write-down of investments
    
    
    
    
    
    
    7,145Gain on sale of investment
    
    
    (31
    )
    
    
    Stock options
    
    
    438
    
    
    
    Change in operating assets and liabilities:Security deposits
    
    
    9,190
    
    
    
    1,060Accounts receivable and other
    
    
    (729
    )
    
    
    (612
    )Prepaid expenses
    
    
    (246
    )
    
    
    (356
    )Income taxes
    
    
    1,646
    
    
    
    (175
    )Accounts payable and accrued liabilities
    
    
    17,458
    
    
    
    3,51238,700
    
    
    
    9,431Cash flows from (used in) financing activities:Issue of capital stock
    
    
    630
    
    
    
    2,401Registration costs
    
    
    (690
    )
    
    
    Dividends
    
    
    (369
    )
    
    
    Repurchase of common shares
    
    
    
    
    
    
    (20,265
    )(429
    )
    
    
    (17,864
    )Cash flows from (used in) investing activities:Purchase of domain names
    
    
    (13
    )
    
    
    (3
    )Purchase of capital assets, net of disposals
    
    
    (2,618
    )
    
    
    (636
    )Investment in subsidiary
    
    
    (111
    )
    
    
    (625
    )Short term investments
    
    
    (5,890
    )
    
    
    (10,857
    )Investments
    
    
    
    
    
    
    (6,401
    )Sale of investments
    
    
    711
    
    
    
    1,056(7,921
    )
    
    
    (17,466
    )Increase (decrease) in cash and cash equivalents
    
    
    30,350
    
    
    
    (25,899
    )Cash and cash equivalents, beginning of year
    
    
    13,660
    
    
    
    39,559Cash and cash equivalents, end of year
    
    $
    44,010
    
    
    $
    13,660Supplemental cash flow information:Income taxes paid
    
    $
    678
    
    
    $
    340Interest received
    
    
    614
    
    
    
    671
 See accompanying notes to consolidated financial statements. CRYPTOLOGIC ANNUAL REPORT 2003 36




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(NOTES TO CONSOLIDATED FINANCIAL STATEMENTS) (In thousands of US dollars, except per share disclosure and where indicated otherwise)
Years ended December 31, 2003 and 2002 CryptoLogic Inc. (the Company) is a software development company with leading
proprietary commerce-enabling technology, permitting secure, reliable,
high-speed and private financial transactions over the Internet. The Company
operates in one segment and its software is currently being used for online
gaming and related electronic commerce. Substantially all of the Companys
revenue is earned in US dollars and British pounds in the form of licensing
fees and support services from licensees located outside of North America.
During the fiscal year, 5% (2002 - 44%) of the Companys revenue was earned
from licensees that form a group. The Company reports its results in US
dollars. 1 SIGNIFICANT ACCOUNTING
POLICIES: The consolidated financial statements are prepared in accordance with Canadian
generally accepted accounting principles, and except as described in note 14,
conform in all material respects with accounting principles generally accepted
in the United States. A summary of significant accounting policies is set out
below: (a) Basis of presentation: The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. (b) Revenue recognition: Revenue from providing software and support services to licensees is recognized
on a daily basis based on the agreements with the licensees. Revenue from the
customization of the software graphics, sound and texts to the specifications
of the licensees is recognized on a straight-line basis over the term of the
software and support agreements. (c) Cash and cash equivalents: Cash and cash equivalents include highly liquid investments with original
maturity dates of 90 days or less, and are stated at cost, which approximates
market value. (d) Short term investments: Short term investments include highly liquid investments with original
maturity dates between 3 and 12 months, and are stated at cost, which
approximates market value. (e) Investments: Investments are stated at cost. If there is a loss in value of an investment
that is other than a temporary decline, the investment will be written down to
its estimated realizable value. (f) Capital assets: Capital assets are stated at cost less accumulated amortization.
Amortization, based on the estimated useful lives of the assets, is provided
using the following methods and annual rates: Asset
    
    Basis
    
    RateComputer equipment
    
    Diminishing balance
    
    30%Office furniture and equipment
    
    Diminishing balance
    
    20%Computer software and licenses
    
    Straight line
    
    3-4 yearsLeasehold improvements
    
    Straight line
    
    Term of lease
 CRYPTOLOGIC ANNUAL REPORT 2003 37




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (g) Research and development: Research costs are expensed as incurred. Costs related to the development of
software are expensed as incurred unless
such costs meet the criteria for deferral and amortization under Canadian
generally accepted accounting principles. (h) Income taxes: The Company uses the asset and liability method of accounting for income taxes.
Future tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Future tax assets and liabilities are
measured using enacted or substantively enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on future tax assets and liabilities of
a change in tax rates is recognized in income in the year that includes the
enactment or substantive enactment date. (i) Change in accounting
policy - stock-based compensation: The Company has a stock option plan for directors, officers and other key
employees. Effective January 1, 2003, the Company has adopted the amended
recommendations of The Canadian Institute of Chartered Accountants (CICA)
with respect to accounting for stock-based compensation and other stock-based
payments. These recommendations are applied in accordance with the transitional
provisions relating to prospective application to all stock-based payments to
non-employees, and to employee awards that are direct awards of stock, call for
settlement in cash or other assets. The Company applies the fair value method
to all grants of stock options. Based on the transitional provisions, all stock
options granted on or after January 1, 2003 are accounted for as capital
transaction 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 a weighted
average expected life of options. The estimated fair value of the options is
recorded over the options vesting period. Any consideration paid on the
exercise of stock options is credited to share capital. For stock options granted in 2002, no compensation cost was recorded. The
Company discloses the pro forma effect of accounting for these awards under the
fair value-based method. (j) Foreign currency translation: Monetary items denominated in other than US dollars are translated into US
dollars at exchange rates in effect at the balance sheet dates, and
non-monetary items are translated at rates of exchange in effect when the
assets were acquired or obligations incurred. Revenue and expenses are
translated at rates in effect at the time of the transactions. Foreign exchange
gains and losses are included in net income. (k) Intangible assets: Intangible assets consist of the following:  (i)
    
    Customer list represents a database of registered subscribers to the
WinnerOnLine web site acquired in the purchase of ALl Online Inc. (ALI). Amortization is provided for on
a straight-line basis over three years.(ii)
    
    Domain names are amortized on a straight-line basis over five years. (I) Goodwill: Goodwill is the residual amount that results when the purchase price of an
acquired business exceeds the sum of the amounts allocated to the assets
acquired, less liabilities assumed, based on their fair values. Goodwill is
allocated as of the date of the business combination to the Companys reporting
units that are expected to benefit from the synergies of the business
combination. CRYPTOLOGIC ANNUAL REPORT 2003 38




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Goodwill is not amortized and is tested for impairment annually, or more
frequently, if events or changes in circumstances indicate that the asset might
be impaired. The impairment test is carried out in two steps. In the first
step, the carrying amount of the reporting unit is compared with its fair
value. When the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is considered not to be impaired and the second
step of the impairment test is unnecessary. The second step is carried out when
the carrying amount of a reporting unit exceeds its fair value, in which
case, the implied fair value of the reporting units goodwill is compared with
its carrying amount to measure the amount of the impairment loss, if any. The
implied fair value of goodwill is determined in the same manner as the value of
goodwill is determined in a business combination described in the preceding
paragraph, using the fair value of the reporting unit as if it was the purchase
price. When the carrying amount of reporting unit goodwill exceeds the implied
fair value of the goodwill, an impairment loss is recognized in an amount equal
to the excess and is presented as a separate line item in the statements of
income. For the years ended December 31, 2003 and 2002, the Company assessed
impairment of goodwill and has determined that there was no impairment in
value. (m) Earnings per share: The Company uses the treasury stock method in computing diluted earnings per
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 share. It assumes that any proceeds would be used to
purchase its common shares at the average market price during the year being
reported on. (n) Derivative instruments: The Company enters into forward foreign exchange contracts to manage its
exposure to currency fluctuations. The forward foreign exchange contracts are
marked to market and the resulting net gain or loss is recognized in operating
costs in the statements of earnings. (o) 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 at the date of the financial
statements and the reported amounts of revenue and expenses during the year.
Actual amounts could differ from those estimates. 2 SECURITY DEPOSITS: Security deposits are held by the Companys bank as security granted to
foreign banks and payment processors that process deposit and credit card
transactions on its behalf and as security for forward foreign exchange
contracts. 3 ACCOUNTS RECEIVABLE AND OTHER: Included in accounts receivable and other are reserves with processors in the
amount of $236 (2002 - $774). The terms of the agreement with payment providers
require the Company to maintain US dollar-denominated funds for reserves in
non-interest bearing accounts with the processors. 4 CAPITAL ASSETS: 2003
    
    2002Computer equipment
    
    $
    3,283
    
    
    $
    3,152Office furniture and equipment
    
    
    543
    
    
    
    459Computer software and licenses
    
    
    2,962
    
    
    
    775Leasehold improvements
    
    
    436
    
    
    
    3907,224
    
    
    
    4,776Less accumulated amortization
    
    
    3,309
    
    
    
    2,063Net book value
    
    $
    3,915
    
    
    $
    2,713
 CRYPTOLOGIC ANNUAL REPORT 2003 39




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 INTANGIBLE ASSETS: 2003
    
    2002Customer list
    
    $
    315
    
    
    $
    315Domain names
    
    
    66
    
    
    
    53381
    
    
    
    368Less accumulated amortization
    
    
    259
    
    
    
    142Net book value
    
    $
    122
    
    
    $
    226
 6 GOODWILL: Goodwill relates to the acquisition of ALI, a gaming content provider operating
WinnerOnLine website on October 1, 2001. In accordance with the terms of the
agreement, the purchase price was increased for contingent consideration, which
amounted to $625 and $111 on October 1, 2002 and 2003, respectively, which
increased the allocation to goodwill. 7 CAPITAL STOCK: (a) Authorized: Unlimited common shares Series F warrants: During fiscal 2001, the Company issued Series F warrants to acquire
30,000 common shares of the Company for Cdn$23.00 per share pursuant to the
acquisition of ALI (note 6). The warrants vest in equal amounts over a
four-year period and expire in October 2005. As at December 31, 2003, no
warrants had been exercised. Issued: Common Shares
    
    Series F WarrantsNumber
    
    
    
    
    
    Number(000s)
    
    Amount
    
    (000s)
    
    Amount
    
    Total amountBalance, December 31, 2001
    
    
    13,137
    
    
    $
    8,448
    
    
    
    30
    
    
    $
    272
    
    
    $
    8,720Repurchase of shares
    
    
    (1,281
    )
    
    
    (401
    )
    
    
    
    
    
    
    
    
    
    
    (401
    )Exercise of stock options
    
    
    350
    
    
    
    2,401
    
    
    
    
    
    
    
    
    
    
    
    2,401Balance, December 31, 2002
    
    
    12,206
    
    
    
    10,448
    
    
    
    30
    
    
    
    272
    
    
    
    10,720Exercise of stock options
    
    
    94
    
    
    
    630
    
    
    
    
    
    
    
    
    
    
    
    630Balance, December 31, 2003
    
    
    12,300
    
    
    $
    11,078
    
    
    
    30
    
    
    $
    272
    
    
    $
    11,350
 (b) Substantial issuer bid: Issuer bid completed during fiscal 2002:  In January 2002, the Company repurchased and cancelled 1,004,934 common
shares for a total cost of $17,763 of which $17,448, representing the excess of
repurchase price over stated value, has been charged to retained earnings. (c) Normal course issuer bid: During fiscal 2002 and 2001 under the normal course issuer bids, the Board of
Directors approved the repurchase and cancellation of up to the following
number of shares representing 5% of the outstanding common shares at that time: Repurchased and cancelled sharesAuthorized
    
    
    
    
    
    
    
    
    
    TotalNormal course issuer bid
    
    shares
    
    2003
    
    2002
    
    under planMay 20,
2002  May 19, 2003
    
    
    603,421
    
    
    
    
    
    
    
    110,000
    
    
    
    110,000May 18,
2001  May 17, 2002
    
    
    656,000
    
    
    
    
    
    
    
    165,500
    
    
    
    440,500
 CRYPTOLOGIC ANNUAL REPORT 2003 40




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Under the May 20, 2002 to May 19, 2003 plan, the Company repurchased and
cancelled 110,000 common shares during 2002 for a total cost of $469 of which
$434, representing the excess of repurchase price over stated value, has been
charged to retained earnings. During fiscal 2002 under the May 18, 2001 to May 17, 2002 plan, the
Company repurchased and cancelled 165,500 common shares for a total cost of
$2,033 of which $1,982, representing the excess of repurchase price over
stated value, has been charged to retained earnings. In total, the excess of repurchase price over stated value for all shares
issued under the substantial issuer bid and normal course issuer bid in 2002
was $19,864. (d) Registration costs: During the year, the Company filed a prospectus to have its shares listed on
the Main Market of the London Stock Exchange. Capital was not raised as part of
the listing transaction. Total costs of $690 related to the listing have been
charged to retained earnings as registration costs in the year. 8 STOCK OPTION PLAN: Under the stock option plan, the Company can grant options to directors,
officers and other key employees to purchase common shares. The plan, which was
amended on May 30, 2002, provides that a maximum of 3,000,000 common shares may
be issued. The exercise price of the options may not be less than the fair
market value of the underlying common shares on the date of grant. As at
December 31, 2003, the Company had not granted stock options with an exercise
price below the fair market value at the date of grant. There are 355,821
common shares available to be issued under the stock option plan as at December
31, 2003. Options typically vest over a period of three or four years and the
term of the options may not exceed five years. Details of stock option transactions are as follows: 2003
    
    2002Weighted average
    
    
    
    
    
    Weighted averageNumber
    
    exercise price
    
    Number
    
    exercise priceof options
    
    of options
    
    of options
    
    of options(Cdn$)
    
    
    
    
    
    (Cdn$)Options outstanding, beginning of year
    
    
    2,239,448
    
    
    $
    15.19
    
    
    
    2,397,589
    
    
    $
    17.24Granted
    
    
    823,980
    
    
    
    9.70
    
    
    
    752,250
    
    
    
    9.78Exercised
    
    
    (94,529
    )
    
    
    8.42
    
    
    
    (349,657
    )
    
    
    10.64Forfeited
    
    
    (651,249
    )
    
    
    14.25
    
    
    
    (560,734
    )
    
    
    19.10Options outstanding, end of year
    
    
    2,317,650
    
    
    
    13.32
    
    
    
    2,239,448
    
    
    
    15.19Options exercisable, end of year
    
    
    1,146,686
    
    
    $
    16.19
    
    
    
    1,274,626
    
    
    $
    16.50
 Options outstanding
    
    Options exercisable2003
    
    2003Weighted averageNumber
    
    remaining life
    
    Number
    
    Weighted averageRange of exercise price
    
    outstanding
    
    (years)
    
    exercisable
    
    exercise price(Cdn$)
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Cdn$)$5.00 - $10.00
    
    
    1,150,250
    
    
    
    3.86
    
    
    
    276,687
    
    
    $
    8.44$10.01 -$15.00
    
    
    702,350
    
    
    
    1.39
    
    
    
    640,025
    
    
    
    12.82$15.01 -$20.00
    
    
    176,500
    
    
    
    4.80
    
    
    
    4,500
    
    
    
    18.73$20.01 - $25.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $25.01 - $30.00
    
    
    78,800
    
    
    
    2.53
    
    
    
    33,400
    
    
    
    27.42$30.01 - $35.00
    
    
    89,400
    
    
    
    0.96
    
    
    
    80,400
    
    
    
    31.57$35.01 - $40.00
    
    
    31,350
    
    
    
    0.77
    
    
    
    27,674
    
    
    
    39.43$40.01 - $45.00
    
    
    89,000
    
    
    
    0.42
    
    
    
    84,000
    
    
    
    40.452,317,650
    
    
    
    2.85
    
    
    
    1,146,686
    
    
    $
    16.19
 CRYPTOLOGIC ANNUAL REPORT 2003 41




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In accordance with the CICA, the Company has expensed the cost of all stock
option grants issued on or after January 1, 2003, determined using fair value
method. The estimated fair value of the options is recorded over the options
vesting period. The fair value of options granted during the year ended
December 31, 2003 was estimated using the Black-Scholes option pricing model
with the following weighted average assumptions: 2003Dividend yield
    
    
    0.75
    %Risk-free interest rate
    
    
    2.75
    %Expected volatility
    
    
    50.0
    %Expected life of options in years
    
    
    5
 Included in the operating costs and shareholders equity is cost of stock
options in the amount of $438. 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 related to the CICA, additional pro forma disclosure is
provided as if the fair value method of accounting had been used to account for
the stock options. The fair value of options granted was determined using the
Black-Scholes option pricing model, using the following weighted assumptions: 2002Dividend yield
    
    
    0
    %Risk-free interest rate
    
    
    2.0
    %Expected volatility
    
    
    100.0
    %Expected life of options in years
    
    
    5
 Had compensation expense been determined based on the fair value of the
employee stock option awards at the grant dates in accordance with the new
recommendations, the Companys loss for the year and loss per share would have
been changed to the following pro forma amounts: 2003
    
    2002As reported
    
    Pro forma
    
    As reported
    
    Pro formaEarnings (loss)
    
    $
    9,441
    
    
    $
    8,706
    
    
    $
    (2,129
    )
    
    $
    (2,520
    )Earnings (loss) per common share:Basic
    
    $
    0.77
    
    
    $
    0.71
    
    
    $
    (0.17
    )
    
    $
    (0.21
    )Diluted
    
    
    0.75
    
    
    
    0.69
    
    
    
    (0.17
    )
    
    
    (0.21
    )
 For stock options issued in 2002, the compensation cost, net of tax, for the
year ended December 31, 2003 was $735 (2002 - $391). 9 COMMITMENTS AND CONTINGENCIES: (a) The Company has entered into lease agreements for premises expiring at
various periods up to April 2007. The future minimum annual rental payments on
the operating leases are as follows: 2004
    
    $
    9822005
    
    
    6722006
    
    
    3272007
    
    
    68
 (b) The Company and its subsidiaries are involved in certain litigation arising
out of the ordinary course and conduct of business. Although such matters cannot be predicted with certainty, management
believes the claims are without merit and does not consider the Companys exposure to such litigation to have a
material impact on these financial statements. (c) In order to manage its exposure to foreign currency risk, the Company
enters into forward foreign exchange contracts.
The fair value of the forward foreign contracts is $15,432 as at December 31,
2003. CRYPTOLOGIC ANNUAL REPORT 2003 42




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10 SPECIAL CHARGE: During 2002, the Company took a non-recurring special charge of $10,506. The
charge comprised the following: Write-down of investments
    
    $
    7,145Reorganization costs
    
    
    1,480Other costs
    
    
    1,881$
    10,506
 (a) Write-down of investments: Management reviewed the Companys investments and other assets, and determined
that the value of the investments held had suffered a decline that was other
than temporary. Included in the write-down is a $6.1 million investment, which
was made during fiscal 2002, in SCG Enterprises Ltd., a wholly-owned subsidiary
of Sports.com Limited. Sports.com Limited was placed into bankruptcy protection
in the UK in late May 2002 and subsequently ceased operations. Also included in the write-down of investments was a net gain of $135
recognized on the sale of 100% of the Companys investment in Dot Com
Entertainment Group Inc., representing 1,055,700 common shares for total
proceeds of $1,056. (b) Reorganization costs: Reorganization costs relate to the consolidation in the United Kingdom of the
players support operations and severance costs associated with executive
management reorganization. (c) Other costs: Other costs were comprised of estimated costs involved with current disputes
and legal costs to defend current litigation. 11 EARNINGS (LOSS) PER COMMON SHARE: Basic and diluted earnings (loss) per share were calculated using the weighted
average common shares and weighted average potential common shares. (000s)
    
    2003
    
    2002Weighted average number of common shares outstanding
    
    
    12,245
    
    
    
    12,257Weighted
average number of common shares outstanding  diluted
    
    
    12,604
    
    
    
    12,879
 The computations for basic and diluted earnings (loss) per share are as
follows: (In thousands of US dollars, except per share data)
    
    2003
    
    2002Earnings before special charge, net of income taxes
    
    $
    9,441
    
    
    $
    7,728Special charge, net of income taxes
    
    
    
    
    
    
    (9,857
    )Earnings (loss)
    
    $
    9,441
    
    
    $
    (2,129
    )Earnings (loss) per common share:Before special charge, net of income taxes:Basic
    
    $
    0.77
    
    
    $
    0.63Diluted
    
    
    0.75
    
    
    
    0.60After special charge, net of tax:Basic
    
    
    0.77
    
    
    
    (0.17
    )Diluted
    
    

    0.75
    
    
    
    (0.17
    )
 Options to purchase 1,151,000
common shares (2002  447,000) were excluded from
the computation of diluted earnings (loss) per share as the exercise price
exceeded the average market price of common shares for the reporting year. CRYPTOLOGIC ANNUAL REPORT 2003 43




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12 INCOME TAXES: The income tax provision (recovery) differs from amounts which would be
obtained by applying the Canadian statutory income tax rate to the earnings
(loss) before income taxes. The following explains the major differences: 2003
    
    2002Earnings (loss) before income taxes
    
    $
    10,654
    
    
    $
    (2,211
    )Income taxes
based on a statutory rate of 36.6% (2002  38.62%)
    
    $
    3,899
    
    
    $
    (854
    )Increase (decrease) in income taxes resulting from:Difference in statutory tax rates in foreign jurisdictions
    
    
    (4,859
    )
    
    
    (2,797
    )Non-deductible capital losses
    
    
    415
    
    
    
    2,778Non-recognition of tax benefit of losses
    
    
    218
    
    
    
    94Non-recognition of other temporary difference
    
    
    1,590
    
    
    
    177Other
    
    
    (50
    )
    
    
    520Actual income tax expense (recovery)
    
    $
    1,213
    
    
    $
    (82
    )
 The tax effects of temporary differences that give rise to significant portions
of the future tax assets and future tax liabilities at December 31, 2003 and
2002 are as follows: 2003
    
    2002Future tax assets:Non-capital tax losses carried forward
    
    $
    163
    
    
    $
    281Deferred financing charges
    
    
    27
    
    
    
    44Capital assets
    
    
    409
    
    
    
    261Reserves not deductible for income taxes
    
    
    510
    
    
    
    280Unrealized foreign exchange losses
    
    
    1,263
    
    
    
    2,372
    
    
    
    866Future tax liabilities:Unrealized foreign exchange gains
    
    
    
    
    
    
    (231
    )2,372
    
    
    
    635Less valuation allowance
    
    
    2,372
    
    
    
    635Net future tax assets
    
    $
    
    
    
    $
    
 There are approximately $446 of losses carried forward available to offset
future taxable income and expire in 2005. 13 FAIR VALUES OF FINANCIAL INSTRUMENTS: The carrying values of financial instruments, which consist of cash and cash
equivalents, security deposits, short term investments, accounts receivable and
other, user funds on deposit, investments, accounts payable and accrued
liabilities and user funds held on deposit, approximate their fair values due
to the short term nature of these instruments. 14 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (GAAP): The Companys consolidated balance sheets and consolidated statements of income
and changes in shareholders equity and cash flows have been prepared in
accordance with Canadian generally accepted accounting principles (Canadian
GAAP) which conform, in all material aspects applicable to the Company, with
generally accepted accounting principles in the United States (US GAAP)
during the years presented. Additional disclosures required under US GAAP are
as follows: CRYPTOLOGIC ANNUAL REPORT 2003 44




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (a) Comprehensive income: In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, Reporting Comprehensive Income (SFAS 130). SFAS 130 establishes
standards for the reporting and disclosure of comprehensive income and its
components in financial statements. Components of comprehensive income or loss
include net income or loss and all other changes in other non-owner changes in
equity, such as the change in the cumulative translation adjustment and the
unrealized gain or loss for the year on available-for-sale securities. For
all periods presented, comprehensive income is the same as net income. (b) Derivative instruments: SFAS 133, Accounting for Derivative Instruments and Hedging Activities (SFAS
133) and SAFS No 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, and Amendment of SFAS 133 require contemporaneous
documentation of the hedging relationship and the entitys risk management
objective and strategy for entering into the hedge as well as initial and
periodic effectiveness assessments. The derivative instruments entered into by
the Company do not meet the hedge criteria to the required documentation and
assessment of the effectiveness of hedges. Therefore, the change in fair value
of these derivative instruments has been recognized in the statement of
earnings. (c) Recent United States accounting pronouncements:  (i)
    
    In 2003, the FASB issued and amended Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN 46). Its consolidation provisions are
applicable for all newly created variable interest entities created after
January 31, 2003, and applicable to existing VIEs as of the beginning of
the Companys year beginning January 1, 2004. With respect to entities
that do not qualify to be assessed for consolidation based on voting
interests, FIN 46 generally requires a company that has a variable
interest that will absorb a majority of VIEs expected losses if they
occur, receive a majority of the entitys expected residual returns if
they occur, or both to consolidate that VIE.(ii)
    
    In 2002, the Emerging Issues Task Force (EITF) reached a consensus
regarding EITF Issue 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables. The consensus addresses not only when and how an
arrangement involving multiple deliverables should be divided into
separate units of accounting but also how the arrangements consideration
should be allocated among separate units. The pronouncement is effective
for the Company commencing with its 2004 fiscal year.(iii)
    
    In 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This
statement requires that under specified circumstances, these instruments
be reclassified from equity to liabilities on the balance sheet. This
statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective for the Companys year
beginning January 1, 2004. The Company has determined that the adoption of the above-mentioned
pronouncements will not have a material impact
on its consolidated financial statements. 15 COMPARATIVE FIGURES: Certain 2002 comparative figures have been reclassified to conform with the
financial statement presentation adopted in 2003. CRYPTOLOGIC ANNUAL REPORT 2003 45




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##### 



SUPPLEMENTAL INFORMATION (FIVE - YEAR REPORT) For the years ended December 31
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Financial Data(In thousands of US dollars)Revenue
    
    
    44,211
    
    
    
    34,427
    
    
    
    43,550
    
    
    
    34,390
    
    
    
    30,980Interest and other income
    
    
    691
    
    
    
    672
    
    
    
    2,215
    
    
    
    3,254
    
    
    
    1,704Earnings before special charge
    
    
    9,441
    
    
    
    7,728
    
    
    
    18,078
    
    
    
    15,485
    
    
    
    20,561Earnings (loss)
    
    
    9,441
    
    
    
    (2,129
    )
    
    
    18,078
    
    
    
    15,485
    
    
    
    20,561Net margin
    
    
    21
    %
    
    
    22
    %*
    
    
    42
    %
    
    
    45
    %
    
    
    66
    %EBITDA
    
    
    11,496
    
    
    
    8,609
    
    
    
    17,422
    
    
    
    14,798
    
    
    
    20,174EBITDA margin
    
    
    26
    %
    
    
    25
    %
    
    
    40
    %
    
    
    43
    %
    
    
    65
    %Operating cash flow
    
    
    38,700
    
    
    
    9,431
    
    
    
    18,123
    
    
    
    5,263
    
    
    
    21,123Cash,
equivalents and short term investments
    
    
    60,757
    
    
    
    24,517
    
    
    
    39,559
    
    
    
    40,882
    
    
    
    39,885Working capital
    
    
    44,733
    
    
    
    35,812
    
    
    
    54,283
    
    
    
    55,341
    
    
    
    44,245Total assets
    
    
    86,066
    
    
    
    52,530
    
    
    
    68,445
    
    
    
    62,456
    
    
    
    49,561Long term debt
    
    Nil
    
    Nil
    
    Nil
    
    Nil
    
    NilShareholders equity
    
    
    50,546
    
    
    
    41,096
    
    
    
    61,089
    
    
    
    57,610
    
    
    
    45,840Per Share Data(In US dollars, except shares outstanding)Before special charge, net of tax:Earnings per share (basic)
    
    
    0.77
    
    
    
    0.63
    
    
    
    1.33
    
    
    
    1.18
    
    
    
    2.40Earnings per share (diluted)
    
    
    0.75
    
    
    
    0.60
    
    
    
    1.21
    
    
    
    1.03
    
    
    
    1.40After special charge, net of tax:Earnings (loss) per share (basic)
    
    
    0.77
    
    
    
    (0.17
    )
    
    
    1.33
    
    
    
    1.18
    
    
    
    2.40Earnings (loss) per share (diluted)
    
    
    0.75
    
    
    
    (0.17
    )
    
    
    1.21
    
    
    
    1.03
    
    
    
    1.40Working capital (basic)
    
    
    3.65
    
    
    
    2.92
    
    
    
    4.00
    
    
    
    4.22
    
    
    
    5.16Working capital (diluted)
    
    
    3.55
    
    
    
    2.78
    
    
    
    3.63
    
    
    
    3.67
    
    
    
    2.87Basic
weighted average number of shares
outstanding (000s)
    
    
    12,245
    
    
    
    12,257
    
    
    
    13,567
    
    
    
    13,103
    
    
    
    8,570Diluted
weighted average number of shares
outstanding (000s)
    
    
    12,604
    
    
    
    12,879
    
    
    
    14,944
    
    
    
    15,070
    
    
    
    15,420Value MeasuresReturn on equity
    
    
    21
    %
    
    
    18
    %*
    
    
    31
    %
    
    
    30
    %
    
    
    58
    %Price to earnings multiple (diluted)
    
    
    16
    
    
    
    8
    *
    
    
    15
    
    
    
    9
    
    
    
    13Market value to book value
    
    
    3
    
    
    
    1
    
    
    
    4
    
    
    
    3
    
    
    
    6Operating DataNumber of employees
    
    
    175
    
    
    
    139
    
    
    
    149
    
    
    
    105
    
    
    
    86Number of licensees
    
    
    11
    
    
    
    18
    
    
    
    19
    
    
    
    20
    
    
    
    15Number of
registered users (000s)
    
    
    1,700
    
    
    
    1,400
    
    
    
    1,000
    
    
    
    680
    
    
    
    480Number of
transactions (000s)
    
    
    417,000
    
    
    
    291,000
    
    
    
    268,000
    
    
    
    185,000
    
    
    
    159,000Processing
volume (US$ billions)
    
    
    5.51
    
    
    
    3.22
    
    
    
    2.72
    
    
    
    2.00
    
    
    
    1.60
 *Before non-recurring special charge in 2002.
Financial data has been taken from audited financial statements. CRYPTOLOGIC ANNUAL REPORT 2003 46




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##### 



SUPPLEMENTAL INFORMATION (TRADING INFORMATION) This table sets forth the high and low prices, as well as the volumes, of the
Companys common shares as traded on the Toronto Stock Exchange, the Nasdaq
Stock Market and the London Stock Exchange on a quarterly basis. TORONTO STOCK EXCHANGE1
    
    NASDAQ2High
    
    Low
    
    Volume
    
    High
    
    Low
    
    Volume2003First quarter
    
    
    7.99
    
    
    
    5.76
    
    
    
    860,688
    
    
    
    5.20
    
    
    
    3.71
    
    
    
    747,145Second quarter
    
    
    11.85
    
    
    
    5.90
    
    
    
    2,398,861
    
    
    
    8.83
    
    
    
    4.00
    
    
    
    2,673,041Third quarter
    
    
    15.10
    
    
    
    8.90
    
    
    
    1,931,864
    
    
    
    11.02
    
    
    
    6.20
    
    
    
    2,926,430Fourth quarter
    
    
    17.50
    
    
    
    12.28
    
    
    
    1,328,210
    
    
    
    13.25
    
    
    
    9.07
    
    
    
    2,214,145Year 2003
    
    
    17.50
    
    
    
    5.76
    
    
    
    6,519,623
    
    
    
    13.25
    
    
    
    3.71
    
    
    
    8,560,7612002First quarter
    
    
    28.59
    
    
    
    17.50
    
    
    
    5,311,125
    
    
    
    17.75
    
    
    
    10.92
    
    
    
    13,532,435Second quarter
    
    
    23.75
    
    
    
    10.80
    
    
    
    2,720,947
    
    
    
    14.90
    
    
    
    7.05
    
    
    
    5,684,272Third quarter
    
    
    13.60
    
    
    
    5.26
    
    
    
    2,048,944
    
    
    
    8.90
    
    
    
    3.37
    
    
    
    1,874,638Fourth quarter
    
    
    9.30
    
    
    
    4.96
    
    
    
    1,882,230
    
    
    
    5.90
    
    
    
    3.12
    
    
    
    3,511,893Year 2002
    
    
    28.59
    
    
    
    4.96
    
    
    
    11,963,246
    
    
    
    17.75
    
    
    
    3.12
    
    
    
    24,603,238
 LONDON STOCK EXCHANGE3High
    
    Low
    
    Volume2003First quarter
    
    
    
    
    
    
    
    
    
    
    Second quarter
    
    
    
    
    
    
    
    
    
    
    Third quarter
    
    
    695.00
    
    
    
    547.50
    
    
    
    2,380Fourth quarter
    
    
    770.00
    
    
    
    550.00
    
    
    
    23,320Year 2003
    
    
    770.00
    
    
    
    547.50
    
    
    
    25,700
  1
    
    Trading prices are in Canadian dollars.2
    
    Trading prices are in US dollars.3
    
    Trading prices are in British pence. CryptoLogics shares began trading on the LSE on September 15, 2003. Statements in this annual report which are not historical, are forward-looking
statements made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995.Investors are cautioned
that all
forward-looking statements involve risks and uncertainties including, without
limitation, risks associated with the Companys financial condition and
prospects, legal risks associated with Internet gaming and risks of
governmental legislation and regulation, risks associated with market
acceptance and technological changes, dependence on licensees and key
licensees, relating to international operations, increased competition and
other risks detailed in the Companys filings with securities regulatory
authorities. When used herein, the words may, would, could, will,
intend, plan, anticipate, believe, seek, propose, estimate,
expect and similar expressions are intended to identify forward-looking
statements. 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 projected in the forward-looking
statements as intended, planned, anticipated, believed, estimated or expected.
CryptoLogic does not intend, and does not assume any obligations, to update
these forward-looking statements. CRYPTOLOGIC ANNUAL REPORT 2003 47




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##### 



(BOARD OF DIRECTORS) Robert H. Stikeman age 58
Chairman, Director(2)(4) Robert Stikeman has
been a partner for the past 16 years in Stikeman, Graham, Keeley &
Spiegel LLP, a law firm he was instrumental in establishing. His firm
also acts as counsel to CryptoLogic. He is an officer and director of several publicly
traded companies. Robert is also Chairman of the Companys Compliance and Nominating Committees. Lewis N. Rose, CA age 45
President and Chief Executive Officer, Director(4) Lewis Rose is President and CEO of
CryptoLogic, having joined the Company in July 2002. He has
20 years of experience in the consumer
products, entertainment and financial services sectors in leadership roles at
some of North Americas major publicly traded companies, including Alliance
Atlantis Communications Inc. and Maple Leaf Foods Inc., and previously with the
merger and acquisition group at CIBC World Markets. Edward L. Greenspan, QC age 60
Director(2)(3)(4) Edward Greenspan is the senior partner of the
Toronto law firm of Greenspan, White. He has been practicing in
Toronto since 1970 and
received his Queens Counsel in 1982. He taught law at the University of
Toronto Law School for approximately 28 years. He has been involved in some of
the most high profile cases in Canada. Edward was a Director of Alliance
Communications Corp. He is also Chairman of the Companys Compensation
Committee. Randall Abramson age 37
Director(1)(3)(4) Randall Abramson is co-founder and
Vice President of Strategic Capital Partners Inc. and co-founder and CEO of its
affiliate, Strategic Advisors Corp., both portfolio management firms for high net worth individuals and institutions. Randall has
over 10 years of investment management experience including portfolio manager
roles at Connor Clark & Company Ltd. and Hodgson Roberton Laing Limited. Lorne Abony age 33
Director(1)(2)(4) Lorne Abony is CEO of CES
Software plc, an AIM listed company on the London Stock
Exchange. Prior to CES, he was a venture partner at Elucid
Technology Ventures
as well as a founder and President of Petopia, an online pet food and supplies
company. Lorne is a member of the Law Society of Upper Canada and formerly
practiced corporate and securities law at a large Toronto law firm. Stephen H. Freedhoff, CA, CFP
age 68
Director(1)(3)(4) Stephen Freedhoff has been a self-employed
consultant since July 1999. Previously he was a partner of a
Canadian national accounting firm for 30 years.
Stephen is also Chairman of the Companys Audit Committee. (1)
    
    Member of Audit Committee(2)
    
    Member of Corporate Governance and Compliance Committee(3)
    
    Member of Compensation Committee(4)
    
    Member of Nominating Committee
 CRYPTOLOGIC ANNUAL REPORT 2003 48




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CORPORATE DIRECTORY DIRECTORS Robert H. Stikeman, Chairman
Lorne Abony
Randall Abramson
Stephen H. Freedhoff
Edward L. Greenspan
Lewis N. Rose OFFICERS Lewis N. Rose, President and CEO
James A. Ryan, Chief Financial Officer
Michael Starzynski, Chief Technology Officer
Serguei Bourenkov, Vice President, Research & System Architecture
A.J. Slivinski, Vice President, Business & Product Development
Marilyn Shabot, Vice President, Human Resources
John K. FitzGerald, General Counsel
Karim Virjee, Director, Systems, Security & Network Operations
Jenifer L. Cua, Director, Treasury LEGAL COUNSEL Stikeman, Graham, Keeley & Spiegel LLP
Toronto, Canada AUDITORS KPMG LLP Chartered Accountants
Toronto, Canada BANKER Bank of Montreal
Toronto, Canada TRANSFER AGENTS Equity Transfer Services Inc.
Toronto, Canada Continental Stock Transfer & Trust Company
New York, USA COMMON SHARES LISTED TSX Symbol: CRY
Nasdaq Symbol: CRYP
LSE Symbol: CRP CORPORATE GOVERNANCE Information regarding the Companys corporate governance policy and
practices can be found in the Companys management information circular. HEAD OFFICE CryptoLogic Inc.
1867 Yonge Street, 7th Floor
Toronto, Ontario, Canada M4S 1Y5 INVESTOR RELATIONS Nancy Chan-Palmateer, Director, Communications
Telephone: 416-545-1455
Facsimile: 416-545-1454
E-mail: investor.relations@cryptologic.com WEB SITE www.cryptologic.com ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS Tuesday, May 11, 2004 at 4:30 p.m. (Eastern)
The Design Exchange
Trading Floor
234 Bay Street
Toronto, Ontario, Canada




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(CRYPTOLOGIC INC BACK COVER)