CryptoLogic Limited Nasdaq CRYP

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					                                                                                      Analyst: Jeff Lawrence, CFA
                                                                                                  October 27, 2008

CryptoLogic Limited
CryptoLogic Limited (Nasdaq:
online gaming software developer,
licensor, and operator.

The Company’s software products
comprise a complete turn-key
Internet-based gaming software
suite featuring: (i) more than 280
casino table and slot games; (ii)
player-to-player poker; and (iii)
multi-player bingo. These products
are available in multiple languages (English, Spanish, Japanese, Chinese,
French, German, Italian and Greek), in multiple currencies (USD, GBP            Nasdaq: CRYP
and Euros), on multiple platforms (download, non-download) and in
play-for-fun and play-for-cash formats. The Internet-based gaming and
electronic commerce software products are used by licensees to create          Rating:          Speculative Buy
virtual casinos, bingo halls or poker rooms online. The software package       Target Price:              $7.99
transfers the gaming information such as playing cards, roulette wheel,        Current Price:             $4.14
or dice numbers between users and remote servers. CRYP’s software              52-Wk Range:        $3.65-21.97
package utilizes each user’s computer to generate the graphics of the          Avg Vol (3 mos):        106,809
virtual casino, bingo hall or poker room, while the licensees’ gaming
servers perform the dealer function such as generating the random
numbers of playing cards, roulette numbers or dice numbers. Selected
popular casino games are also available to the consumer without having
to wait for a download, on both the Java and Flash platforms.

In addition to its casino and poker game software products, CryptoLogic offers complementary products and
services to its licensees including: (i) cash management software for processing revenues and remitting license
and support payments; (ii) e-commerce software so consumers can purchase electronic cash; (iii) customer
relationship management tools to retain customers and reactivate lapsed accounts; and (iv) full-time customer
support to help players with technical questions regarding the software or payment processing through a call
center in Cyprus. The Company has processed over $60 billion in wagers in over 240 countries globally.
Part of the Company’s strategy is to continually develop new casino games to drive profitability for its licensees
and attract new ones. The Company continues to add popular Marvel Comics-themed games, recently launching
Street Fighter II and Movie Mayhem slot products, and is expanding development into mobile phone and
subscription-based gaming. CRYP has also made strategic investments to develop new products and enter
developing markets. The Company purchased Scandinavian poker room for its software assets,
acquired gaming portal, and made investments in Mahjong Time, a developer of online Mahjong
software, mobile gaming developer 568 Network, game developer Mikoishi Studios, and Korea-based Mobilebus
Inc., a mobile and PC gaming developer.

CryptoLogic focuses on a select number of key customers with well-known international brand names associated
with gaming and media. Key licensees include William Hill, a leading UK bookmaker and gaming company (1998),
InterCasino (1996), ukbetting (2003), Playboy Gaming (2006), to-be-launched Holland Casino (2007), (2008),
Maharajah Club (2008), Sky Betting (2008) and PartyGaming (2008). Most of the license agreements are for the full
turn-key online gaming suite although some are for selected games.

The Company’s revenue model is characterized by recurring license fees, and other fees for specific products and
services. Licensees pay an ongoing fee over the contract term for the licensing, hosting and support of the software.
For online casino products, license fees are calculated as a percentage of each licensee’s level of activity in the case of
its online casino site. For online poker products, license fees are calculated as a percentage of the licensee’s “rake”
or tournament fees. Other fees are earned for marketing support services, software customization, and advertising
services. For most of its licensees, the Company reports and remits the net transaction revenues less licensing and
support fees payable to the Company through its cash management software. Some licensees manage their own
e-cash systems and pay their licensing and support fees directly to the Company. The Company’s revenues are
seasonal, with slower sales in 2Q and 3Q due to warmer weather and lower internet usage, and higher in 1Q and 4Q
during the winter and fall months.

With approximately 320 employees, CryptoLogic is headquartered in Dublin, Ireland, and its primary software
development activities are located in Toronto, Canada. CRYP has offices in Dublin, Toronto, Vancouver, London, Cyprus
and Singapore and all facilities are leased. CRYP was founded in 1995 with a primary focus on software for online
North American casino games. In December 1996, CRYP launched InterCasino, a Company-owned brand and the
first customer to license the Company’s software, which is one of the first play-for-money online casinos. CryptoLogic
Inc. listed on the Toronto Stock Exchange in September 1998, NASDAQ Global Select Market in March 2000, and the
London Stock Exchange in September 2003. Following its initial success in North America, the Company expanded
sales and operations into the UK and Europe, and added online poker software to its portfolio as the game gained
popularity worldwide. In September 2006, CRYP began taking steps to reorganize and relocated headquarters to Dublin,
Ireland, in an effort to refocus operations globally. Following US legislation (the Unlawful Internet Gaming Enforcement
Act, or “UIGEA”) prohibiting online gaming in the US in October 2006, CRYP strategically focused on the UK and Europe.

The Company plans to capitalize on global online gaming market growth and its robust balance sheet by focusing
on the acquisition of new licensees, continued new product development and enhancement, strategic investments
in key technologies and geographic markets (primarily China, Korea and Singapore), and pursuing strategic

The company has recently taken steps to refocus on the more lucrative casino games and significantly cut
expenses by announcing that it expects to enter into a partnership to merge its poker players with another poker
network. This move will improve poker liquidity for its licensees and will dramatically reduce costs for the Company.

  Investment Highlights
Global online gaming market continues to grow rapidly
Global Internet gaming (excluding North America) was estimated to be a $9.8 billion market in 2007 by Global Betting
and Gaming Consultants (“GBGC”). It is expected to increase 30% to $12.7 billion in 2008, and grow by a 13.6%
compound annual growth rate (CAGR) to $18.5 billion in 2012.

The Company’s primary segment, online casino gaming, was estimated at $1.9 billion in 2007 and projected to grow
at a 15.5% CAGR to $3.9 billion in 2012, outpacing the overall growth in online gross gaming yields. Their secondary
market, online poker, was estimated at $1.5 billion in 2007 and expected to grow at a 16.4% CAGR to $3.2 billion
by 2012.

This rapid growth is led by increased penetration of internet use in existing markets and new internet users in
developing markets. North America, one of the most mature markets, has an internet penetration rate of 73%. With
Europe at 48% and Asia at only 14%, there is significant room for penetration growth as Europe and Asia further
develop. As players throughout the world have gained increased comfort with processing payment transactions
online, online gaming use has increased. Furthermore, the network effect of having numerous other players to
interact with at any time of the day is drawing in more customers, growing the market. Increasingly easy to use
interfaces, cash payment processing systems and no-download features are making it easier for new players to
join. Also, the proliferation of new online gaming sites targeted at various population groups with distinct interests is
drawing more people online.

The growth also reflects the advantages of gaming online versus offline gaming. Online gaming is quickly accessible
at home, reducing the need to travel to a casino (which, depending on the jurisdiction, may be far away or not
available at all). Online gaming offers a plethora of games, whereas an offline casino may have a limited selection.
Online poker, in particular, increases the chances of significant player liquidity, as the pool of potential players is
larger and available from a greater geographic area. Online gaming also provides a degree of privacy and anonymity
not afforded in an offline casino or poker hall.

In addition to growing the overall gaming market, online gaming is assumed to be taking market share from
traditional off-line gaming. Since online gaming represents less than 5% of the total global gaming market, there is
significant room for growth in capturing market share from the offline gaming market.

Attractive software licensing model
93.6% of the Company’s 2007 revenues were from recurring software license payments. License agreements are
typically 2-3 years in length, and many of CryptoLogic’s customers have a long-term relationship with the
Company. The remainder of the Company’s revenues come from customization fees, support and service fees.
As with most software development companies, CryptoLogic is able to leverage its existing online gaming suite of

products to new licensees at little additional overhead cost. Therefore an increase in the number of licensees,
the size of the addressable market or the amount of volume played online through its licensees’ increases
revenues with approximately 80-85% of incremental revenues hitting the pre-tax profit line.

Barriers to entry
While the online gaming sector remains nascent and subject to numerous characteristic of a rapidly growing
market, there are barriers to entry that would make it difficult for competitors to enter the market, or to take
market share away from the Company. In a market where customers are playing with cash and licensees
are processing high volumes of cash, an established technology like CryptoLogic’s with a track record for
accuracy and security are key. Furthermore, given the regulatory environment for online gaming, licensees need
to be able to rely on CryptoLogic’s strong reputation in the industry, its ‘tier one’ certification, its ongoing
regulatory compliance, independent oversight and transparency of business practices. CryptoLogic’s strong
balance sheet and financial stability also provide customers with trust in an integral software partner that startup
companies are not able to provide. With regards to online poker, CryptoLogic’s critical mass in player
liquidity (over 6,000 concurrent poker players at peak time) is something a new entrant cannot easily replicate
and that is necessary for a successful online poker operation.

Growth in new license agreements
CryptoLogic continuously seeks to augment its longstanding licensee relationships with new customer
acquisitions. The following is a list of the Company’s recent new license agreements:
	      •	October	2008:	five-year	licensing	deal	with	PartyGaming	which	will	offer	its	customers	a	suite	of	CRYP’s
          top branded casino games beginning in the first quarter of 2009.
	      •	October	2008:	multi-year	multi-million	dollar	deal	with	Kurastica	which	will	offer	CRYP’s	award-winning
          Internet casino software to players beginning in the first quarter of 2009 in Russia and CIS.
	      •	August	2008:	three-year	contract	with	the	Gaming	Media	Group	to	provide	internet	casino	games
          available in five languages to GMG players.
	      •	August	2008:	three-year	license	with	Sky	Betting	&	Gaming	for	select	non-downloadable	casino	games
          on commencing in early 2009.
	      •	June	2008:	license	agreement	to	exclusively	provide	online	casino	and	poker	software	to	Ireland-based
          Betjacks, a new gaming site targeted at Irish, UK, South African and Canadian players to be launched in
          fall 2008.
	      •	May	2008:	new	relationship	with,	the	to-be-launched	online	gaming	site	of	growing	South
          Asia gaming brand Khel Galli. Online poker will be launched in mid-2008, mini casino in late 2008, and
          full casino in 2009.
	      •	May	2008:	license	agreement	with	Maharajah	Club,	a	UK-based	online	gaming	site	with	over	25,000
          players targeting the Southeast Asian community. Online poker will be launched in summer 2008, a mini
          casino in late 08, and a full casino in 2009.
	      	•	May	2008:	three	year	exclusive	license	agreement	with,	a	new	online	gaming	site	launched
          by leading Scandinavian gaming executives.
	      •	May	2008:	the	Company	announced	a	new	relationship	with,	whereby	will	license
          selected casino games from CryptoLogic and integrate it into its existing platform. is the
          world’s number one online poker room and casino.

Acquisitions and investments to expand product offering
and extend geographic reach
CryptoLogic’s leading reputation and strong balance sheet (which includes $64MM in cash) have enabled it to
pursue an investment and acquisition strategy that positions the Company for growth in key areas. CryptoLogic’s
2007 acquisition of for $6.1MM, a gaming portal that had $1MM in revenue at the time of purchase, is
already exceeding expectations and expected to achieve approximately $2.5MM in revenues in 2 years. In
2007, CRYP also invested in Singapore-based Mikoishi Studios, a developer of games with a focus on mobile
gaming, and 568 Network, a developer of casual games for the Chinese market. In 2008, the Company invested in
Mahjong Time, a provider of online Mahjong software and turnkey solutions and South Korea-based Mobilebus
Inc., a mobile and PC gaming development company. Management plans to eventually bring all of its Asian
investments under one platform.

CRYP has a proven track record of sourcing and executing strategic and accretive investments, and with $64MM in
dry powder, has a significant opportunity to enhance its organic growth by buying new products and entering new
geographic markets through its investments and acquisitions.

Established leader and strong industry recognition
Founded in 1995, CryptoLogic is one of the most established online gaming software companies and boasts some
of the leading names in gaming and media as licensees. It has a 9-year relationship with William Hill, a leading UK
bookmaker and gaming company, and established InterCasino in 1996, one of the world’s first pay-to-play
online casinos. CryptoLogic’s suite of poker and casino games as well as complementary products (e-cash,
back office, customer relationship management) and services (customer support and software integration) is well
respected by the market, and has earned the Company Gambling Online Magazine’s ‘Top Casino Software’ award
for three years in a row (2006, 2007, 2008).

      Online Gaming Software Market
Online gaming is still a relatively new industry, and represents a small sub segment of the larger overall gaming
industry. Because it is still in early stages of development, the online gaming sector has experienced rapid growth
and is expected to continue growing at attractive rates. The key drivers of growth are the increased penetration of
broadband internet service globally, the ability for players to access gaming sites from anywhere in the world, the
overall popularity of gaming, and marketing and promotion of online gaming by successful operators. The worldwide
market (excluding North America) for online gaming gross yield is forecast to grow from approximately $9.8 billion in
2007 to $18.5 billion in 2012.

The online gaming sector consists of the following products: sports betting, casinos, lotteries, poker, bingo and
skill-based and other games. The main categories, excluding lotteries as they are typically government owned or
sponsored, are sports betting with approximately 45% of total 2007 online gaming yield, followed by online
casinos at 26% and online poker at 20%.

                                          Exhibit 1: Projected Growth of the Global Online Gaming Market

                                                   Estimated Global Online Gross Gaming Yield
                                                           (excluding North America)

                                                                    % CA

                                                        2007         2009E         2012E

                                              Source: Global Betting and Gaming Consultants, 2007

CryptoLogic’s target markets, both the online casino games segment of the market and the online poker games
segment of the market (excluding the US), are estimated to grow at a faster rate than the overall global gross
gaming yield from 2007 to 2012E:

                                               Exhibit 2: Growth in the Online Casino and Poker Markets

                         Internet Casino Revenue                                                    Internet Poker Revenue
                             (ex-US, in USD$B)                                                         (ex-US, in USD$B)

  Source: the Company.

Growth in demand for online gaming software is resulting from increased popularity and proliferation of online
gaming, increased ease of use, and increased number of online gaming sites available for players (potential new
licensees), new and innovative games for players, and rapidly growing Internet penetration in Europe and Asia.

Internet penetration
Global Internet penetration rates reached 20.1% by March 31 2008, driven by high growth in emerging markets
and the rapidly expanding market for high-speed broadband connectivity in developed markets. The global
Internet subscriber base is expected to grow 7.8% annually between 2006 and 2011.

                                                  Exhibit 3: Internet Penetration

                                        Internet penetration levels – Global and in the US

         Source: the Company.

CryptoLogic’s target markets of Europe and Asia represented 64.7% of total global internet users as of March 2008.

                                      Exhibit 4: Global Internet Use Geographic Distribution

Furthermore, CryptoLogic’s target market of Europe has a 47.7% penetration rate, indicating that there is room
for further growth to take penetration to the North American level of 73.1%. Asia possesses even more room to
growth with a current penetration rate of only 14.0%.
                                          Exhibit 5: Global Internet Penetration Rates

Asia is expected to be the next key geographic growth region in the online gaming industry. Industry forecasts
estimate that Asia will eventually become the largest online gaming market in the world. With over 135 million
Internet users and ranking second only to the US, China promises to be the most significant market in Asia. China
also has the world’s largest mobile phone market with more than 400 million subscribers, and mobile gaming is
already a rapidly expanding segment of the online gaming market. As mobile phone markets continue to develop
bandwidth, the opportunity for more complex and interesting mobile gaming will increase.

The Korean market is a well developed market, with government sources estimating that the online and mobile
gaming market is over $1 billion, and the casual card game segment is growing at 24% per annum. The players in
Korea, Japan and Taiwan rank among the world’s highest spenders on online gaming sites.

Business Strategy

                                         Exhibit 6: Business Strategy Components

     New Licensees      Own & Manage Brands          Product Portfolio       Acquisitions & Investments Geographic Expansion

• PartyGaming          • InterCasino            • Over 280 casino             • Outperformance        • Khel Galli
• Kurastica            • InterPoker               games                         of        licensee in India
• Gaming Media Group   • Extreme Poker          • Award -winning              •            • Asian investments
•         •               software                    • Plan to unify all       including 568,
• Betjacks                                      • New product                   Asian investments       Mikoishi Studios,
•                                         launches:                     under one platform      Mobilebus ,
• Maharajah Club                                  Marvel Comics,                                        Mahjong Time
                                                  Streetfighter II

Drive to Increase Number of Licensees
CRYP has longstanding relationships with most of its licensees. Since the license agreements are typically 2-3 years
in length, the Company actively seeks to retain existing customers at the time of renewal. One such important license
agreement with William Hill, who has been a licensee since 1998, is up for renewal this year (2008). The company is
aggressively pursuing new customer wins as part of its refocus on its lucrative core casino games.

Recent new customer wins include:

Date             Company Name                 Description                                      Target Geographic Markets
October 2008     PartyGaming Plc              Five year licensing for CRYP’s top branded       Global
                                              casino games beginning in the first quarter of
October 2008     Kurastica                    Multi-year multi-million dollar deal where      Commonwealth of Independent
                                              Kurastica will offer CRYP’s award-winning In- States (CIS)
                                              ternet casino software to its players beginning
                                              in the first quarter of 2009 in Russia and CIS
August 2008      Gaming Media Group Limited   Three year contract for casino games             UK
                                              which will be made available in five
                                              different languages
August 2008      Sky Betting & Gaming         Three year agreement under which the top         UK
                                              non-downloadable casino games to be avail-
                                              able on in early 2009
June 2008        Betjacks                     New online gaming site based in Ireland to be    Ireland, UK, South Africa, Canada
                                              launched in fall 2008. CRYP will exclusively
                                              provide casino and poker software.
May 2008                New online gaming site of the Southeast Asia     India
                                              gaming brand Khel Galli. CRYP will provide
                                              poker and casino games.
May 2008         Maharajah Club               UK gaming site with over 25,000 existing         UK Southeast Asian community
                                              players. CRYP will provide poker and casino
May 2008                   Three year exclusive license agreement for a     Scandinavia
                                              new site launched by leading Scandinavian
                                              gaming executives.
May 2008             will license selected casino games       UK, Europe, various
                                              from CryptoLogic and integrate it into its
                                              existing platform.

Brand Ownership and Management Strategy
In additional to licensing its software to third party operators, part of the Company’s strategy is to own, control
and manage certain online gaming brands. This enables the Company to increase revenue generation and drive
growth in the online gaming industry in key markets. The Company owns brands such as InterCasino, InterPoker,
ExtremePoker and most recently Wholly-owned subsidiary WagerLogic owns or controls the brands,
and then licenses the brands to third party operators. The Company also licenses the operators of its owned
brands the Company’s full suite of online gaming software, network services and marketing support services.
Through this strategy, however, the Company may be competing with its licensees in certain markets.

New Product Development
CryptoLogic’s new product development strategy is two-pronged: (i) to increase the variety and type of casino
games, enhancing the player experience (to increase volume of play and player stickiness/loyalty); (ii) to develop
totally new games and technologies that fall into the online gaming sector.

CryptoLogic developed 15 new games in 2007 including a newly developed genre of adventure-themed games
(Rajah’s Rubies, Double Panda, Computer Rage), and slot games featuring Marvel Comics characters Spiderman
and the Fantastic Four. In the first quarter of 2008, the Company developed seven new games exclusive to CRYP,
including one based on the popular Streetfighter II franchise. More recently, CRYP completed development on
games featuring the famed Marvel superhero Sub-Mariner and 4-deck multi-hand video blackjack. CRYP’s 2008
investment in Mahjong Time, a provider of online Mahjong software and turnkey solutions, is the first step in
potentially adding Mahjong to its suite of online gaming offerings. Mahjong is an extremely popular game is Asia.

CryptoLogic is also entering emerging areas such as mobile gaming and subscription-based gaming by building on
its investments in Singapore-based Mikoishi Studios, a developer of games with a focus on mobile gaming, and in
South Korea-based Mobilebus Inc., a mobile and PC gaming development company.

CRYP’s 2007 investment in 568 Network, a developer of casual games for the Chinese-speaking market (both in
China and abroad), allows the Company to further develop its casual gaming segment, particularly with regards to
Asia. Casual games are one of the fastest-growing segments of approved online gaming in China. The Company
believes that online casual games may be a major source of revenue for the next three to five years for the online
gaming industry, particularly in Asia.

These new games are expected to contribute to revenues in 2008 and beyond by increasing player traffic for its
licensees and helping to retain and attract new licensees.

Focus on online casino games and cost saving to improve profitability
CryptoLogic has recently announced that it will refocus on its casino games and, in particular, development of its
lucrative branded games. As part of this strategy, the company anticipates announcing a partnership to merge its
poker players with another poker network. This move will improve poker liquidity for its licensees and will
dramatically reduce costs for the Company.

Acquisition and Investment Strategy
Given its significant financial resources, CRYP is able to purchase or invest in key companies, technologies and
markets. This allows it to rapidly enter new markets while enabling smaller companies to benefit from CRYP’s
strong industry reputation, long-standing relationships and size. CRYP has made a number of investments in Asia,
and management plans to eventually bring all of its Asian investments under one platform.

• Mobilebus Inc.

In April 2008 the Company acquired a substantial minority interest in South Korea-based Mobilebus Inc., a mobile
and PC game developer and publisher. CRYP has the option to increase its ownership stake to a majority position
in the future.

The goal of the investment is for Mobilebus and CRYP to develop new games and a new casual game portal for
South Korea. Korea has a well-developed online gaming market and benefits from the world’s highest levels of
Internet and mobile phone usage making it a particularly attractive market. CRYP management also views this
investment as a way to further diversify its game development expertise into Asia.

CRYP and Mobilebus’ new portals will have traditional Korean card and arcade games and poker games. The
venture will also develop subscription-based game offerings.

• Mahjong Time

In April 2008 CryptoLogic invested $2.5 million in Mahjong Time for a significant minority equity stake. Mahjong
Time is a developer of online mahjong software and turnkey solutions. Mahjong is particularly attractive in the
online gaming market because of its large off-line following of over 600 million players globally, and the common
practice of betting on mahjong games.

Mahjong Time’s revenue model is similar to CRYP as it earns licensing fees from online mahjong operators, as
well as through its own site Mahjong Time has players from 136 countries, is the official
partner of the North American Mahjong Association, and is the exclusive provider of online mahjong software for
the World Series of Mahjong.

• Mikoishi Studios

In December 2007 CryptoLogic invested $6.1 million in Mikoishi Studios, a Singapore-based developer of games
including mobile games, for a substantial minority equity stake. CRYP has the option to increase its stake in the

Mikoishi is a leading game development studio that produces games of chance, action, adventure, and casual
games. Mikoishi’s games are operated in over 40 countries across North and South America, Europe and Asia. Its
partners include other major game publishers, Hollywood and mobile operators. Mikoishi’s award-winning games
include Phoenix Wright: Ace Attorney, Star Wars Battlefront Mobile, Super Puzzle Fighter II: Network Battle, and
Metal Unit.

CRYP’s investment in Mikoishi provides the Company with access to Mikoishi’s proprietary technology allowing
games to be ported onto wireless devices. The investment provides CRYP with an entry into the fast growing
mobile gaming market, a key growth area for the online gaming industry, particularly in Asia where consumers
often rely mostly or exclusively on wireless devices for communication.

• 568 Network Inc.

In August 2007 the Company invested $1.2 million in 568 Network Inc., a developer and distributor of online
casual games for the Chinese market. Under the terms of the agreement, CryptoLogic has the option of obtaining
a controlling stake in 568 in the future. 568 and CRYP will establish a new China-based venture that will develop
and distribute casual, skill-based games for the local and overseas Chinese-language markets. The new venture
will develop single- and multi-player mahjong, poker, online pool, puzzle challenges and Chinese poker variants.
The new games will supplement 568’s existing card games (Fight Landlord, Za Jin Hua) and skill-based casual
games (Lian Lian Kan, Dragon Ball).

The investment in 568 offers CRYP entry into one of the most promising online gaming markets globally,
with cultural and language expertise, while expanding into new game categories such as casual gaming and
massively-multiplayer-online-role-playing games (“MMORPG”). 568 benefits from CRYP’s ability to provide
scalability to support thousands of concurrent players and longstanding expertise in the industry.


CryptoLogic acquired UK-based gaming portal in August 2007 for $6.1MM. At the time,
had $1MM in revenue.’s financial performance is already exceeding expectations and the Company
expects it to achieve between $2MM - $3MM in revenues within two years.


In January 2007 the Company purchased the brand and related assets of, a popular Scandinavian
online poker room. CRYP purchased for EUR9 million, with potential additional contingent payments
of EUR4 million depending on performance. generated approximately USD $7 million annually in
revenues at the time of the acquisition. CRYP acquired the poker room assets, software, and customers thereby
increasing liquidity in its poker network. The Company retained the software assets and the brand, and sold the
operation of the website to a third party located in Malta. is now a licensee of the Company, and the
Company gained valuable Scandinavian software assets and customers.

Geographic Expansion
In addition to its core European markets, CRYP is actively looking to expand geographically. The company has
recently entered into a licensing agreement with Kurastica which will offer the CRYP’s product in Russia and the
Commonwealth of Independent States (CIS) thereby diversifying the customer concentration in Europe. In
addition, its recent investments provide entry into the markets of China, India, and Korea as well as exposure to
the games and technologies that are the drivers of those markets.

As part of the strategy of geographic expansion, CRYP is focused on the following:

	      •	CRYP	only	offers	games	and	payment	methods	that	are	approved	by	local	regulators.

	      •	Local	gamers	have	varying	gaming	preferences,	with	popular	games	and	technologies	typically	driven	by
         local cultures. By partnering with companies on the ground in the local markets, CRYP ensures that the
         content, presentation and language are all appropriate to the local markets in which they are offered.

	      •	CRYP	is	seeking	to	expand	into	single-	and	multi-layer	casual	games,	including	MMORPG.	These	types	of
         games are particularly popular in Asia and CRYP hopes to apply its expertise into online gaming offerings
         of chance, skill, casual and role playing games on the PC, online, mobile or a gaming console.

CRYP’s strategy for geographic expansion provides a key driver for growth in the future as the Company taps
some of the fastest growing markets in the industry.

Key Issues
Regulatory requirements
Since the gaming industry is a highly regulated industry, the adherence to regulatory requirements is key to the
Company’s business and licensees. CryptoLogic has made corporate governance and compliance one of its key
focuses. The Company has earned government certification in a ‘tier one’ jurisdiction, Malta. Certain European
jurisdictions, such as the UK and Malta, have taken the approach that online gaming is legal and have chosen
to regulate it. Some European jurisdictions, such as Holland and France, may seek to extend their protection of
government monopolies from land-based gaming to online gaming, while others may choose to restrict online

As a result of its certification in Malta, the Company is subject to stringent requirements similar to those of
land-based gaming including a thorough review of directors, senior management and key personnel, as well as
independent third party testing and review of its software products. Moreover, the Company itself independently
reviews its own suppliers and licensees.

In the UK, the UK Gambling Act was enacted in September 2007, regulating online gaming in the UK. While most of
the regulatory codes under the UK Gambling Act have been enacted, the regulator does have room for interpretation
that could impact the UK online gaming market. The UK Gambling Act requires online gaming software developers
to be licensed either by the Gambling Commission (the regulator), or by another approved European jurisdiction.
Since the Company is already licensed in Malta, and the requirement for software companies to be licensed creates
a new barrier to entry and may force competitors out of the market, the Company views this as positive. The
UK Gambling Act also stipulates a 15% tax on house profits, which could hurt some of the Company’s licensees
financially and compel them to relocation operations at considerable cost.

France, Germany and Italy are all making initial moves to increase regulation of internet gambling. Spain’s regional
government in Madrid has some legal restrictions for online gaming, but has a history of non-enforcement. Holland is
seeking to enforce its state monopoly on gaming with the launch of Holland Casino, which is still waiting government
approval and licenses CryptoLogic software. Scandinavia has imposed a tax on gaming winnings for all non-state
sponsored gaming activities.

CryptoLogic has also been subject to the rigors of being a public company since 1996, and has high standards of
corporate governance and disclosure.

Revenue model and revenue recognition
The Company’s revenue model is twofold: (i) recurring license fees; and (ii) other fees for specific products and
services. Licensees pay an ongoing fee over the contract term for the licensing, hosting and support of the
software. For online casino products, license fees are calculated as a percentage of each licensee’s level of
activity in the case of its online casino site. For online poker products, license fees are calculated as a
percentage of the licensee’s “rake” or tournament fees. Other fees are earned for marketing support services,
software customization, and advertising services.

93.6% of the Company’s 2007 revenues were from recurring hosting and service agreements for the design and
operation of casino and poker sites on behalf of licensees. License agreements are typically 2-3 years in length,
and many of CryptoLogic’s customers have a long-term relationship with the Company. The remainder of the
Company’s revenues come from fees for the customization of software products, support and service fees.

For most of its licensees, CryptoLogic collects its own fees on behalf of licensees through its cash management
software. CRYP reports and remits the net transaction revenues less licensing and support fees payable to
CryptoLogic. Some licensees manage their own e-cash systems and pay their licensing and support fees directly
to the Company. The Company’s revenues are seasonal, with slower sales in 2Q and 3Q due to warmer weather
and lower internet usage, and higher in 1Q and 4Q during the winter and fall months.

Revenue from software hosting to licensees is recognized as the services are performed, on a daily basis, at the
time of gaming transactions. Typically the Company receives an agreed-to share of daily gaming profits from its
licensees, net of certain shared expenses, including costs such as promotion costs. The Company also receives a
standard monthly fee for hosting and related services. Revenue from the initial customization of software
(including graphics, sound and texts) is recognized on a straight-line basis over the term of the license

The Company offers some of its licensees progressive jackpot games. Each time a progressive jackpot is played,
an agreed-to amount is added to a cumulative jackpot for that game. CRYP must fund any jackpot wins from the
pool of funds collected over time. Such jackpot pools are accrued on a monthly basis and are included in
Accounts Payable and Accrued Liabilities on the balance sheet. Because of the uncertain nature of the timing and
size of jackpot payouts, the Company can be subject to large swings in its current liabilities. In addition, the
Company revalued its jackpot payout through a statistical analysis in 2007 that resulted in a one-off increase in
revenue of $4.5 million.

Internet poker liquidity
Internet poker is a key component of the overall online gaming market, representing approximately 23% of global
online gaming revenue (excluding the US) according to GBGC. The success of internet poker rooms is driven by
the size of the rooms, the number of concurrent players and the amount of wager volume in the online poker
room (liquidity). The presence of many players in a poker room at the same time allows players to find a game at
the stake they desire, at the time they desire, or to change tables if they would like to play with different
players. The Company provides access to a central poker room to all of its licensees, to provide liquidity to its
licensees while allowing them to maintain the look and feel of their own branded poker room.
Attracting and maintaining critical mass of poker players in its poker network is key to the Company for its online
poker revenues, which represented approximately 29% of total revenues for 2007. As of 2007, the Company’s
online poker network had approximately 6,000 concurrent poker players global at peak times. This figure is down
from the 2005 peak figure of 9,000, which predates the enactment of UIGEA and also the Company’s loss of major
customer Betfair. The Company has stated that poker liquidity has continued to decline, and has made one of its
key goals to increase poker liquidity in 2008, through acquisitions and through the continual development of new
tournament varieties and system scalability. The 2007 purchase of was part of the strategy to
increase poker room liquidity.

The Company recently announced that it expects to enter into a partnership to merge its poker players with
another poker network. This move will improve poker liquidity for its licensees and will dramatically reduce costs
for the Company.

   Competitive Analysis
CRYP competes with companies operating in various segments of the online gaming industry. In addition to
other online gaming software companies, CRYP may compete with other online gaming operators or land-based
casino operators that may expand into online gaming and choose to develop software in house, or outsource to IT
consultants. CRYP’s most direct competitors, that have similar product offerings and business operating models and
are of significant size, are Boss Media, Playtech and Microgaming. Estimates are that approximately 100 companies
compete in the online gaming software industry, which is characterized by numerous small players and a lack of

Software Suppliers
Boss Media (delisted due to acquisition)

Boss Media was acquired by GEMed in February 2008; GEMed is jointly owned by gaming giant GTECH and
Swedish investment group Medstroms. Boss Media offers software for online casino games, poker, lottery and
bingo. Its software product offering includes online games, business systems for operating the games, payment
administration, technical operation, player support, security monitoring, customer relationship management systems,
license brokering and operation of partner-based gaming networks. Boss Media also offers an Interactive Video
Terminal product and its own poker network called International Poker Network. Although it is no longer a publicly
listed company, reported figures for fiscal year 2007 showed total FY07 sales of SEK312 million (approximately
USD$48 million), operating profit margin of 16.2% and total employees of 199.
Chartwell Technology (TSX: CWH)

Chartwell Technology is a developer and supplier of online gaming software, with 120 employees primarily in Canada.
Chartwell offers online casino, poker, bingo, soft games and mobile games. Chartwell’s FYE 10/31/07 revenues were
CAN$21.2 million, with a negative operating profit margin.

GigaMedia Limited (GIGM)

Founded in 1997 and headquartered in Taiwan, GigaMedia develops and licenses online gaming software, provides
application services, owns and operates an online games portal, and provides broadband Internet access services.
Gigamedia develops and licenses software solutions and application services, including online entertainment and
social networking in the Internet-based entertainment markets. It also operates an Asian casual game portal that
provides online games, including casual games, such as mahjong and various card, chess, and table games, as well
as provides services, such as game clubs for players, tournaments, and social networking. GigaMedia also provides
broadband Internet access services through cable modems, leased-lines, and virtual private networks. Gigamedia’s
geographic focus is Taiwan, Canada, and Hong Kong. Trailing twelve months 3/31/08 sales were $185.4 million, and
operating profit margin was 22.8%.

Microgaming (private)

Headquartered in the Isle of Man, Microgaming is a privately owned company that develops and licenses online
gaming software including casino, poker, bingo, mahjong, mobile, and land-based computer gaming. Microgaming
software powers over 120 online casinos and 40 poker rooms, and Microgaming software runs the world’s largest
poker and progressive jackpot networks. Online poker clients include Ladbroke’s poker and Betgameday, and online
casino clients include Grand Hotel Casino.

Playtech (AIM: PTEC)

Headquartered in the Isle of Man and with over 650 employees, Playtech is one of the leaders in the online
gaming software industry. Its product platform includes online casino, bingo, poker, mobile gaming, fixed-odds
games, live gaming and land-based kiosk networks. Playtech has its own poker and bingo networks for use by its
licensees, and its poker network is the largest independent network in the world. FY07 sales were $103.6
million, and operating profit margin was 64%.

Online Gaming Operators
Online operators could also be considered competitors to CRYP because many of them have their own proprietary
online gaming software (as in the case of Also, since CRYP has its own online gaming brands, and often
white labels its turnkey solutions and has such strong licensing partnerships with its licensees, many online
gaming companies consider them a direct competitor rather than just a software supplier.

                                                        17 (LSE: 888) is a leading online gaming operator. 888 develops and manages principal aspects of its operations inhouse,
including most of its software development, marketing, business development, back office payment
processing, risk management, and customer relationship management. Its most popular gaming sites are, Casino-on-Net, and Pacific Poker. With a market cap of GBP 467 million, 888 Holdings is listed on the
FTSE 250. FY07 sales were GBP 106 million, with an operating profit margin of 15.5%.

PartyGaming plc (LSE: PTY)

PartyGaming is a leading online gaming operator that operates sites for online poker, online casino, online
backgammon, online bingo and online sports betting. Online poker is its key business, representing 64% of FY07
revenues. PartyGaming develops some of its online gaming software in-house, and licenses some software from
third parties. FY07 revenues from continuing operations were $476 million, with an operating profit margin from
continuing operations of 1.1%.

Sportingbet plc (AIM: SBT)

Based in the UK, Sportingbet is a leading online sportsbook company that also operates online casinos, poker and
virtual games. Sportingbet operates under licenses in the UK, Australia, Alderney, Italy and Antigua and operates
in over 30 geographic markets in Europe, Australia, Canada and South America. Its brands include and Paradise Poker. Sportingbet plc uses Boss Media’s software to run its casino and poker
operations. FYE 7/31/07 sales from continuing operations were GBP 1.1 billion, with a negative operating profit

   Financial Analysis
Historical financial performance
In the second quarter of 2008, CRYP generated revenues of $16.8 million, a gross operating profit of $3.6 million,
and a net loss of $1.5 million. Revenue was up 3.2% from 2Q07 but down 13% from 1Q08 largely due to seasonality
effects	and	non-recurrence	of	$1	million	of	royalty	payments.	CRYP’s	G&A	expenses	increased	significantly	due	to	
higher consulting and professional fees related to annual audit and compliance with Sarbanes Oxley, tax planning,
advice	on	M&A	activities	and	protection	of	intellectual	property.

After a strong turnaround in the first quarter from a challenging 2007, the company moved back into negative territory
with a frustrating second quarter.

                                                                  Exhibit 7: Selected Income Statement Data

(US$000s)                                                             FY                FY           3 months ending          3 months ending       Trailing 12 months
                                                                  2006                 2007              3/31/2008                6/30/2008            ending 3/31/08
Revenue                                                            $104,022              $67,153                $19,317                  $16,800                   $71,970
Operating expenses                                                     64,685            49,436                 14,437                    13,170                    52,080
 Gross profit                                                          39,337            17,717                   4,880                    3,630                    19,890

General & administrative                                                   7,907         10,166                  2,853                    4,017                   12,576
Reorganization costs                                                       3,700          5,666                     -                        -                        -
Software development                                                          -              -                      -                        -                        -
Finance                                                                   554               550                    173                       80                       610
Amortization                                                            4,777             6,566                  1,396                    1,469                     6,305
  EBIT                                                                 22,399      -      5,231                    458    -               1,936                       399

Interest income & non operating income                                  7,092             6,217                    896                      824                     4,556
  Earnings before taxes & minority interest                            29,491               986                  1,354    -               1,112                     4,955

Income tax                                                              4,679                  993                583                       285 -                      55
Minority interest                                                          -                   917                162                         96                   1,229
 Net income                                                           $24,812                -$924                $609                   -$1,493                   $3,781

Note: FY07 figures exclude $6.5MM in one-time revenue benefits.

Source: the Company.

Liquidity & capital requirements
As of June 30, 2008, the Company had cash and cash equivalents, restricted cash and security deposits of
approximately $64.4 million and a working capital deficit (excluding cash) of $1.1 million. Accumulated
stockholders’ equity totalled $106.0 million. The decrease in cash position of $13.1 million of the company in
1H08 is attributable mainly to income tax and dividend payments, consideration for the purchase of and other acquisitions.

The company has a strong cash balance of approximately $4.62/share and is actively exploring strategic
acquisitions to strengthen its position in Europe and Asia. This is evident from the latest investments made in
Mahjong Time and Mobilebus. The Company has no debt, and has not indicated that it will raise any debt or
additional equity in the near future.

                                                                      Exhibit 8: Selected Balance Sheet Data

                                                                                                              As on 6/30/08
                                                Cash & restricted cash                                                   $64,410
                                                Net working capital (excl. cash)                                          -$1,102
                                                Total assets                                                            $162,261
                                                Total curent liabilities                                                 $23,034
                                                Total liabilities                                                        $46,612
                                                Total shareholders' equity                                              $106,001
                                               Source: the Company.

Financial outlook
In line with practices of European public companies, the Company does not provide regular quarterly guidance
on anticipated revenues or earnings. The Company has indicated that its goal is to reach pre-UIGEA full year
2006 sales of $104 million by the end of 2009, which would be a significant 45% increase on trailing twelve
months 6/30/08 actual revenues of $71.9 million. The company has already made significant inroads in 2008
by adding several new key licensees in the first half of this year. In addition, new product development with
an emphasis on branded games should increase the volume played on its licensees’ websites.

The Company has been actively investing and acquiring companies and technologies to gain a foothold in key
markets such as China, South Korea and Singapore, communities (i.e., UK Southeast Asian community), and
technologies (mobile gaming, Asian casual gaming). These markets have the potential to be extremely
lucrative for CryptoLogic.

We estimate full-year 2008 revenues of $69.6 million, an increase of 4% over FY07 revenues of $67.2. This reflects an
estimated 16% increase in casino revenues, driven by the Company’s aggressive customer acquisition program and
highly popular casino games. After experiencing a drop in revenue in the second quarter, the company is expected to
show some growth in revenue in the third quarter due to the distribution of new licences.

We believe there will be gross margin pressure as the Company may have to price more competitively than in the
past due to increased competition. Over time we estimate that gross margins will remain in the 35-36% range,
growing steadily over time once the company is stabilized after the restructuring undertaken in 2007.
The company has mentioned that it may achieve a substantial cost savings of $12-$15 million when the
partnership with another poker network materialises; however, given the unknown impact on poker revenues,
we have not built this into our projections.

We estimate that CRYP will generate net earnings of nearly $3.5 million on revenues of $79.9 million in 2009.
This revenue projection is conservative compared to the Company’s stated goal of achieving $104 million.

                                              Exhibit 9: Projected Revenues ($ in millions)

                       Source: the Company.
                                                         Exhibit 10: Financial Model

     CryptoLogic Inc.
     FYE Dec 31 (USD$000s, except per share data)
                                         FY               FY               FY           FY             FY        Q1              Q2
                                        2003             2004             2005         2006           2007      Mar-08         Jun-08
     Income Statement
      Casino                            $44,211          $47,900          $53,000       $59,200       $43,000   $13,426        $10,800
      Poker                                  -            12,000           27,000       33,900         19,600     4,234          3,635
      Other                                  -             3,814            6,307       10,922          4,553     1,657          2,365
        Total revenue                    44,211           63,714           86,307      104,022         67,153    19,317         16,800

     Operating costs                         27,204       39,975          52,658        64,685        49,436     14,437         13,170
       Gross profit                          17,007       23,739          33,649        39,337        17,717      4,880          3,630
                                                                                                       15.1%      14.8%          23.9%
     General and administrative               5,161        6,028           7,642         7,906        10,157      2,853          4,017
     Reorganizational costs                      -            -               -          3,701         5,665         -              -
     Software development costs                  -            -            3,287            -              -         -              -
     Finance                                    350          374             417            554           550        173              80
        EBITA                                11,496       17,337          22,303        27,176         1,345      1,854 -          467

     Amortization                             1,533        2,089           3,894         4,777         6,575      1,396          1,469
       EBIT                                   9,963       15,248          18,409        22,399    -    5,230        458    -     1,936

     Non-operating income                                                                                           102
     Interest income                             691       1,293           3,627         7,092         6,217        794            824
         Profit before tax                   10,654       16,541          22,036        29,491           987      1,354    -     1,112

     Income taxes                             1,213        2,873           1,506         4,679            994       583             285
     Minority interest                                                                      -             971       162              96
        Net income                           $9,441      $13,668          $20,530      $24,812          -$978      $609         -$1,493

     Fully diluted shares outstanding        12,604       13,586          14,067        13,736        13,977     13,937         13,934

     EPS - fully diluted                       $0.75        $1.01           $1.46         $1.81        -$0.07      $0.04         -$0.11

     EBITA                                   11,496       17,337          22,303        27,176         1,345
      Add back reorg costs                       -            -               -          3,701         5,665         -              -
      Add back other one-time costs              -            -               -             -          6,500         -              -
      Adjusted EBITA                         11,496       17,337          22,303        30,877        13,510      1,854    -       467

     Growth and margin %s
     Revenue growth (q/q or y/y)                           44.1%           35.5%         20.5%        -35.4%       5.3%         -13.0%
     Gross margin                             38.5%        37.3%           39.0%         37.8%         26.4%      25.3%          21.6%
     G&A % sales                              11.7%         9.5%            8.9%          7.6%         15.1%      14.8%          23.9%
     Finance % sales                           0.8%         0.6%            0.5%          0.5%           0.8%      0.9%            0.5%
     EBITA margin                             26.0%        27.2%           25.8%         26.1%           2.0%      9.6%           -2.8%
     Adjusted EBITA margin                    26.0%        27.2%           25.8%         29.7%         20.1%       9.6%           -2.8%
     Amortization % sales                      3.5%         3.3%            4.5%          4.6%           9.8%      7.2%            8.7%
     EBIT margin                              22.5%        23.9%           21.3%         21.5%          -7.8%      2.4%         -11.5%
     Effective tax rate %                     11.4%        17.4%            6.8%         15.9%        100.7%      43.1%         -25.6%
     Net profit margin                        21.4%        21.5%           23.8%         23.9%          -1.5%      3.2%           -8.9%

     FY07 financials exlcude $4.5MM gain in casino revenue, and $2MM revenue benefit.
Model Reported Net Income of $5,528 includes both those items.

                                                                  Exhibit 10: Financial Model

  CryptoLogic Inc.
  FYE Dec 31 (USD$000s, except per share data)
                                     Q3 E               Q4 E             FY             FY        FY        FY        FY        FY
                                    Sep-08             Dec-08          2008E          2009E     2010E     2011E     2012E     2013E
  Income Statement
   Casino                            $12,776           $13,448         $49,450        $56,868   $62,554   $68,810   $75,691    $83,260
   Poker                               3,635             3,635          15,139        17,561     19,317    21,249    23,374     25,711
   Other                               1,093             1,093           5,008          5,509     5,785     6,074     6,378      6,696
     Total revenue                    17,504            18,176          69,597        79,938     87,656    96,133   105,442   115,668

  Operating costs                        16,728         13,632          57,967        51,960    56,977    62,486    68,537     75,184
    Gross profit                            776          4,544          11,630        27,978    30,680    33,646    36,905     40,484
  General and administrative              3,501          3,635          13,606        15,988    14,025    15,381    16,871     18,507
  Reorganizational costs                     -              -               -             -          -        -          -          -
  Software development costs                 -              -               -             -          -        -          -          -
  Finance                                   150            150             553            640       701       769       844        925
     EBITA                           -    2,875            759 -         2,529        11,351    15,953    17,496    19,190     21,051

  Amortization                            1,900          1,900           6,665        10,483    12,175    11,506    11,067     10,800
    EBIT                             -    4,775    -     1,141     -     9,194            868    3,779     5,990     8,123     10,251

  Non-operating income
  Interest income                     1166.8319          1,167           3,952          3,673     4,613    5,655     6,829      8,166
      Profit before tax              -    3,608              26 -        5,242          4,541     8,391   11,645    14,953     18,417

  Income taxes                               -                4            872            681    1,259      1,747     2,243     2,763
  Minority interest                         205             202             665           392       587       582       449       184
     Net income                          -$3,813          -$180         -$6,779        $3,468    $6,545    $9,316   $12,261   $15,470

  Fully diluted shares outstanding       13,934         13,934          13,934        13,934    13,934    13,934    13,934     13,934

  EPS - fully diluted                     -$0.27         -$0.01          -$0.49         $0.25     $0.47     $0.67     $0.88      $1.11

  EBITA                                                        -         2,529        11,351    15,953    17,496    19,190     21,051
   Add back reorg costs                      -              -               -             -         -         -         -          -
   Add back other one-time costs             -              -               -             -         -         -         -          -
   Adjusted EBITA                    -    2,875            759 -         2,529        11,351    15,953    17,496    19,190     21,051

  Growth and margin %s
  Revenue growth (q/q or y/y)               4.2%           3.8%            3.6%         14.9%      9.7%      9.7%      9.7%      9.7%
  Gross margin                              4.4%         25.0%           16.7%          35.0%     35.0%     35.0%     35.0%     35.0%
  G&A % sales                              20.0%         20.0%           19.5%          20.0%     16.0%     16.0%     16.0%     16.0%
  Finance % sales                           0.9%           0.8%            0.8%          0.8%      0.8%      0.8%      0.8%      0.8%
  EBITA margin                            -16.4%           4.2%           -3.6%         14.2%     18.2%     18.2%     18.2%     18.2%
  Adjusted EBITA margin                   -16.4%           4.2%           -3.6%         14.2%     18.2%     18.2%     18.2%     18.2%
  Amortization % sales                     10.9%         10.5%             9.6%         13.1%     13.9%     12.0%     10.5%      9.3%
  EBIT margin                             -27.3%          -6.3%         -13.2%           1.1%      4.3%      6.2%      7.7%      8.9%
  Effective tax rate %                      0.0%         15.0%          -16.6%          15.0%     15.0%     15.0%     15.0%     15.0%
  Net profit margin                       -21.8%         -1.0%            -9.7%          4.3%      7.5%      9.7%     11.6%     13.4%

  FY07 financials exlcude $4.5MM gain in casino revenue, and $2MM revenue benefit.
  Reported Net Income of $5,528 includes both those items.


Valuation Analysis
   Valuation Analysis
A discounted cash flow model was used to value CryptoLogic. The cash flows are derived from the projected
financials in Exhibit 10. It is assumed that the company will continue its aggressive investment and acquisition
strategy through 2009 before tightening up. As the Company has no debt, the WACC is based on its cost of
equity, assumed to be approximately 11.1%. While the significant regulatory risks associated with online gaming,
the nascent nature of the industry and the small size of the Company would justify a higher cost of equity, the
Company’s relatively low beta and gaming industry’s historical resilience during economic downturns justifies a
more sensible WACC. Based on our DCF valuation, the Company’s equity value per share is $7.99.

                                                               Exhibit 11: DCF Valuation

        CRYP: Discounted Cash Flow Valuation

        US$ thousands                               2008E          2009E             2010E          2011E         2012E         2013E

        EBITA                                   -     2,529         11,351             15,953        17,496        19,190        21,051

        Amortization                                  6,665         10,483             12,175        11,506        11,067        10,800

        EBIT                                    -     9,194                868          3,779         5,990         8,123        10,251

        NOPAT                                   -     9,194                738          3,212         5,092         6,905         8,714
        Tax rate %                                      15%                15%            15%           15%           15%           15%

        Capex                                   -     7,000    -     7,250       -      7,500   -     7,750   -     8,000   -     8,250
        Changes in working capital              -       952    -     3,335                 19            21            23            25
        Amortization                                  6,665         10,483             12,175        11,506        11,067        10,800
        Net investments/acquisitions            -    15,000    -    10,000       -      2,000   -     2,000   -     2,000   -     2,000

        Free operating cash flow                -    25,481    -      9,364             5,906         6,869         7,995         9,289

        Value for explicit period (2008-2012)   -    18,378
        PV of terminal value                         65,281
          Enterprise Value                           46,904

        - Debt                                           -
        + Cash                                       64,410
           Equity Value                             111,314

        Equity value per share                         $7.99

        Risk Free Rate                                3.93%
        Country Risk Premium                          7.99%
        Beta                                           0.897

        WACC (%)                                      11.1%
        Growth rate (%)                                2.0%

We are initiating coverage of CryptoLogic with a Speculative Buy rating and a $7.99 price target. We think these
shares present an opportunity to invest in a high growth segment of the traditionally less recession sensitive
gaming industry, with an attractive revenue model and no exposure to the US economy. We caution investors,
however, that the regulatory environment is still developing in the markets in which the Company and its
licensees operate. Should the EU, any of the individual European countries in which the Company operates, or
any of the potential markets the Company is looking to expand, adopt similar legislation to the UIGEA or severely
limit online gaming, it would seriously impact the Company. This is a high-risk investment as earnings have been
extremely volatile in recent quarters and this may continue until the new strategy is fully implemented.
However, for an investor with a long horizon, we feel the shares represent a good value at this time. Additional
risk factors are discussed in the following section.

Risk Factors
Regulatory environment
CRYP and most of its licensees are licensed in Malta. The Company and its licensees are required to maintain its
licences in these and other jurisdictions in which it operates. Should the Company or any of its major licensees
lose its license to operate, or should the legislation regarding its Malta-based licenses change significantly, this
could negatively impact the Company’s financial performance.

In addition, the regulatory environment with respect to online gaming is still developing, and in certain
jurisdictions has not been finalized while in others, like the UK, are still new and untested. The US market, with
the enactment of the UIGEA, is one of the few markets that has instituted an unequivocal ban on collecting
money online for gaming. If legislation restricts or bans online gaming is enacted in any of CRYP’s key
geographies or target geographies, the Company will be significantly negatively impacted.

The Company has also stated that there is a small risk that it or its directors could be pursued as potentially
violating the UIGEA even though its operations in the US ceased as soon as the legislation was enacted. This
could put the Company’s cash balance at risk.

Customer concentration
CRYP’s strategic focus has historically been on select licensees with established names in the marketplace so it
has fewer licensees than many of its competitors. Furthermore, all of CryptoLogic’s key licensees operate from
one jurisdiction (Malta). The loss of one or more of these key licensees, or the loss of a license in Malta, would
significantly negatively impact the Company’s financial performance.

Declining poker liquidity
The key to a successful poker room, and one of the key selling points to potential and existing licensees, is poker
room liquidity. The higher the number of players playing in a virtual poker room at any given time, the higher the
quality of the poker-playing experience for consumers. CRYP has recently seen a decline in its poker liquidity,
down to 5,000 concurrent players at peak time, from a high of 9,000 players in 2005. This is largely driven by the
exit of the US market due to UIGEA and also the departure of certain customers from the poker network (Betfair).

The Company recently announced that it expects to enter into a partnership to merge its poker players with
another poker network. This move will improve poker liquidity for its licensees and will dramatically reduce costs
for the Company.

Intense Competition
Competition in the online gaming software market is intense and CRYP competes with several well established,
global gaming brands with significant access to capital, as well as numerous small companies and consultants who
can develop software product. Competition may result in pricing pressures, reduced profit margins or loss of
market share, any of which could adversely affect CRYP’s business and financial performance.


Brian Hadfield (aged 55),           Mr. Hadfield was appointed CEO of the Company in February 2008, having
President and CEO                   previously served as a director of the Company since May 2007. Mr. Hadfield is
                                    a senior technology executive with experience running international
                                    businesses. He served as managing director of Unisys Limited until 2005,
                                    where he managed its UK, Middle East, Africa and India operations. In 2005,
                                    Mr. Hadfield retired from Unisys and began serving as a non-executive director
                                    of business and educational organizations.

                                    Mr. Hadfield held progressively more senior positions at Unisys for 21 years,
                                    culminating in a five-year assignment as managing director for the U.K., Middle
                                    East, Africa and India. In this role, he oversaw a work force that grew from
                                    3,000 to 9,000 employees, managed the transformation from a technology to a
                                    services-based company and grew the company’s revenue by more than 23% to
                                    over $1 billion, most of which was annuity based. Earlier in his career, Mr.
                                    Hadfield served as vice president for operations at the Bank of Boston.

Stephen B. Taylor                   Mr. Taylor joined CryptoLogic Inc. in August 2005 and has 25 years’ experience
(aged 50),                          in financial and business management, public markets, and mergers and
CFO                                 acquisitions. Mr. Taylor has been a Chartered Accountant in Canada since
                                    1983. He spent the first 11 years of his career at PricewaterhouseCoopers
                                    auditing multinational clients in the manufacturing, mining and financial
                                    services sectors. Mr. Taylor also served as Vice-President Corporate
                                    Development during his 10 years at Derlan Industries, a TSX listed aerospace
                                    company, President and COO of Spellcaster Telecommunications, an earlystage
                                    private software company, Vice President of Mergers and Acquisitions
                                    with	Ernst	&	Young’s	corporate	finance	practice,	and	investment	banker	with
                                    Seale and Associates of Arlington, Virginia.

Michael Starzynski,                 Mr. Starzynski joined the Company as Chief Technology Officer in March 2003.
Chief Technical Officer             Mr. Starzynski has more than 20 years’ global information technology
                                    experience in both the telecommunications and financial services sectors.
                                    From 2000 to 2003, he was Chief Technology Officer of Financial Models
                                    Company, a leading provider of investment management systems and services.
                                    From 1998 to 2000, he was Chief Technology Officer of SRG Software Inc., a
                                    software and consulting services company. Previously he was Chief Technology
                                    Architect at CGI Canada and spent 13 years with Bell Canada.

Justin Thouin,                      Mr. Thouin joined the Company in July 2003, initially as head of Casino Software
Vice President,                     Development, with a focus on developing innovative casino products. He is
Product Management                  responsible for player research to drive game development and for developing
and Business Development            strategic partnerships with top brands such as Marvel™ and Bejeweled™.
                                    Prior to his tenure at the Group, Mr. Thouin worked at Maple Leaf Foods,
                                    Canada’s largest food company, in a variety of roles including consumer
                                    marketing, sales, and finance. Mr. Thouin has a Commerce (Honours) degree
                                    from Queen’s University in Kingston Ontario.

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