UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

**FORM 10-K**

             

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

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

 

**Commission file number 0-28572**.

 

 

|                                                                                       |
|--------------------------------------------------------------------------------------------|
| **OPTIMAL                            GROUP INC.**                                          |
| (Exact name                            of registrant as specified in its charter)          |
|                                                                                       |   |
|                                                                                       |   |
| **Canada**                                                                                 | **98-0160833** |
| (State or                            other jurisdiction                                    | (I.R.S.                            Employer |
| of                            incorporation or organization)                               | Identification No.) |
|                                                                                       |   |
|                                                                                       |   |
| **3500 de                            Maisonneuve Blvd. West, Suite 1700,**                 | **(514)                            738-8885** |
| **Montreal, Quebec, Canada, H3Z 3C1**                                                      |   |
| (Address of                            principal executive offices and postal code)        | (Registrant                            telephone number, including area code) |
|                                                                                       |   |
|                                                                                       |   |
| **Securities registered pursuant to Section 12(b) of                            the Act:** |
| **Title                            of Each Class**                                         | **Name                            of Each Exchange on Which Registered** |
| **Class                            “A” shares, no par value**                  | **Nasdaq                            Stock Market** |
|                                                                                       |   |
| **Securities registered pursuant to Section 12(g) of                            the Act:** |
| **None**                                                                                   |
|                                                                                       |

 

 

| Indicate by check mark if the registrant is a well-known                            seasoned issuer, as defined in Rule 405 of the Securities                            Act                                                                                                                                                                                                                                                                                                                                                                                           | YesoNox                                                                  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------|
| Indicate by check mark if the registrant is not required                            to file reports pursuant to Section 13 or Section 15(d) of the                            Act                                                                                                                                                                                                                                                                                                                                                                                      | YesoNox                                                                  |
| Indicate                            by check mark whether the registrant (1) has filed all reports required                            to be filed by Section 13 or 15 (d) of the Securities Exchange Act of                            1934 during the preceding 12 months (or for such shorter period that                            the registrant was required to file such reports), and (2) has been                            subject to such filing requirements for the past 90 days.                                                                       | YesxNoo                                                                  |
| Indicate                            by check mark if disclosure of delinquent filers pursuant to Item 405                            of Regulation S-K is not contained herein and will not be contained, to                            the best of registrant’s knowledge, in definitive proxy or                            information statements incorporated by reference in Part III of this                            Form 10-K or any amendment to this Form 10-K                                                                                       | x                                                                        |
| Indicate                            by check mark whether the registrant is a large accelerated filer, an                            accelerated filer, a non-accelerated filer, or a smaller reporting                            company. See the definitions of “large accelerated filer” ,                            “accelerated filer” and “smaller reporting                            company” in Rule 12 b-2 of the Exchange Act (Check                            one):                                                |                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                     |   |   |
| Large                            Accelerated filero                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Accelerated                            filerx                            | Non-accelerated filero | Small                            reporting companyo |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | (Do not                            check if a smaller reporting company) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                     |
| Indicate by check mark whether the registrant is a shell                            company (as defined in Rule 12b-2 of the Act).                                                                                                                                                                                                                                                                                                                                                                                                                                     | YesoNox                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                     |
| Aggregate                            market value of the voting stock of the registrant held by                            non-affiliates of the registrant as of June 30, 2007 (computed by                            reference to the last reported sale price of the Class “A”                            shares on the Nasdaq Global Market on such date): $175,112,073. For                            purposes of this calculation, only executive officers and directors are                            deemed to be affiliates of the registrant. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Number of Class                            “A” shares outstanding at February 29, 2008:                            25,971,246                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| DOCUMENTS INCORPORATED BY                            REFERENCE: NONE.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                          |  |  |  |

 

 

1

 

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**TABLE OF CONTENTS**

 

 

|         |                                                                                 |                                                                                                                                                                         | **Page** |
|--------------|--------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **PART I**   |                                                                                 |                                                                                                                                                                         |
|         | ****
****ITEM                            1.****                                      | **BUSINESS**                                                                                                                                                                 | **4**    |
|         | ********
****ITEM                            1A.****                                 | **RISK FACTORS**                                                                                                                                                             | **14**   |
|         | ****
****ITEM                            1B.****                                     | **UNRESOLVED STAFF COMMENTS**                                                                                                                                                | **23**   |
|         | ****
****ITEM                            2.****                                      | **PROPERTIES**                                                                                                                                                               | **23**   |
|         | ****
****ITEM                            3.****                                      | **LEGAL PROCEEDINGS**                                                                                                                                                        | **24**   |
|         | ****
****ITEM                            4.****                                      | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY                            HOLDERS**                                                                                           | **24**   |
|         |                                                                                 |                                                                                                                                                                         |
| **PART II**  |                                                                                 |                                                                                                                                                                         |
|         | ****
****ITEM                            5.****                                      | **MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED                            STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY                            SECURITIES** | **24**   |
|         | ****
****ITEM                            6.****                                      | **SELECTED FINANCIAL DATA**                                                                                                                                                  | **26**   |
|         | ****
****ITEM                            7.****                                      | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF                            FINANCIAL CONDITION AND RESULTS OF OPERATIONS**                                                   | **29**   |
|         | ****
****ITEM                            7A.****                                     | **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET                            RISK**                                                                                    | **46**   |
|         | ****
****ITEM                            8.****                                      | **FINANCIAL STATEMENTS AND SUPPLEMENTARY                            DATA**                                                                                                   | **47**   |
|         | ****
****ITEM                            9.****

                               | **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON                            ACCOUNTING AND FINANCIAL DISCLOSURE**                                                          | **103**  |
|         | ****
****ITEM                            9A.****                                     | **CONTROLS AND PROCEDURES**                                                                                                                                                  | **103**  |
|         | ****
****ITEM                            9B.****                                     | **OTHER INFORMATION**                                                                                                                                                        | **103**  |
|         |                                                                                 |                                                                                                                                                                         |
| **PART III** |                                                                                 |                                                                                                                                                                         |
|         | ****
****ITEM                            10.****                                     | **DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE                            GOVERNANCE**                                                                                        | **104**  |
|         | ****
****ITEM                            11.****                                     | **EXECUTIVE COMPENSATION**                                                                                                                                                   | **107**  |
|         | ****
****ITEM                            12.****

                              | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND                            MANAGEMENT AND RELATED STOCKHOLDER MATTERS**                                                | **118**  |
|         | ****
****ITEM                            13.****

                              | **CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND                            DIRECTOR INDEPENDENCE**                                                                     | **120**  |
|         | ****
****ITEM                            14.****                                     | **PRINCIPAL ACCOUNTING FEES AND SERVICES**                                                                                                                                   | **120**  |
|         |                                                                                 |                                                                                                                                                                         |
| **PART IV**  |                                                                                 |                                                                                                                                                                         |
|         | ****
****ITEM                            15.****                                     | **EXHIBITS, FINANCIAL STATEMENT                            SCHEDULES**                                                                                                       | **121**  |
|         |                                                                                 |                                                                                                                                                                         |     |

 

 

Each            of Optimal, Optimal Group, Optimal Payments, FireOne, FireOne Group, WowWee, WowWee            Robotics, WowWee Flytech, WowWee Alive, WowWee Technologies, Robosapien, Roboraptor,            Roboreptile, Robopet, Robopanda, Roboquad, Roboboa, RS Media, Femisapien, RS Tri-bot,            Mr. Personality, Wrex the Dawg, Bugbots, Chatterbots, Flytech Dragonfly, FlyTech            Hornet, FlyTech Moth, FlyTech Mosquito, FlyTech Butterfly, FlyTech Bladestar, FlyTech            FairyFly, FlyTech Dragon, Flytech Bat, Facetronics, Rovio and associated logos, are            trademarks or registered trademarks of our company or an affiliate of our company.            Elvis, NorthStar, Visa, MasterCard, U-Scan and all other trademarks appearing in this            annual report are the property of their respective owners.

 

2

 

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***In this Form 10-K, except where otherwise indicated, references to            “dollars” or “$” are to United States dollars, references to            “Cdn$” are to Canadian dollars, references to our “common            shares” are to our Class “A” shares****and            all references to “our consolidated financial statements” are to our            audited consolidated financial statements, which are included in “Item 8.            Financial Statements and Supplementary Data.”***

 

Our consolidated financial statements are prepared on the basis of            generally accepted accounting principles (“GAAP”) in Canada, which is            different in some respects from U.S. GAAP. For a description of the material            differences between Canadian GAAP and U.S. GAAP in regard to our consolidated financial            statements, see note 24 of the notes to our consolidated financial            statements.

 

**Cautionary Statements Regarding Forward-Looking            Statements**

 

This Form 10-K contains certain forward-looking statements within the            meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities            Exchange Act of 1934.Words such as “expects”, “intends”,            “anticipates”, “plans”, “believes”,            “seeks”, “estimates”, or variations of such words and similar            expressions are intended to identify such forward-looking statements. Forward-looking            statements include, but are not limited to, statements about our current expectations            with respect to our future growth strategies, results, opportunities and prospects,            competitive position and industry environment. These forward-looking statements are            subject to a number of risks, uncertainties and other factors that could cause our            actual results, performance, prospects or opportunities, or those of the markets we            serve, to differ materially from those expressed in, or implied by, these            forward-looking statements, including:

 

|   | **•** | existing and future governmental regulations and                            disputes with governmental authorities; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | general economic, legal and business conditions in                            the markets we serve; |
|--------|------------|-----------------------------------------------------------------------------------------------------|

             

|   | **•** | consumer confidence in the security of financial                            information transmitted via the Internet; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | levels of consumer and merchant fraud, disputes                            between consumers and merchants and merchant insolvency; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | liability for merchant chargebacks; |
|--------|------------|-------------------------------------|

             

|   | **•** | our ability to safeguard against breaches of privacy                            and security when processing electronic transactions and use of our                            payments systems for illegal purposes; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | the imposition of and our compliance with rules and                            practice procedures implemented by credit card and check clearing                            associations; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | our ability to adapt to changes in technology,                            including technology relating to electronic payments                            systems; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | our ability to protect our intellectual                            property; |
|--------|------------|------------------------------------------------------------------------------|

             

|   | **•** | our relationships with our suppliers and the banking                            associations that we rely upon to process our electronic                            transactions; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | disruptions in the function of our electronic                            payments systems and technological defects; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | our ability to complete, integrate and benefit from                            acquisitions, divestitures, joint ventures and strategic                            alliances; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | our ability to retain key personnel; |
|--------|------------|--------------------------------------|

             

|   | **•** | currency exchange rate fluctuations; |
|--------|------------|--------------------------------------|

             

3

 

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|   | **•** | our ability to successfully implement our strategies                            for our recently acquired WowWee business; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | changing consumer preferences for electronics and                            play products; |
|--------|------------|---------------------------------------------------------------------------------------------|

             

|   | **•** | the seasonality of retail sales; |
|--------|------------|----------------------------------|

             

|   | **•** | concentration among our major retail customers for                            the products of our WowWee business; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | economic, social and political conditions in China,                            where WowWee’s products are manufactured; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | the price and supply of raw materials used to                            manufacture WowWee’s products; |
|--------|------------|---------------------------------------------------------------------------------------------------------------|

             

|   | **•** | product liability claims and product                            recalls; |
|--------|------------|--------------------------------------------------------------------------|

             

|   | **•** | increased competition; |
|--------|------------|------------------------|

             

|   | **•** | litigation; and |
|--------|------------|-----------------|

             

|   | **•** | the other risks, uncertainties, trends and other                            factors discussed under the headings “Item 7. Management’s                            Discussion and Analysis of Financial Condition and Results of                            Operations”, “Item 1A. Risk Factors” and “Item                            1. Business” and elsewhere in this annual report. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

There may be additional risks and uncertainties and other factors that            we do not currently view as material or that are not necessarily known. The forward            looking statements made in this annual report are only made as of the date of this            annual report.

             

Except as required by applicable securities laws, we undertake no            obligation to publicly update or revise any forward-looking statement, whether as a            result of new information, future events, changes in circumstances or any other reason            after the date of this annual report.

 

The Private Securities Litigation Reform Act of 1995 provides a            “safe harbor” for forward-looking statements to encourage companies to            provide prospective information about their companies without fear of litigation. We            are relying on the “safe harbor” provisions of the Private Securities            Litigation Reform Act in connection with the forward-looking statements included in            this annual report.

 

**PART I**

 

| **ITEM 1.** | **BUSINESS** |
|-------------|--------------|

 

**Company Overview**

             

We operated businesses in two segments at various times during 2007.            Through WowWee (our business segment established by acquisition in November 2007 and            comprised of WowWee Group Limited, WowWee Canada Inc. and WowWee USA, Inc.), we design,            develop, market and distribute technology-based, consumer robotic, toy and            entertainment products. Through Optimal Payments (our business segment comprised of            Optimal Payments Inc. and its related affiliates), we process credit card payments for            small and medium-sized Internet businesses, mail-order/telephone-order (MOTO) merchants            and retail point-of-sale merchants, and process electronic checks and direct debits            online and by telephone.

             

 

4

 

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**Our Corporate Organization**

 

Our company was formed in 1984 and is incorporated under the federal            laws of Canada. We entered the consumer robotic, toy and entertainment products            business segment by acquisition in November 2007 (see note 7 (a) of the notes to            our consolidated financial statements) and we entered the payment processing business            segment through the acquisition of Terra Payments Inc. in April 2004. Our principal            office is located at 3500 de Maisonneuve Blvd. West, Suite 1700, Montreal, Quebec, H3Z            3C1, and our telephone number is (514) 738-8885. Our principal office will be relocated            to 3500 de Maisonneuve Blvd. West, Suite 800, Montreal, Quebec, H3Z 3C1 on or about            April 1, 2008; our telephone number will remain unchanged.

 

**Our Industry Segments**

 

During 2007, we operated in two segments: WowWee and Optimal Payments            (see note 20 of the notes to our consolidated financial statements).

 

**WOWWEE**

 

***Our Products***

 

Based in Hong Kong, with offices in La Jolla, California and Montreal,            Quebec, WowWee designs, develops, markets and distributes technology-based, consumer            robotic, toy and entertainment products that can be sold at a variety of price            points.

 

|   | For 2008, WowWee’s product offering encompasses                            four distinct lines: |
|--------|-------------------------------------------------------------------------------------------------------|

             

|   | **•** | WowWee Robotics |
|--------|------------|-----------------|

|   | **•** | WowWee Flytech |
|--------|------------|----------------|

|   | **•** | WowWee Alive |
|--------|------------|--------------|

|   | **•** | WowWee Technologies. |
|--------|------------|----------------------|

 

*WowWee Robotics*

 

WowWee is best known for its “robo” line of consumer robotic            products. Robosapien, introduced in 2004, was the first in a line of entertainment            robotic products that incorporates applied biomorphic robotics technology and is            uniquely programmable to perform a variety of functions. The WowWee Robotics line            currently includes:

 

|   | **•** | Roboraptor, a robotic dinosaur |
|--------|------------|--------------------------------|

|   | **•** | Roboreptile, a robotic reptile |
|--------|------------|--------------------------------|

|   | **•** | Robopet, a robotic dog |
|--------|------------|------------------------|

|   | **•** | Robopanda, a touch sensitive robotic panda                            bear |
|--------|------------|----------------------------------------------------------------------------|

|   | **•** | Roboquad, a robotic quadruped |
|--------|------------|-------------------------------|

|   | **•** | Roboboa, a robotic snake |
|--------|------------|--------------------------|

|   | **•** | Robosapien V2, an advanced version of                            Robosapien |
|--------|------------|-----------------------------------------------------------------------------|

|   | **•** | RS Media, a robot based on Robosapien, complete with                            multimedia capabilities. |
|--------|------------|----------------------------------------------------------------------------------------------------------|

 

|   | New products for the 2008 WowWee Robotics line                            include: |
|--------|------------------------------------------------------------------------------------|

             

|   | **•** | Femisapien, an extremely agile female                            robot that can be controlled using the robot’s four-way joystick                            hands. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Tri-bot, a “youthful”,                            talkative and animated robot that maneuvers easily and quickly on a                            three-wheel omni-directional base and invites the user to play                            interactive games using the remote controller. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Mr. Personality, a three-wheeled                            omni-directional robot incorporating a full color LCD screen,                            displaying cartoon-like facial expressions that are synchronized with                            the robot’s interactive dialogue. USB connectivity allows the                            user to download new personalities via the Internet. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Wrex the Dawg, a highly stylized                            “junkyard” robotic dog, full of character and voice                            files. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

5

 

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|   | Each of the foregoing items bears the                            “RS” symbol to signify that it has a                            “personality” and displays emotion. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | The 2008 WowWee Robotics line will also                            include: |
|--------|-----------------------------------------------------------------------------|

 

|   | **•** | Bugbots - fast-moving, bug-like toys                            with antennae that enable them to detect objects, and quickly move away                            from them. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Chatterbots, a series of three                            animated character figurines, Dog/Cat, Devil/Angel and The Fairy                            Godfather, that connect directly to a user’s computer (PC or MAC)                            via a USB cable, recognize what the user is doing on the computer and                            react with entertaining comments and quips. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Roboremote, a remote controller that                            is compatible with any infrared (IR) controlled WowWee robot. The user                            can assign a choice of actions to the buttons, all customizable with                            the accompanying PC software. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | WowWee also markets “mini” and                            “micro mini” mechanical versions of most of the                            “RS” characters. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

*WowWee FlyTech*

 

In early 2007, WowWee launched the Flytech Dragonfly, adding the flight            segment to its product line. The WowWee FlyTech line also includes FlyTech Hornet and            FlyTech Barry B. Benson, the official flying bee product for Dreamworks            Animation’s “Bee Movie”, starring Jerry Seinfeld.

 

|   | New products for the 2008 FlyTech line                            include: |
|--------|----------------------------------------------------------------------------|

 

|   | **•** | FlyTech Moth |
|--------|------------|--------------|

|   | **•** | FlyTech Mosquito |
|--------|------------|------------------|

|   | **•** | FlyTech Butterfly |
|--------|------------|-------------------|

|   | **•** | FlyTech Bladestar |
|--------|------------|-------------------|

|   | **•** | FlyTech Fairyfly |
|--------|------------|------------------|

|   | **•** | FlyTech Dragon |
|--------|------------|----------------|

|   | **•** | FlyTech Bat. |
|--------|------------|--------------|

             

FlyTech Dragonfly, Hornet and Barry B. Benson are radio controlled            ornithopters that use dual flapping wings to provide lift and propulsion; FlyTech            Fairyfly, Dragon and Bat are IR controlled ornithopters equipped with dual flapping            wings; FlyTech Moth, Mosquito, and Butterfly are “charge and go”            ornithopters with dual flapping wings - aimed at a younger audience, the user cannot            control the flyer’s flight path.

 

FlyTech Bladestar is an indoor flying machine equipped with two spinning            blades and onboard sensors. FlyTech Bladestar operates in either Autopilot Mode in            which the flyer will detect obstacles and fly away from them, or, alternatively, under            the control of a three-channel digital IR remote controller.

 

*WowWee Alive*

 

In 2005, WowWee introduced Chimpanzee, the first product in its Alive            series, based on highly sophisticated, proprietary Facetronics animatronic technology.            The product is also designed with stereoscopic sound technology, touch sensors, and            infrared vision technology which enable the Chimpanzee to interact directly with people            around it, following motion and sound with its head and eyes. The same realistic action            is featured in WowWee’s interactive head and bust in the likeness of Elvis            Presley that was introduced in 2007.

 

|   | New products for the 2008 WowWee Alive line                            include: |
|--------|---------------------------------------------------------------------------------|

             

|   | **•** | Lion Cub |
|--------|------------|----------|

|   | **•** | White Tiger Cub |
|--------|------------|-----------------|

|   | **•** | Panda Cub |
|--------|------------|-----------|

|   | **•** | Polar Bear Cub. |
|--------|------------|-----------------|

 

6

 

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The Alive Cubs are articulated robots with realistically textured and            patterned fur for a life-like appearance. Sensors in the cub enable it to detect if it            is upright or lying on its back, being stroked, or handled roughly. In response, the            cub can make realistic sounds accordingly, or close its eyes in sleep, thus encouraging            the user to bond with it.

 

*WowWee Technologies*

 

Rovio, a mobile telepresence robot, was introduced at the Consumer            Electronics Association 2008 International CES as the first product in the WowWee            Technologies line. The Rovio robot employs the NorthStar system from Evolution Robotics            to locate and navigate user-defined waypoints in its immediate environment. Streaming            audio and video through any web-accessible device, Rovio provides robotic surveillance            and telepresence.

 

***Our Competitive Strengths***

 

We believe that WowWee’s key competitive strengths are in product            development, engineering and design, including its ability to work with third party            manufacturers to develop innovative consumer technology-based products.

 

We believe that WowWee’s core competency is its ability to            identify cutting-edge technologies and, through its flexible design process, to            incorporate these technologies in the development of innovative products. The Rovio            robot, incorporating Evolution Robotics’ NorthStar technology; Femisapien, with            extreme agility and controller-free, touch-based control via its four-way joystick            hands; the FlyTech products, incorporating technology that allows for the commercial            production of ornithopters; and the FlyTech Bladestar, with its onboard sensor-based            navigation, are some recent examples of this core competency.

 

WowWee has developed robust partnerships with high quality Chinese            manufacturers that have demonstrated their commitment to WowWee by investing in            advanced manufacturing methodologies and human resources to support WowWee’s            product development process. WowWee’s design and engineering team takes a            “hands-on” approach, managing these manufacturing relationships with a view            to ensuring that each product is manufactured and assembled at the highest quality            levels.

 

We believe that our acquisition of the WowWee business will provide it            with greater financial and operational resources to grow, both in North America and            internationally, and a greater ability to capitalize on its corporate brands through            the development of a cross-platform entertainment media strategy.

 

***Our Business Strategy***

 

We expect to implement specific strategies in order to enhance            WowWee’s growth and financial performance. These strategies include:

 

|   | **•** | expanding sales and distribution through a broadening                            of the sales channels, particularly outside North America in emerging                            markets; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | expanding product design, development and production                            capabilities to produce an increased number of products at varying                            price points; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | broadening development initiatives into products that                            combine computer connectivity, utility and entertainment; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | embarking on branded entertainment initiatives,                            licensing, publishing and merchandising; and |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------|

|   | **•** | evaluating potential acquisition                            opportunities. |
|--------|------------|----------------------------------------------------------------------------|

 

 

7

 

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***Our Customers***

 

WowWee products are sold in a range of brick and mortar channels            including grocery stores, pharmacies, toy shops, department stores and high-end            consumer technologies stores. Key North American retailer customers include:

 

|   | **•** | Best Buy |
|--------|------------|----------|

|   | **•** | Circuit City |
|--------|------------|--------------|

|   | **•** | J.C. Penney |
|--------|------------|-------------|

|   | **•** | Macy’s |
|--------|------------|--------------|

|   | **•** | Radio Shack |
|--------|------------|-------------|

|   | **•** | Sears/K-Mart |
|--------|------------|--------------|

|   | **•** | Target |
|--------|------------|--------|

|   | **•** | Toys “R” Us |
|--------|------------|-------------------------|

|   | **•** | The Sharper Image |
|--------|------------|-------------------|

|   | **•** | Wal-Mart. |
|--------|------------|-----------|

             

Each of these retailer customers, as well as most other brick and mortar            retailer customers in the U.S., also carries the full line of WowWee products on its            Internet sales site. Online sales of WowWee’s products are also made through            Internet-based “e-tailers” such as Amazon and Buy.com.

 

***Manufacturing***

 

WowWee’s products are produced in China by third party            manufacturers with which WowWee has long-standing relationships. Consistent with            industry practice, the use of third party manufacturers allows WowWee to avoid            incurring fixed manufacturing costs, while improving flexibility, capacity and            production technology.        

 

By outsourcing its manufacturing process, WowWee maintains a flexible            business model that enables it to be responsive to changing technology. In addition,            once a product has reached its commercialization phase, WowWee is able to minimize            inventory risk by manufacturing products based upon actual customer orders. Upon final            assembly, products can be shipped directly from the manufacturing locations to            retailers and distributors, with title to the products passing to retailer customers in            China.

 

Although WowWee does not conduct the day-to-day manufacturing of its            products, it is extensively involved in the design of the product prototype and            production tools, dies and moulds for its products and seeks to ensure quality control            by actively reviewing the production process and testing the products produced by its            manufacturers. WowWee employs quality control inspectors who rotate among its            manufacturers’ factories to monitor the production of substantially all of its            products.

 

WowWee’s quality assurance personnel advise as to compliance with            applicable regulations during each phase of product development, and perform compliance            testing, and coordinate third party independent compliance testing, on all WowWee            products. See “Government Regulation” below. Once pre-production testing            has been completed and product production has been approved, WowWee’s quality            assurance personnel monitor production at the manufacturer’s facility for            compliance with WowWee’s quality requirements.

 

***Suppliers***

 

The principal raw materials used in the production and sale of            WowWee’s products are plastics, metals, plush, integrated circuits and standard            electronic components, all of which are currently available from a variety of sources.            Although WowWee does not manufacture its products, it owns the tools, dies and moulds            used in the manufacturing process, and these are transferable among manufacturers            should WowWee choose to employ alternative manufacturers.

 

 

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***Sales, Marketing and Distribution***

 

Within the United States and Canada, WowWee sells its products directly            to its retailer customers through its direct sales channel and through independent            sales representatives. For retailers across the rest of the world, WowWee utilizes a            network of distributors located in various jurisdictions. WowWee products are also            available for sale through WowWee’s Internet-based store            (www.wowweestore.com            ). In 2007, approximately 55% of its products were sold in North America, with the            balance being sold internationally.

 

WowWee does not have written agreements with its customers. Instead,            sales are made based on purchase orders, primarily against letters of credit. The            majority of orders are traditionally written during the first two quarters of the year,            with shipments occurring throughout the year as new product becomes available. The            majority of the product shipments occur during the third and fourth quarters of the            year.

 

WowWee presents products to its customers at trade shows, such as            International CES, and various toy fairs, as well as at private meetings throughout the            year. WowWee generally introduces new products to its major customers during the year            prior to the year of their introduction for retail sale. WowWee employs a range of            advertising and promotional vehicles to promote its products to consumers including            broadcast, Internet and print advertising, PR outreach, and exhibition at consumer            expos such as Digital Life. WowWee also maintains a corporate website and individual            sites for its brands and products.

 

WowWee products have been recognized for excellence in technology,            design and quality by numerous organizations around the world; most recently            including Popular Mechanics Editor’s Choice Award (Flytech Bladestar - 2008            International CES), Time Magazine Best Inventions of the Year (FlyTech Dragonfly -            2007), Robosapien V2 (BETT Award - 2008 United Kingdom).

 

In 2007, products from the WowWee Robotics product line were a featured            McDonald’s Happy Meal boys brand in most McDonald’s territories            worldwide.

 

***Research and Development; Product Development***

 

WowWee’s 32-person engineering and design team develops new            technologies using internal capabilities and seeks to identify emerging or            underutilized innovations that are currently being developed or that are available in            the marketplace. In order to leverage the man-hours invested in prior products, older            generations of products frequently form the foundation for the next generation of            products as well as new product lines. New technologies are then integrated to enhance            the overall functionality of the product.

 

In sourcing technologies, WowWee reviews the latest technology            innovations at trade-shows, conferences, colleges and universities, on the Internet,            and through word-of-mouth. WowWee regularly reviews technologies or product concepts            from third party sources that it believes could have potential synergies with            WowWee’s current product line or that could be successfully commercialized based            upon WowWee’s development process.

 

WowWee generally brings all sought-after third party technologies            in-house, but once inside, allows its internal engineering and design team to develop            new product concepts with relative autonomy. WowWee also licenses third party            technologies for development within unique consumer applications developed by            WowWee.

 

In the course of its product development, WowWee leverages its retail            relationships to help gauge potential consumer demand. WowWee conducts            “roadshow” meetings with its key retailer customers to solicit immediate            feedback on its new product concepts. Based upon this early feedback, WowWee determines            the course of further development or, as necessary, modifies the products. In the early            phases of product development, WowWee works with its third party manufacturers to            engineer a manufacturing prototype to determine if the potential product can be            manufactured on a commercially viable scale. Once further development work has been            conducted, and a preliminary sample is available, WowWee moves to solicit further            feedback from key retailer customers, and begins to take preliminary orders for the            product. If the initial orders from these key retailer customers indicates that the            product might achieve sufficiently profitable unit sales, WowWee continues its            development work and initiates the product tooling process with one of its product            manufacturers.

 

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Safety testing of WowWee’s products is done at the            manufacturers’ facilities by quality control personnel employed by WowWee or by            independent third party contractors engaged by WowWee. Safety testing is designed to            ensure compliance with applicable product safety regulations (see “Government            Regulation” below). In addition, certain of WowWee’s larger customers use            independent laboratories to test WowWee’s products according to their own            standards before shipment.

 

***Government Regulation***

 

As a developer and supplier of consumer products, WowWee operates in a            highly regulated environment in the United States and international markets. In the            United States, WowWee’s products are subject to the provisions of the Consumer            Product Safety Act (“CPSA”), the Federal Hazardous Substances Act            (“FHSA”), the Flammable Fabrics Act (“FFA”) and the regulations            promulgated thereunder, as well as the rules and regulations of the Federal            Communications Commission (“FCC Rules”). The CPSA and the FHSA enable the            Consumer Products Safety Commission (“CPSC”) to exclude from the market            consumer products that fail to comply with applicable product safety regulations or            otherwise create a substantial risk of injury, and articles that contain excessive            amounts of a banned hazardous substance. The FFA enables the CPSC to regulate and            enforce flammability standards for fabrics used in consumer products. The FCC Rules            require conformity with technical standards that limit radio frequency emissions in            order to control potential interference to radio communications. Similar laws exist in            various international markets. WowWee maintains a quality control program designed to            ensure compliance with all applicable laws (see “Research and Development;            Product Development” above). Regulations that apply to the sale of WowWee’s            products also include guidelines for advertising directed toward children.

 

***Competition***

 

WowWee competes with numerous domestic and foreign manufacturers,            importers and marketers in each of its product categories. Globally, certain of            WowWee’s competitors have greater financial resources, larger sales and marketing            and product development departments, stronger brand name recognition, longer operating            histories and benefit from greater economies of scale.

 

***Intellectual Property***

 

All of WowWee’s products are produced and sold under trademarks            owned by it or, in certain cases, licensed to it. WowWee typically registers its            trademarks in the jurisdictions where its products are sold. WowWee also files design            patents in China and other jurisdictions for most of its products and has recently            instituted a program under which utility patents will be filed where it is deemed            appropriate as a means of protecting WowWee’s proprietary technology.

 

|   | WowWee maintains ownership of all of the tooling                            associated with its products. |
|--------|-----------------------------------------------------------------------------------------------------------|

 

***Employees***

 

As of December 31, 2007, WowWee employed 86 full-time employees. Its            employees are not represented by any collective bargaining unit and it has never            experienced a work stoppage. We believe that WowWee’s employee relations are            good.

 

**OPTIMALPAYMENTS**

 

***Our Services***

 

Optimal Payments provides technology and services that businesses            require to accept credit card, electronic check and direct debit payments. Optimal            Payments processes credit and debit card payments for card-not-present and card-present            transactions, including Internet businesses, mail-order/telephone-order merchants and            retail point-of-sale merchants. Optimal Payments also processes checks and direct            debits online and by telephone.

 

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For merchants that want to accept payments in a card-not-present            environment, Optimal Payments provides the technology to integrate into the            merchant’s website, training, on-going technical support, risk management to help            detect and prevent fraudulent transactions, real-time online reporting and            administrative tools and settlement services.

 

For merchants that want to accept payments in a card-present            environment, Optimal Payments provides the necessary hardware, training and on-going            technical support. Settlement services for these merchants are provided by third-party            processors on an outsourced basis.

 

To help mitigate its risk exposure, Optimal Payments retains a portion            of amounts owed to certain merchants (based on processing dollar volume) for a            six-month period to cover potential merchant credit losses, which can arise as a result            of, among other things, disputes between consumers and merchants or credit card and            check clearing association fines related to chargeback activity. The aggregate amount            withheld is referred to as “held as reserves” and Optimal Payments’            liability to refund its customers for these amounts is included in the line item            “Customer reserves and security deposits” on the balance sheet contained in            our consolidated financial statements. In the case of a dispute between a merchant and            its customer, if the dispute is not resolved in the merchant’s favour, the            disputed transaction amount is refunded to the merchant’s customer and charged            back to Optimal Payments. If it is unable to collect a chargeback amount from the            merchant, Optimal Payments bears the credit risk for this amount. As a result, Optimal            Payments’ acquiring processing suppliers require it to maintain certain amounts            with them as reserves. Amounts withheld by Optimal Payments’ acquiring processing            suppliers as reserves are included in cash and short-term investments on our balance            sheet as “held as reserves”. For merchants who use its services, Optimal            Payments withholds reserves to help offset its exposure to chargebacks. The reserves            are collected and refunded on a rolling basis. As new transactions are processed,            Optimal Payments withholds a portion as the reserve, while at the same time refunding            previously withheld reserves for which the six-month period has expired.

 

***Our Competitive Strengths***

 

|   | We believe that Optimal Payments’ principal                            competitive strengths are: |
|--------|---------------------------------------------------------------------------------------------------------|

 

|   | **•** | *Optimal Payments has strong                            proprietary risk management expertise.*Optimal Payments’ proprietary risk management                            expertise helps to reduce the inherently higher level of risk                            associated with processing credit card and electronic check payments                            received by Internet or telephone. Its proprietary risk management                            tools and processes are designed to handle a wide variety of                            transactions, the performance profiles of which vary. These                            transactions may originate from consumers (authorization and purchase),                            merchants (settlement and credit) or internal users (query). Most of                            these transactions are initiated by the consumer because there are                            comparatively more consumers than there are merchants and merchant                            transactions relate to previously submitted consumer transactions. With                            this knowledge, Optimal Payments has developed a unique proprietary                            transaction processor with an emphasis on the easy handling of                            customer-submitted authorization and purchase transactions. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | *Optimal Payments maintains a                            proprietary transaction processing platform that it can tailor to meet                            the needs of its customers.*Optimal Payments                            has developed its own proprietary transaction processing technology,                            which has given it the flexibility to tailor its offerings to the needs                            of its merchants and internal users. Its network operations center is                            mission critical, fully redundant and benefits from automated 24/7                            network monitoring. Its transaction processing engine includes an                            Internet merchant account, payment gateway, real-time authorization,                            risk management and fraud protection, as well as back-end reporting                            tools that help merchants manage their operations. Optimal                            Payments’ electronic payment services can be integrated into a                            merchant’s existing business systems. Optimal Payments has                            invested significantly in its technology and we believe that the                            barriers to entry to the payment processing industry are high, largely                            due to the need to establish a substantial volume of processing in                            order to negotiate competitive pricing with acquiring banks, and                            particularly in the card-not-present processing industry due to the                            need to develop the technology and expertise required in order to                            securely process these types of transactions. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

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|   | **•** | *Optimal Payments provides                            dedicated customer service.*Optimal                            Payments’ internal account management staff is focused on meeting                            the needs of its merchant customers. Its larger card-not-present                            customers are assigned an account manager to help ensure that                            merchants’ expectations are met or exceeded. For card-not-present                            merchants, Optimal Payments understands the importance of 24/7 uptime,                            therefore its account managers ensure their availability and timely                            responses to any merchant inquiries. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | *Optimal Payments offers merchants                            comprehensive payment processing solutions.*Optimal Payments provides merchants with both                            card-present and card-not-present processing options, risk management                            expertise, multi-currency and multiple payment methods (specifically                            pertaining to card-not-present transactions), a proprietary processing                            technology platform specifically pertaining to its card-not-present                            transactions, and a focus on customer care. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

By offering both card-present and card-not-present payment processing            solutions, Optimal Payments offers merchants the simplicity of having one supplier for            both of these services, reducing the administrative burden of having multiple payment            processing suppliers and helping to allow merchants to focus on their core            business.

 

***Our Business Strategy***

 

To continue to grow its payment processing business, Optimal            Payments’ strategy is to provide merchants with the ability to process a variety            of electronic transactions, including both card-present and card-not-present credit and            debit transactions. Although it will offer a wide variety of electronic transaction            solutions, Optimal Payments will focus its efforts and strategy on marketing and            selling its card-not-present transaction processing service. We believe that Optimal            Payments’ experience in processing card-not-present transactions, specifically            its technology and risk management expertise, positions it as a leader in this            area.

             

|   | Key elements of the Optimal Payments business                            strategy include: |
|--------|--------------------------------------------------------------------------------------------|

             

|   | **•** | further enhancing its risk management capabilities                            and solutions for its merchant customers; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------|

|   | **•** | expanding its merchant customer base; |
|--------|------------|---------------------------------------|

|   | **•** | expanding the currency options available in its                            solutions; and |
|--------|------------|-------------------------------------------------------------------------------------------|

|   | **•** | expanding the geographical availability of its                            solutions into new territories. |
|--------|------------|-----------------------------------------------------------------------------------------------------------|

             

With its existing infrastructure and supplier relationships, we believe            that Optimal Payments can accommodate expected industry growth. We believe that its            available capacity and infrastructure will allow Optimal Payments to benefit from            operational efficiencies as it grows its processing volume.

 

***Our Customers***

 

|   | Optimal Payments provides services to over 26,000                            small to medium-sized merchants. |
|--------|---------------------------------------------------------------------------------------------------------------|

 

***Suppliers***

 

Optimal Payments’ key suppliers are its transaction processing            suppliers, which are primarily financial institutions that are members of the Visa and            MasterCard credit card associations and check clearing associations, such as the            National Automated Clearing House Association. These relationships provide Optimal            Payments with the ability to connect to the various payment networks and enable it to            process various types of transactions in different geographic regions.

 

***Sales and Marketing***

 

Optimal Payments’ sales efforts are conducted through direct            sales, independent sales agents and strategic partnerships. Optimal Payments employs an            in-house sales force whose focus is to sell its full range of services directly to            merchants. Independent sales agents refer merchants to Optimal Payments in return for a            commission based on the processing volume from the referred merchant.

 

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Optimal Payments generates revenues primarily from fees charged to            merchants for payment processing services.Fees charged to merchants typically include a            discount rate based upon a percentage of the dollar amounts processed, and a variety of            fixed transaction fees. Merchant fees are based upon the merchant’s transaction            volume and risk profile. Where Optimal Payments is the primary party responsible for            providing processing services, revenue is recorded on a gross basis and amounts paid to            the acquiring processing supplier are recorded as part of our transaction processing            expenses. Where Optimal Payments is not the primary party in providing a merchant with            processing services, we record revenue net of amounts paid to the acquiring processing            supplier. Revenue is recognized at the time the transaction is performed.

 

***Research and Development***

 

Optimal Payments recognizes the importance of having access to leading            technology in order to be able to develop advanced services for its customers,            independent sales agents and for its own internal use. To this end, Optimal Payments            maintains a team of development engineers, quality assurance professionals and            technical code writers. As of December 31, 2007, approximately 24 employees were            engaged in such activities.

 

***Government Regulation***

 

As electronic commerce in general and most of the card-not-present            services that Optimal Payments offers are relatively new developments, the manner in            which existing state, provincial, federal and foreign government regulations may be            applied is uncertain and difficult to predict. Due to the relatively recent development            of online gaming, there are few laws or regulations that deal directly with online            gaming payment processing and there is uncertainty as to the legal status of online            gaming. While some jurisdictions have adopted or are in the process of reviewing            legislation to regulate online gaming, other jurisdictions have enacted or propose to            enact legislation intended to restrict or prohibit online gaming.

 

On October 13, 2006, the United States Unlawful Internet Gambling            Enforcement Act of 2006 (the “Act”) was enacted. The Act prohibits any            person engaged in the business of betting or wagering from knowingly accepting payments            related to unlawful bets or wagers transmitted over the Internet. The Act instructs the            U.S. Treasury Department and Federal Reserve to impose new obligations upon financial            institutions and other payment processors to establish procedures designed to block            online gaming-related financial transactions. It also expressly requires Internet bets            and wagers to comply with the law of the jurisdiction where the wagers are initiated            and received. Upon the passage of the Act, our then majority-owned subsidiary FireOne            Group plc ceased processing settlement transactions originating from United States            customers that may be viewed as related to online gaming.

 

***Competition***

 

We believe that the payments markets are growing at a meaningful rate.            Companies that either have developed or are developing product offerings in competition            with Optimal Payments include iPayment Inc., Heartland Payments Systems, Inc., PayPal            Inc., TeleCheck International Inc., TransFirst Holdings Inc., DataCash Group plc and            WorldPay plc. Certain of Optimal Payments’ competitors are larger and have            greater financial, technical and other resources than we do.

 

***Intellectual Property***

 

We regard Optimal Payments’ software as proprietary and attempt to            protect it, where applicable, with copyrights, trade secret measures and nondisclosure            agreements. Despite these protections, it may be possible for competitors or users to            copy aspects of its intellectual property or to obtain information that we regard as            trade secrets. Existing copyright laws afford only limited practical protection for            computer software. The laws of foreign countries generally do not protect Optimal            Payments’ proprietary rights in its services to the same extent as the laws of            the jurisdictions in which it operates such as the United States, Canada and the United            Kingdom. In addition, Optimal Payments may experience more difficulty in enforcing its            proprietary rights in certain foreign jurisdictions.

 

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***Employees***

 

As of December 31, 2007, Optimal Payments employed approximately 131            full time employees. Its employees are not represented by any collective bargaining            unit and it has never experienced a work stoppage. We believe that Optimal            Payments’ employee relations are good.

 

**Financial Information About Segments and Geographic            Areas**

 

|   | See note 20 of the notes to our consolidated                            financial statements. |
|--------|-----------------------------------------------------------------------------------------------|

 

**Where You Can Find Additional Information**

 

We are required to furnish to our shareholders annual reports containing            audited consolidated financial statements certified by our auditors and quarterly            reports containing unaudited financial data for the first three quarters of each fiscal            year following the end of the respective fiscal quarter. We prepare our consolidated            financial statements in accordance with accounting principles which are generally            accepted in Canada with a reconciliation to accounting principles generally accepted in            the United States.

             

You may request a copy of these filings, at no cost, by writing or            telephoning us at the following address or telephone number:

 

Optimal Group Inc.

3500 de Maisonneuve Boulevard West

Suite 1700

Montreal, Quebec, H3Z 3C1

Tel: (514) 738-8885

 

We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and            Current Reports on Form 8-K with the Securities and Exchange Commission. You may read            and copy any materials we file with the Securities and Exchange Commission at the            Commission’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.            You may obtain information on the hours of operation of the Securities and Exchange            Commission’s Public Reference Room by calling the Commission at 1-800-SEC-0330.            The Securities and Exchange Commission maintains an Internet site            (www.sec.gov)            that contains reports, proxy and information statements, and other information            regarding issuers that file electronically with the Commission. Such reports and all            amendments to such reports regarding the Company are available free of charge or            through the Company’s website,www.optimalgrp.com,            as soon as reasonably practicable after such reports are electronically filed with the            Securities and Exchange Commission. Information contained in or otherwise accessed            through our website does not form part of this Report. All such references to our            website are inactive textual references only.

 

| **ITEM 1A.** | **RISK FACTORS** |
|--------------|------------------|

 

*An investment in our common shares involves a high degree of risk.            You should carefully consider the risks described below before making an investment            decision. Our business, financial condition and results of operations could be            materially and adversely affected by any of these risks. The trading price of our            common shares could decline due to any of these risks or other factors, and you may            lose all or part of your investment. The risks described below are those that we            currently believe may materially affect us.*

 

***Our business depends upon the services of key            personnel.***

             

Our ability to successfully integrate acquisitions and to grow our            business depends largely upon the services of our Co-Chairman, our Co-Chairman and            Chief Executive Officer and our Chief Financial Officer, the loss of any of whom could            adversely affect our business and overall results of operations.

 

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WowWee’s future success depends largely on the continued            contribution of its key designers and technical personnel. The loss of services of any            of these key personnel could harm WowWee. Recruiting skilled designers and technical            personnel is highly competitive. If WowWee fails to retain any of these key personnel,            and/or fails to hire, train and integrate replacement personnel, it might not be able            to maintain and expand its business, and our results of operations could be adversely            affected.

 

The loss of any of Optimal Payments’ senior officers could            adversely affect its relationships with its strategic service providers, which would            adversely affect its business.

             

***We may be unable to find suitable acquisition candidates and we            may not be able to successfully integrate businesses we acquire into our            operations.***

             

Our future growth strategy may include acquiring other businesses. For            example, in November 2007 we acquired WowWee. However, we may not be able to identify            and acquire suitable target businesses or, to the extent required, obtain financing for            such acquisitions on satisfactory terms. Integrating acquired businesses into our            operations may involve unforeseen difficulties and may require a disproportionate            amount of resources and management attention. Acquisitions involve a number of special            risks, including:

             

|   | **•** | the time and expense associated with identifying and                            evaluating an acquisition, |
|--------|------------|------------------------------------------------------------------------------------------------------------|

|   | **•** | the diversion of management’s attention from                            day-to-day operations, |
|--------|------------|------------------------------------------------------------------------------------------------------|

|   | **•** | the difficulty in integrating widely dispersed                            operations with distinct corporate cultures, |
|--------|------------|------------------------------------------------------------------------------------------------------------------------|

|   | **•** | the potential loss of key employees of the acquired                            business, |
|--------|------------|------------------------------------------------------------------------------------------|

|   | **•** | the difficulty of incorporating acquired technologies                            successfully, |
|--------|------------|------------------------------------------------------------------------------------------------|

|   | **•** | the potential impairment of relationships with                            employees, customers and strategic partners, and |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------|

|   | **•** | the inability to maintain uniform standards,                            controls, procedures and policies. |
|--------|------------|------------------------------------------------------------------------------------------------------------|

             

Customer satisfaction or performance problems at an acquired business            could adversely affect the reputation of our entire business. Future acquisitions may            be financed through the issuance of common shares, which may dilute the ownership of            our shareholders, or through the incurrence of indebtedness. Acquisitions may also            result in significant charges to earnings. Furthermore, there can be no assurance that            competition for acquisition candidates will not escalate, thereby increasing the costs            of making acquisitions or making suitable acquisitions more difficult to            find.

             

***We are subject to the risk that a taxation authority could            challenge certain filing positions we have taken, and that a successful challenge could            require us to pay significant additional taxes.***

             

Although we believe that all filing positions we take in our tax returns            are reasonable and appropriate, there is no assurance that a taxation authority will            not challenge those positions. Such challenges could include disputing positions taken            in connection with the transfer of our online gaming processing business to FireOne            Group plc and its affiliates in 2005, and the subsequent public offering of a portion            of the FireOne Group plc ordinary shares. A challenge to certain filing positions we            have taken, if successful, could result in us being required to pay additional taxes            (including penalties and interest) and the amount of such additional taxes could be            material to us.

 

***We are subject to exchange rate fluctuations between the U.S.            dollar and the Canadian dollar.***

             

The majority of our revenues are generated in U.S. dollars and a            significant portion of our expenses is incurred in Canadian dollars. A fluctuation in            the value of the Canadian dollar relative to the U.S. dollar may result in variations            in our revenues, expenses and earnings. We have not implemented a currency hedging            program.

 

***Our operating strategy for WowWee might not succeed and the            anticipated benefits to us from our acquisition of WowWee might not be            realized.***

 

Our ability to realize the anticipated benefits of our acquisition of            the WowWee business will depend, in part, on the successful implementation of specific            new strategies designed to enhance the growth and financial performance of the WowWee            business. These include:

             

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|   | **•** | Expanding sales and distribution through a broadening                            of WowWee’s sales channels, particularly outside North America in                            emerging markets; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Expanding product design, development and production                            capabilities to produce an increased number of products at varying                            price points; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Broadening development initiatives into products that                            combine computer connectivity, utility and entertainment; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Embarking on branded entertainment initiatives,                            licensing, publishing and merchandising; and |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Evaluating potential acquisition                            opportunities. |
|--------|------------|----------------------------------------------------------------------------|

 

If we fail to succeed in implementing these and other strategies that we            might develop, WowWee could fail to grow, we may not realize the full benefits            anticipated from the acquisition of the WowWee business, and our financial performance            and results of operations could be adversely affected.

 

***If WowWee does not satisfy consumer preferences our results of            operations may be adversely affected.***

             

WowWee competes with a wide range of manufacturers, marketers and            sellers of consumer electronics and play products, many of which are larger than us and            have greater financial resources than we do. Consumer preferences change. If its            competitors’ products achieve greater market acceptance than WowWee’s            products, WowWee’s products are unable to satisfy consumer preferences, or WowWee            fails to respond to changes in consumer preferences with products that achieve and            sustain market acceptance in a timely and cost-effective manner, demand for            WowWee’s products could decrease and our results of operations could be adversely            affected.

 

***WowWee’s business is seasonal and its annual operating            results depend, in large part, upon the relatively brief holiday season in the fourth            quarter of the year.***

             

Retail sales of WowWee’s products are susceptible to seasonal            variations, with a majority of sales occurring between September and December. As a            result, WowWee’s operating results depend, in large part, upon sales made during            this period. If WowWee achieves less than satisfactory sales, operating earnings or            cash flows from operating activities during the September to December period in any            fiscal year, we may not be able to compensate sufficiently for the lower sales,            operating earnings, or cash flows from operating activities during the first eight            months of the fiscal year.

 

***Improved inventory management by retailers resulting in shorter            lead times for production and possible shipping disruptions during peak demand times            may affect the ability of WowWee to deliver its products in time to meet retailer            demands.***

 

As retailers attempt to manage their inventories better by requiring            suppliers to ship products closer to the time the retailers expect to sell products to            consumers, suppliers such as WowWee may have shorter lead times for production, and            disruptions in shipping, for any reason, from China during peak demand times may affect            the ability of WowWee to deliver its products in time to meet retailer            demand.

 

***WowWee’s sales are concentrated among a relatively small            number of major retailer customers, which exposes WowWee to any financial difficulties            or changes in purchasing preferences or policies of these customers.***

             

A small number of major retailer customers account for a large            proportion of WowWee’s sales. WowWee’s customers make purchases by one-time            purchase orders, as opposed to making long-term purchase commitments. These customers            could reduce their overall purchases of WowWee’s products for any reason,            including due to financial difficulties, or could reduce the shelf space allotted for            such products. Any such change by a major customer of WowWee could significantly harm            its business and our results of operations.

 

Consolidation among WowWee’s major customers would compound the            effect upon us of any financial difficulties suffered by such customers or any changes            in the purchasing preferences or policies of such customers. Increased consolidation            among its customers could negatively impact the ability of WowWee to negotiate higher            sales prices for its products and could result in lower gross profit margins than would            otherwise be obtained if there were less consolidation among its customers.

 

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***All of WowWee’s products are manufactured in China and we            are subject to the risk that political developments, including currency revaluation and            trade relations between China and the markets in which WowWee’s products are            sold, could increase the costs of producing and delay or prevent shipping such            products.***

             

All of WowWee’s products are manufactured by third parties in the            People’s Republic of China. Social and economic conditions in China affecting the            movement of products from China to the markets in which WowWee’s products are            sold, particularly North America, and the labor and other costs of doing business in            China could have a significant negative impact on our results of operations. Factors            that could negatively affect WowWee include a potential revaluation of the Chinese            yuan, which may increase the cost of producing products in China, increased labor costs            and labor disputes that could result in difficulties in transporting products            manufactured in China to the ports on the western coast of North America. Also, a            negative change in China’s trade status with the United States or the European            Union, including the imposition of trade sanctions, could significantly increase the            cost of products imported from China. Any increase in the cost of producing and the            cost of, or disruptions in, shipping WowWee’s products in and from China could            significantly adversely affect our results of operations.

 

***A reduction or interruption in the supply of raw materials, parts            and components or a significant increase in the price of supplies used to produce            WowWee’s products could negatively affect WowWee’s gross profit            margins.***

             

WowWee may from time to time encounter shortages of materials, parts and            components from its suppliers or a price increase in such materials, parts and            components resulting from their shortage. Price increases for components such as resin            used in plastics, rising fuel and transportation costs and raw material prices, may            significantly reduce WowWee’s gross profit margins and our results of operations.            Due to market conditions, timing of pricing decisions, competition and other factors,            there can be no assurance that WowWee will be able to offset any of such increased            costs by adjusting the prices of its products because increases in the prices of            WowWee’s products could result in lower sales.

 

***As a developer and supplier of consumer products, WowWee is            subject to various government regulations, violation of which could subject us to            sanctions.***

 

As a developer and supplier of consumer products, WowWee operates in a            highly regulated environment in the United States and international markets.            Regulations that apply to its products and their importation include regulation of            advertising directed toward children and product safety. There can be no assurance that            WowWee or its products will be in compliance in the future with such regulations. In            addition, changes in laws or regulations may lead to increased compliance-related costs            in WowWee’s business. Failure to comply with such regulations could result in            monetary liabilities and other sanctions which could have a negative impact on WowWee,            our financial condition and our results of operations. WowWee could also be subject to            involuntary product recalls or may voluntarily conduct a product recall, the costs of            which could be significant. In addition, any product recall, regardless of direct costs            of the recall, may harm consumer perceptions of WowWee’s products.

 

***WowWee could be the subject of future product liability suits or            product recalls, which could harm WowWee.***

 

Products that have been or may be developed by WowWee may expose us to            potential liability from personal injury or property damage claims by the users of such            products. There can be no assurance that a claim will not be brought against us in the            future. While we currently maintain product liability insurance coverage, we may not be            able to maintain such coverage or such coverage may not be adequate to cover all            potential claims. Moreover, even if we maintain sufficient insurance coverage, any            successful claim could significantly harm WowWee, our financial condition and our            results of operations.

 

***Failure by WowWee to protect its proprietary intellectual property            and information could have a material adverse effect on WowWee, our financial condition            and results of operations.***

 

The value of WowWee depends to a large degree on its ability to protect            its intellectual property and information, including its trademarks, trade names,            copyrights and trade secrets. WowWee’s business is subject to the risk of third            parties counterfeiting its products or infringing on its intellectual property rights.            Any failure by WowWee to protect its proprietary intellectual property and information            could have a material adverse effect on WowWee, our financial condition and our results            of operations.

 

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***Optimal Payments is at risk of loss due to fraud, disputes and            merchant insolvency***.

             

Optimal Payments faces risks of loss due to fraud and disputes between            consumers and merchants, including the unauthorized use of credit card and bank account            information and identity theft, merchant fraud, disputes over the quality of goods and            services, breaches of system security, employee fraud and use of its system for illegal            or improper purposes. When a consumer pays a merchant for goods or services using a            credit card and the cardholder disputes the charge, the amount of the disputed item            gets charged back to Optimal Payments and the credit card association may levy fees            against Optimal Payments. Chargebacks can arise from the unauthorized use of a            cardholder’s card number or from a cardholder’s claim that a merchant            failed to perform a transaction. Disputes can also arise when a consumer pays a            merchant for goods or services using a check and the financial institution returns the            check. In addition, if Optimal Payments’ chargeback or dispute rate becomes            excessive, credit card and check clearing associations may require it to pay fines and            have done so in the past. There is a risk that Optimal Payments may be required to pay            fines in the future and the amount of such fines may be material. While Optimal            Payments attempts to recover from the merchant the amount charged back and the amount            of any fines imposed upon it by credit card and check clearing associations, Optimal            Payments may not always be successful in doing so for various reasons, such as merchant            insolvency.

 

***Optimal Payments may not be able to safeguard against security and            privacy breaches in its electronic transactions.***

             

A significant element of electronic commerce and communication is the            secure transmission of confidential information over public networks. Optimal            Payments’ electronic commerce software uses encryption and authentication            technology to securely transmit confidential information. Although Optimal Payments            strives to use only proven applications for premium data security and integrity to            process electronic transactions, use of these applications may not be sufficient to            address changing market conditions or developments in technology or the security and            privacy concerns of Optimal Payments’ existing and potential            customers.

 

Optimal Payments may not be able to prevent security or privacy            breaches. A security or privacy breach could:

             

|   | **•** | expose Optimal Payments to liability and to                            potentially costly litigation; |
|--------|------------|-------------------------------------------------------------------------------------------------------|

|   | **•** | cause Optimal Payments to incur expenses relating to                            the remediation of these breaches; and |
|--------|------------|------------------------------------------------------------------------------------------------------------------------|

|   | **•** | cause Optimal Payments’ customers to lose                            confidence in its services, harm its reputation, and deter customers                            from using Optimal Payments’ services. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

Although Optimal Payments requires that its agreements with service            providers who have access to merchant and consumer data include confidentiality            obligations that restrict these parties from using or disclosing any consumer or            merchant data except as necessary to perform their services under the applicable            agreements, there can be no assurance that these contractual measures will prevent the            unauthorized disclosure of merchant or consumer data. Individuals may attempt to            circumvent the measures that Optimal Payments takes to protect customer transaction            data. Security breaches could result in the disclosure of proprietary information, such            as bank account or credit card information.

 

If Optimal Payments is unable to protect the security and privacy of its            electronic transactions and data, it could be exposed to risk of loss, litigation and            possible liability, and its business volume, revenues and results of operations will be            materially adversely affected.

 

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***Optimal Payments’ payments systems might be used for illegal            or improper purposes.***

 

Despite its measures to detect and prevent identity theft, unauthorized            use of credit cards, and similar misconduct, and to monitor and comply with laws and            regulations restricting or prohibiting the processing of certain types of transactions            for its merchant customers, Optimal Payments’ payments systems are susceptible to            illegal or improper uses by third parties. These uses may include illegal online            gaming, fraudulent sales of goods or services, illicit sales of prescription            medications or controlled substances, software and other intellectual property piracy,            money laundering, bank fraud, child pornography trafficking, prohibited sales of            alcoholic beverages and tobacco products and online securities fraud. Illegal or            improper use of payments systems may lead to increased government regulation of Optimal            Payments or other legal consequences which may have an adverse impact on its revenues            and results of operations. Laws or regulations that restrict or prohibit the business            activities of Optimal Payments’ merchant customers may prevent Optimal Payments            from providing, or may make it impracticable for it to continue to provide, its            payments systems to such merchants and their customers, which would adversely affect            its revenues and results of operations.

 

***Optimal Payments must comply with credit card and check clearing            association rules and practices, which could impose additional costs and burdens on its            payments business***.

             

Optimal Payments must comply with the operating rules of the various            credit card associations and check clearing associations with which it is registered,            such as the National Automated Clearing House Association for checks. The associations            could adopt operating rules with which it may be difficult or impossible for Optimal            Payments to comply. In addition, cases of fraud or disputes between consumers and            merchants can result in chargebacks. If Optimal Payments’ chargebacks or disputes            become excessive, its processing suppliers could fine it or terminate its ability to            accept credit cards or checks for payments. The termination of its relationship with            credit card or check clearing associations, or acquiring banks, would limit its ability            to provide transaction processing services.

             

***Optimal Payments may not be able to develop new services that are            accepted by its customers.***

             

The success of Optimal Payments’ operations depends upon            acceptance of its electronic payments technology by merchants. Optimal Payments may            experience difficulties that could delay or prevent the successful development,            introduction and marketing of new services and enhancements, or new services and            enhancements may not be introduced in a timely fashion or may not adequately meet the            requirements of the marketplace and achieve market acceptance.

             

***The failure of Optimal Payments’ systems, the systems of            third parties or the Internet could negatively impact its business and harm its            reputation for reliability.***

             

Computer viruses, disgruntled or rogue employees, electronic break-ins,            power losses, telecommunications failures, security breaches, natural disasters and            similar events could damage or disrupt the function of Optimal Payments’ systems            and those of third parties upon whom it relies, such as bank processing and credit card            systems, thereby adversely affecting Optimal Payments’ business and reputation.            Optimal Payments’ insurance policies may not adequately compensate it for any            losses that may occur due to any failures or interruptions in these systems.

             

Higher transaction volumes may require Optimal Payments to expand and            upgrade its technology, transaction processing systems and network infrastructure. It            could experience periodic, temporary capacity constraints, which may cause            unanticipated system disruptions, slower response times and reduced levels of customer            service. Optimal Payments may be unable to accurately project the rate or timing of            increases, if any, in the use of its services or to expand and upgrade its systems and            infrastructure to accommodate these increases in a timely manner.

             

Optimal Payments has developed a formal disaster recovery plan designed            to safeguard against system failures, however, there is no assurance that any disaster            recovery plan that it might implement will protect it from all possible system            failures.

 

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***Increasing government regulation of Internet commerce could make            it more costly or difficult for Optimal Payments to conduct its            business.***

             

As Internet commerce continues to grow, it may become the subject of            increasing government regulation. Much of the current legislation relating to            commercial transactions pre-dates and may be incompatible with Internet electronic            commerce. Well-established financial institutions and credit card companies may be able            to influence the development of regulations that prioritize their interests to Optimal            Payments’ detriment. Regulators may choose to enact or enforce legislation that            restricts Optimal Payments’ operations and other aspects of the electronic            commerce market. 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 apply to the Internet.

 

Existing legislation in Canada, the United States and abroad regulates            communications and commerce specifically. However, the application of such laws in the            context of the Internet and electronic commerce is uncertain. Laws and regulations that            address issues such as user privacy, pricing, online content regulation, taxation and            the characteristics and quality of online services are under consideration by federal,            provincial, state, local and foreign governments and agencies.

 

New laws or regulations relating to the Internet, or applications or            interpretations of existing laws, that decrease the growth in the use of the Internet            or demand for Optimal Payments’ electronic commerce services, or that increase            the costs associated with providing such services or transmitting data over the            Internet could adversely affect our results of operations.

 

***If Optimal Payments’ relationships with its banking partners            deteriorated, its ability to process transactions could be impaired or            halted***.

             

Optimal Payments relies on strategic partnerships and suppliers to help            supply, promote and distribute its services. Optimal Payments particularly depends upon            its strategic banking relationships. The credit card association members and financial            institutions that process electronic transactions have adopted guidelines that apply to            online transactions. While we believe that Optimal Payments’ operations comply            with these guidelines, credit card association members and financial institutions could            nonetheless decide in the future to refuse to process transactions for Optimal            Payments. Such a decision could be implemented with little or no advance notice to            Optimal Payments. If such a situation occurred and Optimal Payments were not able to            conclude alternative arrangements with other credit card association members or            financial institutions, its ability to carry out payment transactions could be impaired            or even halted.

             

***It may be difficult or costly for Optimal Payments to enforce its            rights with respect to assets held in foreign jurisdictions.***

             

Certain of Optimal Payments’ suppliers’ processing            agreements require it to maintain cash reserves with such suppliers. In some instances,            these suppliers are located in overseas jurisdictions, including the Caribbean and            Europe. If a processing supplier does not release its reserves in accordance with its            contractual obligations, Optimal Payments will be required to take legal action within            that foreign jurisdiction. Recovering funds held as reserves through legal action in            foreign jurisdictions could be costly and difficult and the diversion of resources            required to pursue the funds could negatively impact our financial condition and            results of operations.

             

***Optimal Payments’ intellectual property rights may be            infringed by unauthorized third parties.***

             

Optimal Payments relies upon a combination of copyright, trademark and            trade secret laws, non-disclosure and release of interest in intellectual property            agreements and license agreements to establish and protect its proprietary rights in            its service offerings and technology. The source codes for Optimal Payments’            service offerings and technology are protected both as trade secrets and as            unpublished, unregistered copyrighted works. However, Optimal Payments currently has no            patents for its service offerings and technology.

 

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Despite these precautions, it may be possible for a third party to copy            or otherwise obtain and use Optimal Payments’ services or technology without            authorization or to develop similar technology independently. Policing unauthorized use            of its services is and will continue to be difficult, particularly in light of the            global nature of Optimal Payments’ operations, and the laws of other            jurisdictions may offer it little or no effective protection of its intellectual            property rights. Optimal Payments relies in part on “on-screen” licenses,            which are not manually signed by end-users and, therefore, may be unenforceable under            some laws. Optimal Payments may bring litigation proceedings to enforce its            intellectual property rights; however, such litigation, whether successful or            unsuccessful, could result in substantial costs and the diversion of            resources.

             

In addition, there is no assurance that Optimal Payments’ services            are not within the scope of intellectual property rights held by others, either now or            in the future. If a claim is asserted against it by a third party, Optimal Payments may            be forced to seek a license from that third party for the use of the applicable            intellectual property. Such a license, if required, may not be available on reasonable            terms or at all.

             

***Optimal Payments operates in a competitive market for its            services***.

 

Potential competitors in Optimal Payments’ market include credit            card association members, financial institutions, payment processors and other similar            entities, some of which may have greater financial resources than we do, more firmly            entrenched market positions or greater brand recognition. These potential competitors            may require that their own technology, rather than the technology of third parties such            as Optimal Payments, be used in connection with their payment mechanisms. Competition            is likely to intensify as the market develops and matures, which could result in            downward pressure on Optimal Payments’ prices, reduce its margins and erode its            market share.

             

Optimal Payments may not be able to identify, develop, manufacture,            market or support new services or offer new services that appeal to its customers as            fast as its competitors or respond effectively to technological changes or product            innovations by its competitors. If Optimal Payments fails to anticipate or respond            effectively to technological developments and customer requirements or experiences            significant delays in product developments or roll-outs, it may lose its market share            and our revenues and results of operations could be adversely affected.

             

***Optimal Payments relies upon non-exclusive arrangements with            independent sales agents to acquire and retain its            customers***.

             

In addition to its internal sales and marketing efforts, Optimal            Payments relies upon independent sales agents to acquire and retain its customers. Its            arrangements with these independent sales agents are non-exclusive. As a result,            Optimal Payments’ sales agents may enter into arrangements with Optimal            Payments’ competitors that provide preferential treatment to those competitors or            they may terminate their arrangements with Optimal Payments. If Optimal Payments fails            to maintain strong relationships with its independent sales agents or fails to provide            its independent sales agents with sufficient incentives to motivate their sales            efforts, Optimal Payments’ customer base may not expand and could            decrease.

 

***Optimal Payments’ services are based on sophisticated            technology, which may be negatively affected by technological defects and product            development delays***.

             

Services based on sophisticated technology and computing systems, such            as Optimal Payments’ payment processing services, often encounter development            delays, and the underlying technology may contain undetected defects when introduced or            when the volume of services provided increases. Optimal Payments may experience delays            in the development of its transaction processing services or the technology and            computing systems underlying its services. In addition, despite testing, it is possible            that Optimal Payments’ technology may nevertheless contain errors, and this could            delay product launches and innovations and damage its customer relations.

             

***Optimal Payments’ business is subject to fluctuations in            general business conditions.***

             

The current downturn in general economic conditions has caused some of            Optimal Payments’ merchant customers to experience difficulty in supporting their            current operations and implementing their business plans. If these merchants make fewer            sales of their products and services, Optimal Payments will have fewer transactions to            process, resulting in lower revenues.

 

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In addition, in a recessionary environment, the merchants Optimal            Payments serves become subject to a higher risk of insolvency, which could adversely            affect our results of operations. Optimal Payments bears the credit risk for            chargebacks related to billing disputes between credit card holders and merchants. If a            merchant seeks protective relief under bankruptcy laws or is otherwise unable or            unwilling to reimburse Optimal Payments for chargebacks borne by Optimal Payments,            Optimal Payments may be liable for the full transaction amount of a            chargeback.

 

***Due to recently enacted legislation in the United States, our            formerly majority owned subsidiary, FireOne Group plc, has ceased processing            settlements for online gaming transactions originating from United States customers            and, as a result, Optimal Payments’ revenues decreased significantly. Optimal            Payments may not be able to replace the revenues lost from the cessation of this            business.***

 

On October 13, 2006, the United States Unlawful Internet Gambling            Enforcement Act of 2006 was enacted. The Act prohibits any person engaged in the            business of betting or wagering from knowingly accepting payments related to unlawful            bets or wagers transmitted over the Internet. The Act also instructs the U.S. Treasury            Department and Federal Reserve to impose new obligations upon financial institutions            and other payment processors to establish procedures designed to block online            gaming-related financial transactions. It also expressly requires Internet bets and            wagers to comply with the law of the jurisdiction where the wagers are initiated and            received. Upon passage of the Act, our then majority owned subsidiary, FireOne Group            plc, ceased processing settlement transactions originating from United States customers            that may be viewed as related to online gaming. The cessation of this portion of our            payments processing business had a material adverse effect on our revenues and our            results of operations from our payments processing business.Optimal Payments is            actively pursuing strategies to replace the revenues that were lost due to the            cessation of processing online gaming transactions originating from U.S. consumers.            However, it may not be able to identify and engage in other opportunities that will            offset the loss of these revenues.

 

***The legal status of online gaming is uncertain in some of the            jurisdictions in which Optimal Payments continues to provide settlement processing            services for online gaming activities. Future regulation or enforcement proceedings may            make it costly or impossible for Optimal Payments to continue processing transactions            for gaming merchants in those jurisdictions and may subject us to substantial            penalties. Reports of regulatory initiatives or enforcement proceedings that are            unfavorable to Optimal Payments or to its customers or suppliers may adversely affect            the trading price of our common shares.***

 

In many jurisdictions there are few, if any, laws or            regulations that deal directly with payment processing for online gaming            transactions. The legal status of online gaming itself is uncertain in many of the            jurisdictions in which Optimal Payments operates. While some jurisdictions have taken            the position that online gaming is legal and have adopted or are in the process of            reviewing legislation to regulate online gaming, other jurisdictions have taken the            opposite view and enacted legislation to attempt to restrict or prohibit online gaming.            For example, the United States Unlawful Internet Gambling Enforcement Act of 2006            prohibits any person engaged in the business of betting or wagering from knowingly            accepting payments related to unlawful bets or wagers transmitted over the Internet,            which resulted in our then majority owned subsidiary, FireOne Group plc, ceasing to            process settlement transactions originating from United States customers that may be            viewed as related to online gaming. If other governments also decide to enact            legislation restricting or prohibiting online gaming activities in their jurisdictions,            Optimal Payments may also have to cease processing settlement transactions in those            jurisdictions. In addition, we may be exposed to adverse consequences as a result of            future enforcement proceedings, governmental investigations or lawsuits initiated            against Optimal Payments in jurisdictions where online gaming is or becomes restricted            or prohibited, including the United States in the aftermath of the Unlawful Internet            Gambling Enforcement Act of 2006. Any adverse findings, rulings or judgments rendered            against Optimal Payments could involve substantial penalties, fines, injunctions or            other sanctions being invoked against it and could have a material adverse effect on            our business, revenues, operating results and financial condition. Any future            enforcement or legal proceedings threatened or commenced against Optimal Payments            relating to online gaming, whether or not ultimately successful, could involve            substantial litigation expense and the diversion of the attention of key executives.            The outcome of any such litigation cannot be predicted. Future regulation, lawsuits,            investigations, enforcement actions or other similar actions by law enforcement or            regulatory authorities, whether directed against Optimal Payments, its competitors,            customers or suppliers, may also make it costly or unfeasible for Optimal Payments to            continue processing transactions for gaming merchants in the jurisdictions in which it            continues such processing activities. Further, any actual or threatened legislative            development or regulatory proceedings in those jurisdictions that negatively affects a            participant in the online gaming industry could further adversely affect the

 

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trading price of our common shares. From time to time, reports about            regulatory initiatives, or enforcement proceedings that are or would be unfavorable to            us, or to Optimal Payments’ customers or suppliers, have had a swift and negative            impact on the trading price of our common shares, and our common shares may again            experience trading price volatility in the future due to such reports.

             

***Optimal Payments’ status under certain financial services            regulations is unclear.***

             

Optimal Payments operates in an industry subject to government            regulation. Optimal Payments currently is subject to money laundering regulations and            might now or in the future be subject to money transmitter or electronic money            regulations in various jurisdictions. If Optimal Payments is found to be in violation            of any current or future regulations, it could be exposed to financial liability,            including substantial fines which could be imposed on a per transaction basis and            disgorgement of our profits, forced to change its business practices, or forced to            cease doing business altogether or with the residents of one or more            jurisdictions.

 

***We have a material amount of goodwill which, if it becomes            impaired, would result in a reduction in our net income.***

 

Goodwill is the amount by which the cost of an acquisition accounted for            using the purchase method exceeds the fair value of the net assets we acquire. Current            accounting standards require that goodwill be periodically evaluated for impairment            based on the fair value of the reporting unit. We tested Optimal Payments for            impairment at December 31, 2007 and revised our forecast to reflect higher merchant            attrition and lower growth expectations for this business segment. As a result, a            goodwill impairment loss of approximately $22.6 million was recognized in this business            segment. After recording this impairment loss, at December 31, 2007, approximately            $66.2 million, or 22.8%, of our total assets represented goodwill. Any further declines            in our assessment of the fair value of Optimal Payments and any decline in our            assessment of the fair value of WowWee may impact the carrying value of these two            business segments, which could result in a further write-down of our goodwill and a            reduction in our net income.

 

***We may be subject to additional litigation stemming from our            operation of the U-scan self-checkout business.***

             

In 2004, we settled an action alleging that the*U-Scan*self-checkout systems that we            marketed infringed upon the claimant’s patent. In 1999, 2001 and 2003, a second            party sent demand letters to us alleging a different patent infringement. We may in the            future be subject to other litigation relating to our prior involvement in the            self-checkout business. Defending against such litigation may be time consuming,            expensive and distracting from the conduct of our current businesses, and the outcome            of litigation is difficult to predict. The adverse resolution of any specific lawsuit            could have a material adverse effect on our business, results of operations and            financial condition.

 

| **ITEM 1B.** | **UNRESOLVED STAFF COMMENTS** |
|--------------|-------------------------------|

 

|   | We have nothing to report under this item. |
|--------|--------------------------------------------|

 

 

| **ITEM 2.** | **PROPERTIES** |
|-------------|----------------|

 

**Facilities**

 

Our corporate headquarters are currently located in approximately 6,000            square feet of leased space at 3500 de Maisonneuve Blvd West, Suite 1700, Montreal,            Quebec under a lease that expires on October 30, 2010. On or about April 1, 2008, our            corporate headquarters and the offices of our subsidiary, WowWee Canada Inc., will both            relocate to approximately 11,000 square feet of leased space at 3500 de Maisonneuve            Blvd West, Suite 800, Montreal, Quebec under a lease that expires on April 30, 2013.            WowWee Canada Inc. currently occupies approximately 3,000 square feet of leased space            in Montreal, Quebec under a lease that expires on December 31, 2010. We intend to            sublet these premises.

 

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Optimal Payments is located in approximately 30,000 square feet of            leased space at 3500 de Maisonneuve Blvd West, Montreal, Quebec, under a lease that            expires on October 30, 2010. Since February 1st, 2007, 5,835 square feet of            this space has been sublet to a third party. Optimal Payments also has a development            office in Hull, Quebec, and sales offices in Markham, Ontario; Houston, Texas;            Bloomfield Hills, Michigan; Miami, Florida; and Cambridge, England.

 

WowWee Group Limited is located in approximately 20,000 square feet of            leased space in Energy Plaza, 92 Granville Road, Tsimshatsui East Kowloon, Hong Kong            under leases that expire at various dates between June 2008 and November 2010. WowWee            USA, Inc. occupies approximately 1,600 square feet of leased space in La Jolla,            California.

 

| **ITEM 3.** | **LEGAL PROCEEDINGS** |
|-------------|-----------------------|

 

**Legal Proceedings**

 

In March and June 2005, we received letters from Fujitsu claiming            recovery of expenses allegedly incurred and forecast by Fujitsu to be incurred in            relation to the operation of our former*U-Scan*self-checkout business. In December 2005, we were notified by Fujitsu of            its intention to arbitrate its claims. In February 2007, Fujitsu initiated arbitration            proceedings. After consultation with counsel, we believe that there is no basis for            these claims and intend to vigorously defend our position. Management is unable to            determine the resolution of this matter or estimate the ultimate liability, if any,            related thereto.

 

We are also party to litigation arising in the normal course of            operations. We do not expect the resolution of such matters to have a materially            adverse effect on our financial position or results of operations.

 

We were pursuing the recovery of funds withdrawn from a Terra bank            account by one of its credit card suppliers for various service charges assessed            pertaining to periods prior to December 31, 2001, on the belief that these            charges were largely unsubstantiated. The claim, which was being pursued through legal            recourse, was settled and received in July 2007 for $3.0 million.

 

Following announcements by the U.S. Attorney’s Office in the            Southern District of New York relating to its investigation of the U.S. Internet            gambling industry, we announced on May 8, 2007 that we had initiated discussions with            the U.S. Attorney’s Office in the Southern District of New York and are in the            process of responding to a voluntary request for information issued by the U.S.            Attorney’s Office. In connection with such ongoing investigation, we announced on            May 11, 2007 that we had received a copy of warrants of seizure issued by the U.S.            Attorney’s Office against funds of certain payment processors that were on            deposit with two U.S. banks. These funds included $19.2 million that were on deposit to            the credit of our affiliates.

             

| **ITEM 4.** | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY                            HOLDERS** |
|-------------|------------------------------------------------------------------------------------|

 

|   | No matters were                            submitted to a vote of security holders during the fourth quarter of                            fiscal 2007. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

**PART II**

 

| **ITEM 5.** | **MARKET FOR REGISTRANT’S COMMON EQUITY,                            RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY                            SECURITIES** |
|-------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

**Market Information**

 

Our common shares trade on the Nasdaq Global Market under the symbol            “OPMR.” The following table sets forth the range of high and low sales            prices for our common shares as reported by the Nasdaq Global Market.

             

 

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|        | **Nasdaq Global Market**              |
|-------------|---------------------------------------|
|        | **$                            High** | **$                            Low** |
|        |                                  |   |
| **2007**    |                                  |   |
| 4th Quarter | 6.00                                  | 3.28 |
| 3rd Quarter | 7.79                                  | 5.22 |
| 2ndQuarter  | 9.56                                  | 7.32 |
| 1stQuarter  | 9.94                                  | 7.45 |
|        |                                  |   |
| **2006**    |                                  |   |
| 4th Quarter | 9.90                                  | 7.54 |
| 3rd Quarter | 14.90                                 | 9.88 |
| 2ndQuarter  | 16.90                                 | 12.71 |
| 1stQuarter  | 22.42                                 | 14.17 |

 

**Holders**

 

|   | At February 29, 2008, there were 604 stockholders of                            record of our common shares. |
|--------|--------------------------------------------------------------------------------------------------------------|

 

**Dividends**

 

Our policy is to retain all earnings, if any are realized, for the            development and growth of our business. We have never declared or paid cash dividends            on our common shares and we do not anticipate paying cash dividends in the foreseeable            future. Any determination to pay dividends will be at the discretion of our Board of            Directors and will depend upon our financial condition, results of operations, capital            requirements, limitations contained in loan agreements, if any, and such other factors            as our Board of Directors deems relevant.

 

**Performance Graph**

 

The following graph compares the cumulative total shareholder return on            our common shares with the Nasdaq Composite Index for the five years ended December 31,            2007. The graph sets the beginning value of our common shares and the Nasdaq Composite            Index at $100 and assumes that all dividends are reinvested.

 

 

 

             

|                                                                | Dec-02 | Dec-03 | Dec-04 | Dec-05 | Dec-06 | Dec-07 |
|---------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                                                |   |   |   |   |   |   |
| Optimal Group                                    Inc. common shares | 100.00 | 22.57  | 33.23  | 57.15  | 26.85  | 11.71  |
| Nasdaq Composite                                    Index           | 100.00 | 102.72 | 111.54 | 113.07 | 123.84 | 135.99 |

 

 

 

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**Purchases of Equity Securities**

 

The following table is a summary of our purchases of common shares for            the period from November 21, 2006 to December 31, 2007.

| **Optimal Group Inc. Purchases of Equity                                Securities** |
|--------------------------------------------------------------------------------------|
|                                                                                 |
| **Period**                                                                           | **Total Number of****Shares Purchased** | **Average Price Paid****Per Share ($)** | ******Total Number of Shares Purchased                                as Part of Publicly Announced Plans or                                Programs******(1)******** | ******Maximum Number of Shares that May                                Yet Be Purchased Under the Plans or                                Programs******(1)******** |
|                                                                                 |   |   |   |   |
| October 1, 2007 – October 31,                                2007              | Nil     | N/A | Nil | 1,100,000     |
| November 1, 2007 – November 20,                                2007            | Nil     | N/A | Nil | 1,100,000     |
| November 21, 2007 – November 30,                                2007           | Nil     | N/A | Nil | 1,300,000                                (3) |
| December 1, 2007 – December 31,                                2007            | 65,302(3) | 3.8882 | 65,302 | 1,234,698     |
|                                                                                 |   |   |   |   |
| Total                                                                                | 65,302     | 3.8882 | 65,302 | 1,234,698     |

 

 

|   | (1) | No purchases of our common shares                            were made under our stock purchase program publicly announced on                            November 6, 2006 under which we were authorized to purchase up to                            1,100,000 shares, being approximately 4.6% of the 23,795,182 common                            shares outstanding as at November 13, 2006. We were authorized under                            our 2006 stock purchase program to purchase our common shares on the                            open market through the facilities of the Nasdaq Stock Market from time                            to time over the course of the 12-month period that commenced on                            November 21, 2006 and ended on November 20, 2007. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | On November 6, 2007 we announced the                            renewal of our stock purchase program authorizing the purchase of up to                            1,300,000 shares, being approximately 5% of the 26,036,548 common                            shares outstanding as at November 14, 2007. We are authorized under our                            2007 stock purchase program to purchase our common shares on the open                            market through the facilities of the Nasdaq Stock Market from time to                            time over the course of the 12-month period that commenced on November                            21, 2007 and ends on November 20, 2008. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | All the shares were purchased in                            December 2007; 53,400 shares were cancelled in December 2007. The                            purchase of 11,902 shares was settled, and the purchase price was paid,                            only in January 2008, at which time these shares were                            cancelled. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

| **ITEM 6.** | **SELECTED FINANCIAL AND OTHER DATA** |
|-------------|---------------------------------------|

 

 

The selected consolidated statements of operations data for the three            years ended December 31, 2007 and the consolidated balance sheet data at December 31,            2007 and 2006 should be read in conjunction with the audited financial statements and            related “Management’s Discussion and Analysis of Results of Operations and            Financial Condition” and other financial information presented elsewhere in this            annual report on Form 10-K. The selected consolidated statement of operations for the            years ended December 31, 2004 and 2003 and the consolidated balance sheet data at            December 31, 2005, 2004 and 2003 have been derived from audited financial statements            not included herein. The selected consolidated statement of earnings data for the years            ended December 31, 2004 and 2003 and the selected consolidated balance sheet data at            December 31, 2004 and 2003 include the operations of our former hardware maintenance            and repair services business and our former U-Scan self-check-out business as            discontinued operations and the comparability of the information presented for such            periods is affected accordingly.

 

Our consolidated financial statements are prepared on the basis of            generally accepted accounting principles (“GAAP”) in Canada, which differs            in certain respects from U.S. GAAP. For a description of the material differences            between Canadian GAAP and U.S. GAAP as they relate to our consolidated financial            statements, see note 24 of the notes to our consolidated financial            statements.

 

26

 

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|                                                                                                                       | **Year                                ended December 31,**                            |
|----------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|
|                                                                                                                       | **2007**                                                                              | **2006** | **2005** | **2004** | **2003** |
|                                                                                                                       | **Audited**                                                                           | **Unaudited** |   |
|                                                                                                                       | **(U.S. dollars, in thousands except per share                                data)** |
| **Consolidated Statement of Operations                                Data:**                                              |                                                                                  |   |   |   |   |   |   |   |   |   |
| Revenues                                                                                                                   | $                                                                                     | 123,328  | $ | 191,893  | $ | 144,898  | $ | 51,491  | $ | -   |
| Transaction processing and cost of sales                                                                                   |                                                                                  | 78,685  |   | 94,906  |   | 67,495  |   | 23,866  |   | -   |
| Selling, general and administrative                                                                                        |                                                                                  | 31,679  |   | 47,553  |   | 35,689  |   | 13,526  |   | -   |
| Amortization of intangibles pertaining to                                transaction processing and cost of sales          |                                                                                  | 13,971  |   | 12,129  |   | 7,833  |   | 1,791  |   | -   |
| Amortization of property and equipment                                                                                     |                                                                                  | 1,908  |   | 1,520  |   | 1,324  |   | 1,030  |   | -   |
| Stock-based compensation pertaining to selling,                                general and administrative                  |                                                                                  | 6,257  |   | 1,707  |   | 20,191  |   | 4,394  |   | -   |
| Research and development                                                                                                   |                                                                                  | 3,278  |   | 3,388  |   | 2,659  |   | 1,511  |   | -   |
| Operating leases                                                                                                           |                                                                                  | 1,196  |   | 1,498  |   | 1,103  |   | 623  |   | -   |
| Restructuring costs                                                                                                        |                                                                                  | - |   | 1,581  |   | 3,299  |   | -   |   | -   |
| Impairment loss                                                                                                            |                                                                                  | 22,552  |   | 1,910  |   | -   |   | -   |   | -   |
| Investment income                                                                                                          |                                                                                  | 5,831  |   | 8,388  |   | 2,973  |   | 731  |   | -   |
| Gain on sale of interest in FireOne                                                                                        |                                                                                  | - |   | -   |   | 30,411  |   | -   |   | -   |
| (Loss) earnings from continuing operations before                                income taxes and non-controlling interest |                                                                                  | (30,367) |   | 34,089  |   | 38,689  |   | 5,481  |   | -   |
| Income tax provision                                                                                                       |                                                                                  | (5,985) |   | (1,070) |   | (11,388) |   | (1,486) |   | -   |
| Non-controlling interest                                                                                                   |                                                                                  | (159) |   | (6,934) |   | (4,181) |   | -   |   | -   |
| (Loss) earnings from continuing                                operations                                                  |                                                                                  | (36,511) |   | 26,085  |   | 23,120  |   | 3,995  |   | -   |
| Loss from discontinued operations, net of income                                taxes                                      |                                                                                  | - |   | (9,023) |   | (22,355) |   | (17,412) |   | (6,168) |
| (Loss) gain on disposal of net assets from                                discontinued operations, net of income taxes     |                                                                                  | - |   | (4,283) |   | (188)  |   | 4,164  |   | -   |
| Net (loss) earnings                                                                                                        | $                                                                                     | (36,511) | $ | 12,779  | $ | 577  | $ | (9,253) | $ | (6,168) |
|                                                                                                                       |                                                                                  |   |   |   |   |   |   |   |   |   |
| Weighted average number of shares                                (thousands):                                              |                                                                                  |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                      |                                                                                  | 24,179  |   | 23,629  |   | 22,869  |   | 20,290  |   | 14,936  |
| Diluted                                                                                                                    |                                                                                  | 24,179  |   | 25,439  |   | 25,345  |   | 20,426  |   | 14,937  |
| Net (loss) earnings per share:                                                                                             |                                                                                  |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                      | $                                                                                     | (1.51) | $ | 0.54  | $ | 0.03  | $ | (0.46) | $ | (0.41) |
| Diluted                                                                                                                    | $                                                                                     | (1.51) | $ | 0.50  | $ | 0.02  | $ | (0.46) | $ | (0.41) |
|                                                                                                                            |                                                                                       |  |  |  |  |  |  |  |  |  |  |

 

 

 

 

27

 

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| **Balance Sheet                            Data:**                                                      | **December                            31,**                 |
|---------------------------------------------------------------------------------------------------------|-------------------------------------------------------------|
|                                                                                                    | **2007**                                                    | **2006** | **2005** | **2004** | **2003** |
|                                                                                                    | **Audited**                                                 |
|                                                                                                    | **(U.S.                            dollars, in thousands)** |
|                                                                                                    |                                                        |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents, short-term investments and                            settlement assets      | $                                                           | 64,385 | $ | 182,604 | $ | 201,324 | $ | 165,525 | $ | 78,514 |
| Cash and short-term investments held as                            reserves                             |                                                        | 8,579 |   | 22,070 |   | 25,736 |   | 24,379 |   | -  |
|                                                                                                    |                                                        |   |   |   |   |   |   |   |   |   |
| Working capital (excluding cash and short-term                            investments held as reserves) |                                                        | 15,914 |   | 97,395 |   | 65,045 |   | 68,768 |   | 92,745 |
| Total assets                                                                                            |                                                        | 290,281 |   | 340,537 |   | 385,466 |   | 295,246 |   | 135,543 |
| Bank indebtedness                                                                                       |                                                        | -  |   | 8,581 |   | 8,390 |   | 8,301 |   | 10,726 |
| Customer reserves and security deposits                                                                 |                                                        | 21,324 |   | 61,897 |   | 112,422 |   | 77,574 |   | -  |
| Shareholders’ equity                                                                              |                                                        | 201,705 |   | 219,382 |   | 203,290 |   | 176,681 |   | 113,293 |
|                                                                                                         |                                                             |  |  |  |  |  |  |  |  |  |  |  |

 

 

 

| **U.S. GAAP Financial                            Data:** | **Year                            ended December 31,**                            |          |
|----------------------------------------------------------|-----------------------------------------------------------------------------------|---------------|
|                                                     | **2007**                                                                          | **2006**      | **2005** | **2004** | **2003** |   |
|                                                     | **Audited**                                                                       | **Unaudited** |   |
|                                                     | **(U.S.                            dollars, in thousands except per share data)** |          |
|                                                     |                                                                              |          |   |   |   |   |   |   |   |   |
| Revenues                                                 | $                                                                                 | 123,328  | $ | 191,893  | $ | 144,898  | $ | 51,491  | $ | -   |
| Net (loss) earnings                                      |                                                                              | (36,511)      |   | 12,779  |   | 577  |   | (9,253) |   | (6,168) |
| Basic net (loss) earnings per share                      |                                                                              | (1.51)        |   | 0.54  |   | 0.03  |   | (0.46) |   | (0.41) |
| Diluted net (loss) earnings per share                    |                                                                              | (1.51)        |   | 0.50  |   | 0.02  |   | (0.46) |   | (0.41) |
|                                                     |                                                                              |
|                                                     |                                                                              |
|                                                     | **December                            31,**                                       |          |
|                                                     | **2007**                                                                          | **2006**      | **2005** | **2004** | **2003** |   |
|                                                     | **Audited**                                                                       |          |
|                                                     | **(U.S.                            dollars, in thousands)**                       |          |
|                                                     |                                                                              |          |   |   |   |   |
| Total assets                                             | $                                                                                 | 290,281  | $ | 340,537  | $ | 385,466  | $ | 295,246  | $ | 135,543  |   |
|                                                     |                                                                              |          |   |   |   |   |   |   |   |   |
|                                                          |                                                                                   |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

             

 

 

 

 

 

 

 

28

 

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| **ITEM 7.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF                            FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|----------------------------------------------------------------------------------------------------------------------------|

             

The following discussion of the financial condition and results of            operations of our company describes our business, our vision and strategy, seasonality            and trends within our business environment, the critical accounting policies of our            company that will help you understand our consolidated financial statements, the            principal factors affecting our results of operations, and our liquidity and capital            resources. This discussion should be read in conjunction with our consolidated            financial statements, the factors set forth under “Item 1A. Risk Factors”            and “Cautionary Statement Regarding Forward-Looking Statements” and all            other financial information contained elsewhere in this annual report. All dollar            amounts are expressed in United States dollars (unless otherwise stated) and, other            than those expressed in millions of dollars, have been rounded to the nearest            thousand.

             

We prepare our consolidated financial statements in accordance with            Canadian GAAP, with reconciliation to U.S. GAAP, as disclosed in note 24 of the notes            to our consolidated financial statements. For a description of the material differences            between Canadian GAAP and U.S. GAAP as they relate to our consolidated financial            statements, see note 24 of the notes to our consolidated financial            statements.

 

**Overview**

             

We operated businesses in two segments at various times during 2007.            Through WowWee (our business segment established by acquisition in November 2007 and            comprised of WowWee Group Limited, WowWee Canada Inc. and WowWee USA, Inc.), we design,            develop, market and distribute technology-based, consumer robotic, toy and            entertainment products. Through Optimal Payments (our business segment comprised of            Optimal Payments Inc. and its related affiliates), we process credit card payments for            small and medium-sized Internet businesses, mail-order/telephone-order (MOTO) merchants            and retail point-of-sale merchants, and process electronic checks and direct debits            online and by telephone.

 

On February 23, 2007, Optimal Acquisition Inc., our wholly-owned            subsidiary, completed the acquisition of all of the outstanding shares of Optimal            Payments (Ireland) Limited (formerly known as FireOne Group plc) (“OPIL”)            held by non-controlling shareholders.

 

**Our Industry Segments**

 

We operated in two segments during 2007: WowWee and Optimal Payments            (see note 20 of the notes to our consolidated financial statements).

 

**WOWWEE**

 

Based in Hong Kong, with offices in La Jolla, California and Montreal,            Quebec, WowWee designs, develops, markets and distributes technology-based, consumer            robotic, toy and entertainment products that can be sold at a variety of price points.            For 2008, WowWee’s product offering encompasses four distinct lines: WowWee            Robotics, WowWee Flytech, WowWee Alive and WowWee Technologies. See “Item 1            – Business” for details of WowWee’s product lines.

 

WowWee products are sold in a range of brick and mortar channels            including grocery stores, pharmacies, toy shops, department stores and high-end            consumer technologies stores. A majority of our retailer customers in the U.S. also            carries the full line of WowWee products on their Internet sales sites. Online sales of            WowWee’s products are also made through Internet-based “e-tailers”            such as Amazon and Buy.com.

 

29

 

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WowWee’s products are produced in China by third party            manufacturers with which WowWee has long-standing relationships. Consistent with            industry practice, the use of third party manufacturers allows WowWee to avoid            incurring fixed manufacturing costs, while improving flexibility, capacity and            production technology. By outsourcing its manufacturing process, WowWee maintains a            flexible business model that enables it to be responsive to changing technology. In            addition, once a product has reached its commercialization phase, WowWee is able to            minimize inventory risk by manufacturing products based upon actual customer orders.            Upon final assembly, products can be shipped directly from the manufacturing locations            to retailers and distributors, with title to the products passing to retailer customers            in China. Although WowWee does not conduct the day-to-day manufacturing of its            products, it is extensively involved in the design of the product prototype and            production tools, dies and moulds for its products and seeks to ensure quality control            by actively reviewing the production process and testing the products produced by its            manufacturers. WowWee employs quality control inspectors who rotate among its            manufacturers’ factories to monitor the production of substantially all of its            products. WowWee’s quality assurance personnel advise as to compliance with            applicable regulations during each phase of product development, and perform compliance            testing, and coordinate third party independent compliance testing, on all WowWee            products. Once pre-production testing has been completed and product production has            been approved, WowWee`s quality assurance personnel monitor production at the            manufacturer’s facility for compliance with WowWee’s quality            requirements.

 

Within the United States and Canada, WowWee sells its products directly            to its retailer customers through its direct sales channel and through independent            sales representatives. For retailers across the rest of the world, WowWee utilizes a            network of distributors located in various jurisdictions. WowWee products are also            available for sale through WowWee’s Internet-based store            (www.wowweestore.com            ). In 2007, approximately 55% of its products were sold in North America, with the            balance being sold internationally. WowWee does not have written agreements with its            customers. Instead, sales are made based on purchase orders, primarily against letters            of credit. The majority of orders are traditionally written during the first two            quarters of the year, with shipments occurring throughout the year as new product            becomes available. The majority of product shipments occur during the third and fourth            quarters of the year. Revenue is recognized when (i) persuasive evidence of an            arrangement exists; (ii) products are shipped to customers who assume risk of loss,            (iii) collection of the respective receivable is probable and (iv) sales price is fixed            or determinable. Accruals for customer discounts, rebates, incentives and allowances            are recorded when the related revenues are recognized.

 

WowWee’s 32-person engineering and design team develops new            technologies using internal capabilities and seeks to identify emerging or            underutilized innovations that are currently being developed or that are available in            the marketplace. In order to leverage the man-hours invested in prior products, older            generations of products frequently form the foundation for the next generation of            products as well as new product lines. New technologies are then integrated to enhance            the overall functionality of the product. In sourcing technologies, WowWee reviews the            latest technology innovations at trade-shows, conferences, colleges and universities,            on the Internet, and through word-of-mouth. WowWee regularly reviews technologies or            product concepts from third party sources that it believes could have potential            synergies with WowWee’s current product line or that could be successfully            commercialized based upon WowWee’s development process. WowWee also licenses            third party technologies for development within unique consumer applications developed            by WowWee.

 

 

30

 

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**OPTIMALPAYMENTS**

 

Optimal Payments provides technology and services that businesses            require to accept credit card, electronic check and direct debit payments. Optimal            Payments processes credit card payments for card-not-present and card-present            transactions, including Internet businesses, mail-order/telephone-order merchants, and            retail point-of-sale merchants. Optimal Payments also processes checks and direct            debits online and by telephone.

             

Optimal Payments generates revenues primarily from fees charged to            merchants for processing services. Fees charged to merchants typically include a            discount rate, based upon a percentage of the dollar amounts processed, and a variety            of fixed transaction fees. Merchant fees charged are based upon the merchant’s            transaction volume and risk profile. Generally, higher discount rates are charged for            card-not-present transactions than for card-present transactions in order to compensate            for the higher cost of underwriting and managing the increased chargeback risk            associated with these transactions. Other fees are derived from a variety of fixed            transaction fees, including fees for monthly minimum charge volume requirements,            statement fees, annual fees and fees for other miscellaneous items, such as handling            chargebacks. Revenue is recognized primarily at the time the transaction is performed.            Where Optimal Payments is the primary party responsible for providing processing            services, revenue is recorded on a gross basis and amounts paid to the acquiring            processing supplier are recorded as part of our transaction processing expenses. Where            Optimal Payments is not the primary party in providing a merchant with processing            services, we record revenue net of amounts paid to the acquiring processing supplier            (see note 4 (m) of the notes to our consolidated financial statements).

             

Disputes between a customer and a merchant periodically arise as a            result of, among other things, consumer dissatisfaction with merchandise quality or            merchant services. Such disputes may not always be resolved in the merchant’s            favor. If a dispute is not resolved in the merchant’s favor, the transaction is            charged back to Optimal Payments and the purchase price is refunded to the            merchant’s customer. If Optimal Payments is unable to collect the amount charged            back from the merchant, it bears the credit risk for the full amount of the            transaction. As a result, Optimal Payments’ acquiring processing suppliers            require it to maintain certain amounts with them as reserves. Amounts withheld from            Optimal Payments by its acquiring processing suppliers as reserves are included as            current assets on our balance sheet under “held as reserves”. Optimal            Payments retains a percentage of amounts owed to certain merchants based on processing            dollar volume, typically for a six-month period, to absorb potential losses arising as            a result of, among other things, disputes between consumers and merchants or credit            card or check clearing association fines related to chargeback activity. These reserves            comprise specifically identifiable reserves for merchant transactions for which losses            can be estimated and an estimate of loss in the remaining portfolio based on            experience. The aggregate amount withheld is referred to as “held as            reserves” and the amount that Optimal Payments must eventually pay its customers            in respect of remaining reserves is recorded under the line item “Customer            reserves and security deposits” on the balance sheet contained in our            consolidated financial statements.

             

**Significant Developments in Our Business in 2007**

 

On November 7, 2007, we acquired substantially all of the assets of            WowWee Limited, a privately-held Hong Kong-based designer, developer, marketer and            distributor of technology-based, consumer robotic, toy and entertainment products, as            well as substantially all of the assets of WowWee Marketing, Inc., with offices in            California, and WowWee Group Company, with offices in Canada. WowWee Marketing and            WowWee Group were service providers to WowWee Limited in the operation of its            business. We believe that our acquisition will provide the WowWee business with greater            financial and operational resources to grow both in North America and internationally,            and to build upon the existing consumer-focused franchise of the business, by            capitalizing on its corporate brands through the development of a cross-platform            entertainment media strategy.

 

The total purchase price we paid for the WowWee business was $60,421,            consisting of cash consideration of $46,570, the issuance of 2,169,197 common shares            with a fair value of $10,000 and a warrant to purchase 820,000 common shares having an            estimated fair value $2,696. The warrant has an exercise price of $5.56 per share and            is exercisable for a period of 7 years. Our transaction costs in connection with this            transaction were approximately $1,155.

 

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Following announcements by the U.S. Attorney’s Office in the            Southern District of New York relating to its investigation of the U.S. Internet            gambling industry, we announced on May 8, 2007 that we had initiated discussions with            the U.S. Attorney’s Office in the Southern District of New York and are in the            process of responding to a voluntary request for information issued by the U.S.            Attorney’s Office. In connection with such ongoing investigation, we announced on            May 11, 2007 that we had received a copy of warrants of seizure issued by the U.S.            Attorney’s Office against funds of certain payment processors that were on            deposit with two U.S. banks. These funds included $19.2 million that were on deposit to            the credit of affiliates of ours. The total amount seized of $19.2 million is presented            as long-term restricted cash on the consolidated balance sheets. We have not recorded            any provision for this matter in our consolidated financial statements because the            outcome of these discussions and the amount of loss, if any, is not            determinable.

 

On February 23, 2007, Optimal Acquisition Inc., our wholly-owned            subsidiary, completed the acquisition of all of the outstanding shares of OPIL held by            non-controlling shareholders, which as of that date became a wholly-owned subsidiary of            ours. Effective February 23, 2007, a non-controlling interest is no longer            recorded in the consolidated financial statements. Our transaction costs in connection            with this transaction were $1.7 million. The transaction was accounted for using the            purchase method. We recorded goodwill of $1.6 million in connection with this            transaction.

 

**Seasonality**

             

Revenue derived from the Optimal Payments business segment is currently            not subject to seasonality. Revenue from WowWee business segment is subject to seasonal            variability with a significant portion of revenues generated in the third and fourth            quarter of each calendar year.

             

**Critical Accounting Policies and Estimates**

 

Our consolidated financial statements have been prepared in accordance            with Canadian GAAP, which requires us to make numerous estimates and assumptions.            Financial results as determined by actual events could differ from those estimates and            assumptions, and therefore affect our reported results of operations and financial            position. Our significant accounting policies are more fully described in note 4 of the            notes to our consolidated financial statements. The critical accounting policies            described here are those that are most important to the depiction of our financial            condition and results of operations. The preparation of financial statements also            involves significant management judgment in making estimates about the effect of            matters that are inherently uncertain. While best estimates have been used for            reporting financial statement items subject to measurement uncertainty, management            considers that it is possible, based on existing knowledge, that changes in future            conditions in the near term could affect the reported amounts of assets and liabilities            and disclosures of contingent assets and liabilities. “Near term” is            considered to be within one year from the date of the financial statements.

             

***Stock-based Compensation***

 

We use the fair value-based method to account for stock-based            compensation and other stock-based payments, such as stock options and restricted share            units. Under the fair value-based method, compensation cost is measured at fair value            at the date of grant and is expensed over the award’s vesting period. The fair            value of stock options granted is determined at the date of grant using the            Black-Scholes option pricing model, which requires certain assumptions, including            future stock price volatility, risk-free interest rates, and expected time to exercise.            Changes to any of these assumptions, or the use of a different option pricing model,            would result in different fair values for stock-based compensation.

             

***Reserve for Losses on Merchant Accounts***

 

When a consumer pays a merchant for goods or services online and the            consumer subsequently disputes the online transaction, the amount of the disputed item            gets charged back to Optimal Payments and the credit card or clearing bank association            may levy a fee against it. In addition, if Optimal Payments’ chargeback rate            becomes excessive, the associations can also require it to pay fines. In turn, Optimal            Payments attempts to recover from the merchant the amount charged back and the amount            of such fines. However, it may not always be successful in doing so, for reasons which            could include merchant insolvency. We evaluate the risk associated with merchants and            consumers and estimate our loss based primarily on historical experience and other            relevant factors.

 

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***Goodwill and Other Intangibles***

 

We account for business acquisitions using the purchase method.            Accordingly, the purchase price of a business acquisition is allocated to its            identifiable net assets, including identifiable intangible assets, on the basis of            estimated fair values as at the date of purchase, with any excess being assigned to            goodwill. We estimate the fair value of assets and liabilities acquired at the date of            acquisition using a projected discounted cash flow method and other valuation methods.            We make a number of significant estimates when calculating fair value using a projected            discounted cash flow method. These estimates include estimating projected future cash            flows, the number of years used, the discount rate and others. We believe that our            estimates and valuation methods are reasonable. They are consistent with our inherent            planning and reflect our best estimates, but they have inherent uncertainties that            management may not be able to control.

 

Goodwill is not amortized but rather evaluated under an impairment            approach. Other intangible assets with finite lives continue to be amortized over their            estimated useful lives. The amounts recorded as intangible assets at the date of            acquisition represent the estimated fair value of these assets based on estimated            future cash flows discounted at appropriate discount rates. In addition, in our            assessment of impairment, we are required to determine the fair value of the businesses            from which the goodwill and intangibles originated. For intangibles with finite lives,            we make estimates of future cash flows to be generated from the related            assets.

 

***Income Taxes***

 

We provide for income taxes using the asset and liability method of tax            allocation. Under this method, future income tax assets and liabilities are determined            based on deductible or taxable temporary differences between financial statement values            and tax values of assets and liabilities using substantively enacted income tax rates            expected to be in effect for the year in which the differences are expected to reverse.            We establish a valuation allowance against future income tax assets if, based on            available information, it is more likely than not that some or all of the future income            tax assets will not be realized. In assessing the reliability of tax assets, we            consider whether it is more likely than not that some portion or all of the tax assets            will not be realized. The ultimate realization of the future tax assets is dependent            upon the generation of future taxable income during the periods in which the temporary            differences become deductible. We considered the scheduled reversal of tax liabilities,            projected future taxable income, and tax planning strategies in making this            assessment.

             

***Contingent liabilities***

 

Our former gaming payment processing services segment derived a            substantial portion of its revenue prior to October 13, 2006 from processing            transactions from U.S. based gaming. Therefore, we may be exposed to adverse            consequences as a result of enforcement proceedings, governmental investigations or            lawsuits initiated against us in jurisdictions where gaming is or becomes restricted or            prohibited. Following announcements by the U.S. Attorney’s Office in the Southern            District of New York relating to its investigation of the U.S. Internet gambling            industry, we announced on May 8, 2007 that we had initiated discussions with the U.S.            Attorney’s Office in the Southern District of New York and are in the process of            responding to a voluntary request for information issued by the U.S. Attorney’s            Office. We have not recorded any provision for this matter because the outcome of these            discussions and the amount of loss, if any, are not determinable. While best estimates            have been used for reporting financial statement items subject to measurement            uncertainty, management considers that it is possible that changes in future conditions            in the near term could require a material change in the recognized amounts of certain            assets and liabilities. “Near term” is considered to be within one year            from the date of the financial statements.

 

We are also party to litigation arising in the normal course of            operations. The results of legal proceedings cannot be predicted with certainty. Should            we fail to prevail in any of these legal matters or should several legal matters be            resolved against us in the same reporting period, the consolidated operating results of            a particular reporting period could be materially adversely affected.

 

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**Recent Accounting Pronouncements**

 

| ***(a)*** | ***New Accounting                            Policie**s* |
|-----------|----------------------------------------------------------|

 

The following accounting standards have recently been issued by the            Canadian Institute of Chartered Accountants (CICA), and the Financial Accounting            Standard Board (FASB) that are relevant to our company.

 

 

Effective January 1, 2007, we adopted the Canadian Institute of            Chartered Accountants (CICA) Handbook Section 1530, Comprehensive Income, CICA Handbook            Section 3251, Equity, CICA Handbook Section 3855, Financial Instruments –            Recognition and Measurement, CICA Handbook Section 3861, Financial Instruments –            Disclosure and Presentation, and CICA Handbook Section 3865, Hedges. Sections 3855,            3861 and 3865 provide comprehensive requirements for the recognition and measurement of            financial instruments, as well as standards on when and how hedge accounting may be            applied. Handbook Section 3251 establishes standards for the presentation of equity and            change in equity during the reporting period and requires us to present separately            equity components and changes in equity arising from (i) net earnings; (ii) other            comprehensive income; (iii) other changes in retained earnings; (iv) changes in            contributed surplus and (v) changes in share capital. A new consolidated statement of            changes in shareholders’ equity is presented in our consolidated financial            statements. Handbook Section 1530 also establishes standards for reporting and            displaying comprehensive income. Comprehensive income is defined as the change in            equity from transactions and other events from non-owner sources. Other comprehensive            income refers to items recognized in comprehensive income but that are excluded from            net income calculated in accordance with generally accepted accounting principles            (GAAP).

             

Under these new standards, all financial instruments are classified into            one of the following five categories: held-for-trading, held-to-maturity investments,            loans and receivables, available-for-sale financial assets or other financial            liabilities. Upon initial recognition, all financial assets and liabilities are            recognized at fair value. Subsequent to initial recognition, all financial instruments,            including derivatives, are included in the consolidated balance sheet and are measured            at fair market value with the exception of loans and receivables, held-to-maturity            investments and other financial liabilities, which will be measured at amortized cost.            Subsequent measurement and recognition of changes in fair value of financial            instruments depend on their initial classification. Held-for-trading financial            investments are measured at fair value and all gains and losses are included in net            income in the period in which they arise. Available-for-sale financial instruments are            measured at fair value with revaluation gains and losses included in other            comprehensive income until the asset is removed from the balance sheet.

             

The standards require derivative instruments to be recorded as either            assets or liabilities measured at their fair value unless exempted from derivative            treatment as a normal purchase and sale. Certain derivatives embedded in other            contracts must also be measured at fair value. All changes in the fair value of            derivatives are recognized in earnings unless specific hedge criteria are met, which            requires that a company must formally document, designate and assess the effectiveness            of transactions that receive hedge accounting. We chose to review all contracts in            place on January 1, 2007 that were entered into after January 1, 2003, for any            embedded derivatives needed to be accounted for separately at fair value from the base            contract.

             

As a result of the adoption of these standards, we have classified our            cash and cash equivalents, short-term investments, cash and short-term investments held            as reserves, and restricted cash as available for sale. We have classified our accounts            receivable and settlement assets as loans and receivables, and accounts payable and            accrued liabilities, and customer reserves and security deposits as other financial            liabilities, all of which are measured at amortized cost. The adoption of these new            standards also resulted in the reclassification of the amount of $1,484 previously            recorded in “Cumulative translation adjustment” to “Accumulated other            comprehensive loss” on the consolidated balance sheets. The adoption of these            standards had no impact on the consolidated statement of earnings.

             

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| ***(b)*** | ***Future Accounting                            Pronouncements*** |
|-----------|-------------------------------------------------------------------|

 

The following accounting pronouncements have recently been issued by the            Canadian Institute of Chartered Accountants (CICA), and the Financial Accounting            Standard Board (FASB) that may be relevant to our company.

             

 

Section 1535, Capital Disclosures, established guidelines for disclosure            of both qualitative and quantitative information that enables users of financial            statements to evaluate the entity’s objectives, policies and processes for            managing capital. This new standard relates to disclosure only and will not impact our            financial results. This standard is effective January 1, 2008.

             

 

Section 3862,*Financial Instruments -            Disclosure*, describes the required disclosure for the            assessment of the significance of financial instruments for an entity’s financial            position and performance and of the nature and extent of risk arising from financial            instruments to which the entity is exposed and how the entity manages those risks.            Section 3863,*Financial Instruments –            Presentation*, establishes standards for presentation of            financial instruments and non-financial derivatives. It carries forward the            presentation related requirements of Section 3861,*Financial            Instruments - Disclosure and Presentation*. These new            standards relate to disclosure only and will not impact our financial results. These            standards are effective January 1, 2008.

 

 

In June 2007, CICA issued Section 3031, Inventories, which replaces            Section 3030 and harmonizes the Canadian standards related to inventories with IFRS.            This Section provides changes to the measurement and more extensive guidance on the            determination of cost, including allocation of overhead; narrows the permitted cost            formulas; requires impairment testing; and expands the disclosure requirements to            increase transparency. This Section applies to interim and annual financial statements            for fiscal years beginning on or after January 1, 2008. The adoption of this standard            is not expected to have a significant impact on our consolidated financial            statements.

 

 

In 2005, the Accounting Standards Board of Canada (AcSB) announced that            accounting standards in Canada are to converge with International Financial Reporting            Standards (IFRS). In May 2007, the CICA published an updated version of its            “Implementation Plan for Incorporating International Financial Reporting            Standards into Canadian GAAP”. This plan includes an outline of the key decisions            that the CICA needs to make as it implements the Strategic Plan for publicly            accountable enterprises that will converge Canadian generally accepted accounting            standards with IFRS. While IFRS uses a conceptual framework similar to Canadian GAAP,            there are significant differences in accounting standards which must be addressed.            These standards are effective for fiscal years beginning on or after January 1,            2011.

             

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*SFAS No. 141R, Business Combinations*

 

In December 2007, the FASB issued a revised standard on accounting for            business combinations. The major changes to accounting for business combinations            include the following: all business acquisitions would be measured at fair value; the            existing definition of a business would be expanded; certain pre-acquisition            contingencies would be measured at fair value; most acquisition-related costs would be            recognized as expenses as incurred (they would no longer be part of the purchase            consideration); obligations for contingent consideration would be measured and            recognized at fair value at the date of acquisition (measurement and recognition would            no longer be dependent on settlement of the contingency); non-controlling interests            would be measured at fair value at the date of acquisition (i.e., 100% of the assets            and liabilities would be measured at fair value even when an acquisition is less than            100%); goodwill, if any, arising on a business combination reflects the excess of the            fair value of the acquiree, as a whole, over the net amount of the recognized            identifiable assets acquired and liabilities assumed, and would be allocated to the            acquirer and the non-controlling interest. The statement is effective for periods            beginning on or after January 1, 2009. We will apply the standard for acquisitions            occurring after this date.

             

*SFAS No. 157 - Fair value measurements*

             

In September 2006, the FASB issued Statement of Financial Accounting            Standards (SFAS) No. 157, Fair Value Measurements. SFAS No. 157 clarifies the principle            that fair value should be based on the assumptions market participants would use when            pricing an asset or liability and establishes a fair value hierarchy that prioritizes            the information used to develop those assumptions. Under the standard, fair value            measurements would be separately disclosed by level within the fair value hierarchy.            SFAS No. 157 is effective for financial statements issued for fiscal years beginning            after November 15, 2007 and interim periods within those fiscal years, with early            adoption permitted. We do not expect the adoption of SFAS No. 157 to materially impact            our consolidated financial statements.

             

*SFAS No. 159 - Fair value option for financial assets and financial            liabilities*

             

This statement permits entities the option to measure financial            instruments at fair value (“fair value option”) thereby achieving an            offsetting effect for accounting purposes for certain changes in fair value of certain            related assets and liabilities without having to apply hedge accounting. The fair value            option is applied on an instrument-by-instrument basis to the entire instrument. Items            eligible for the fair value option are measured at fair value at specified election            dates. The Statement is effective for financial statements issued for fiscal years            beginning after November 15, 2007. We do not expect the adoption of SFAS 159 to            materially impact our consolidated financial statements.

             

*SFAS No. 160 - Non-controlling interest in consolidated financial            statements*

             

In December 2007, the FASB issued a revised standard on accounting for            non-controlling interests and transactions with non-controlling interest holders in            consolidated financial statements. This statement specifies that non-controlling            interests are to be treated as a separate component of equity, not as a liability or            other items outside of equity. Because non-controlling interests are an element of            equity, increases and decreases in the parent’s ownership interest that leave            control intact are accounted for as capital transactions rather than as a step            acquisition or dilution gains or losses. The carrying amount of the non-controlling            interests is adjusted to reflect the changes in ownership interests, and any difference            between the amount by which the non-controlling interests are adjusted and the fair            value of the consideration paid or received is recognized directly in equity            attributable to the controlling interest.

             

This standard requires net income and comprehensive income to be            displayed for both the controlling and the non-controlling interests. Additional            required disclosures and reconciliations include a separate schedule that shows the            effects of any transactions with the non controlling interests on the equity            attributable to the controlling interest.

             

The statement is effective for periods beginning on or after December            15, 2008. SFAS 160 will be applied prospectively to all non-controlling interests,            including any that arose before the effective date. We do not expect the adoption of            SFAS 160 to materially impact our consolidated financial statements.

 

36

 

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**Financial Condition**

 

As at December 31, 2007, cash and cash equivalents, cash held as            reserves, short-term investments, short-term investments held as reserves and            settlement assets totaled $73.0 million (including $8.6 million held as reserves),            compared to $204.7 million as at December 31, 2006 (including $22.1 million held as            reserves). The decrease in cash and cash equivalents, and short-term investments is            primarily due to the acquisition of the WowWee business, the acquisition of all the            issued and outstanding ordinary shares of OPIL held by non-controlling shareholders,            the reduction of customer reserves, the seizure of cash by the U.S. Attorney’s            Office in connection with its ongoing investigation of the U.S. Internet gambling            industry (see “Significant Developments in Our Business in 2007”) presented            as long-term restricted cash on the consolidated balance sheet, the repayment of bank            indebtedness, a decrease in cash generated from operations, and the purchase of capital            assets. As described above, a significant portion of cash and cash equivalents, and            short-term investments have a corresponding liability as these cash amounts are derived            from reserves and security deposits which are due to customers (see “Our Industry            Segments – Optimal Payments”). As at year end, our cash and cash            equivalents, short-term investments and settlement assets positions, net of bank            indebtedness and customer reserves and security deposits, were as follows:

             

| (U.S. dollars, in thousands)            |   | **2007**     |   | **2006**      |
|-----------------------------------------|--------|--------------|--------|---------------|
|                                    |   |         |   |          |   |
| Cash and cash equivalents               | $      | 47,193  | $      | 103,922  |   |
| Cash held as reserves                   |   | 6,869   |   | 18,960   |   |
| Short-term investments                  |   | 12,477  |   | 71,621   |   |
| Short-term investments held as reserves |   | 1,710   |   | 3,110    |   |
| Settlement assets                       |   | 4,715   |   | 7,061    |   |
|                                    |   | 72,964  |   | 204,674  |   |
| Less:                                   |   |         |   |          |   |
| Bank indebtedness                       |   | -            |   | (8,581)       |   |
| Customer reserves and security deposits |   | (21,324)     |   | (61,897)      |   |
|                                    |   |         |   |          |   |
| Net                                     | $      | 51,640  | $      | 134,196  |   |
|                                         |        |              |        |               |  |  |  |

 

Our portfolio of liquid and investment grade short-term investments            consists of U.S. denominated discounted and undiscounted notes and bonds.

 

Working capital as at December 31, 2007, excluding cash and short-term            investments held as reserves, was $15.9 million, as compared to $97.4 million at            December 31, 2006. This decrease is due primarily to the acquisition of WowWee, the            acquisition of all the issued and outstanding ordinary shares of OPIL held by            non-controlling shareholders, the seizure of cash by the U.S. Attorney’s Office            in connection with its ongoing investigation of the U.S. Internet gambling industry            (see “Significant Developments in Our Business in 2007”) presented as            long-term restricted cash on the consolidated balance sheet, and the purchase of            capital assets.

 

Accounts receivable as at December 31, 2007 were $18.5 million compared            to $10.3 million at December 31, 2006. The increase of $8.2 million resulted primarily            from the acquisition of WowWee.

 

Goodwill increased by $17.0 million, from $49.2 million as at December            31, 2006 to $66.2 million as at December 31, 2007. This increase is due primarily to            the acquisition of WowWee, the acquisition of all the issued and outstanding ordinary            shares of OPIL held by non-controlling shareholders, offset by an impairment loss            recorded for Optimal Payments in 2007.

 

Intangible assets increased by $30.1 million, from $56.8 million as at            December 31, 2006 to $86.9 million as at December 31, 2007. This increase is due            primarily to the acquisition of WowWee.

 

37

 

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Customer reserves and security deposits as at December 31, 2007 were            $21.3 million compared to $61.9 million as at December 31, 2006. This decrease is due            mainly to a reduction in transaction processing volume resulting from the enactment of            the Unlawful Internet Gambling Enforcement Act of 2006.

 

Shareholders’ equity as at December 31, 2007 was $201.7 million as            compared to $219.4 million as at December 31, 2006. The decrease is attributable            primarily to our net loss for the period, offset by the issuance of shares and warrants            upon the acquisition of WowWee.

 

**Quarterly Results**

 

The following table sets forth certain summarized unaudited quarterly            financial data for the periods presented. The financial data has been derived from            unaudited financial statements that, in the opinion of management, reflect all            adjustments, consisting only of normal recurring adjustments, necessary for a fair            presentation of such quarterly data. The operating results for any quarter are not            necessarily indicative of the results to be expected for any future period.

             

The unaudited financial statements are prepared on the basis of Canadian            GAAP, which is different in some regards from U.S. GAAP. The following quarterly            results are adjusted to present the results of operations of our hardware maintenance            and repair services business as discontinued operations.

 

Upon the passage of the Act on October 13, 2006, OPIL immediately ceased            processing settlement transactions originating from United States customers that may be            viewed as related to online gaming, which accounted for approximately 81% of revenues            of the gaming payment processing services segment for the year ended December 31, 2006.            Since the passage of the Act, our revenues and profitability have been adversely            affected and we expect that this will continue for at least the short-term.

             

|   |                                                                                                                       | **For                                the quarter ended**                                    |
|--------|----------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
|   |                                                                                                                       | **Dec.                                31,**                                                 | **Sept. 30,** | **June                                30,** | **March 31,** | **Dec.                                31,** | **Sept. 30,** | **June                                30,** | **March 31,** |
|   | **2007**                                                                                                                   | **2007**                                                                                    | **2007** | **2007** | **2006** | **2006** | **2006** | **2006** |
|   |                                                                                                                       | **(U.S. dollars, in thousands except per share                                data)**  |
|   |                                                                                                                       | **(unaudited)**                                                                        |
|   | Revenues                                                                                                                   | $                                                                                           | 37,598 | $ | 27,622 | $ | 28,042 | $ | 30,066 | $ | 33,932  | $ | 53,297  | $ | 52,242  | $ | 52,422  |
|   | (Loss) earnings from continuing operations before                                income taxes and non-controlling interest |                                                                                        | (26,898) |   | (20) |   | 1,263 |   | (4,712) |   | 5,047  |   | 6,981  |   | 10,411  |   | 11,650  |
|   | Income tax (provision) recovery                                                                                            |                                                                                        | (4,705) |   | (393) |   | (106) |   | (781) |   | 155  |   | 3,098  |   | (1,852) |   | (2,471) |
|   | Non – controlling interest                                                                                           |                                                                                        | -   |   | -   |   | -   |   | (159) |   | (1,416) |   | (1,361) |   | (2,037) |   | (2,120) |
|   | (Loss) earnings from continuing                                operations                                                  | $                                                                                           | (31,603) | $ | (413) | $ | 1,157 | $ | (5,652) | $ | 3,786  | $ | 8,718  | $ | 6,522  | $ | 7,059  |
|   |                                                                                                                       |                                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   | Net (loss)                                earnings                                                                         | $                                                                                           | (31,603) | $ | (413) | $ | 1,157 | $ | (5,652) | $ | 2,753  | $ | 1,946  | $ | 3,691  | $ | 4,389  |
|   |                                                                                                                       |                                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   | Net (loss) earnings per share:                                                                                             |                                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|   | Basic                                                                                                                      | $                                                                                           | (1.26) | $ | (0.02) | $ | 0.05 | $ | (0.24) | $ | 0.12  | $ | 0.08  | $ | 0.16  | $ | 0.19  |
|   | Diluted                                                                                                                    | $                                                                                           | (1.26) | $ | (0.02) | $ | 0.05 | $ | (0.24) | $ | 0.11  | $ | 0.08  | $ | 0.14  | $ | 0.17  |
|        |                                                                                                                            |                                                                                             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

             

The following table sets forth, for the periods indicated, statement of            operations data expressed as a percentage of total revenues:

 

|                                                                                                                   | **For the                            quarter ended** |
|------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------|
|                                                                                                                   | **Dec. 31,**                                         | **Sept.                            30,** | **June                            30,** | **March                            31,** | **Dec.                            31,** | **Sept.                            30,** | **June                            30,** | **March                            31,** |
|                                                                                                                   | **2007**                                             | **2007** | **2007** | **2007** | **2006** | **2006** | **2006** | **2006** |
|                                                                                                                   | **(unaudited)**                                      |
| Revenues                                                                                                               | 100.0%                                               | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |
| (Loss) earnings from continuing operations before income                            taxes and non-controlling interest | (71.5)                                | (0.1)    | 4.5    | (15.7)    | 14.9    | 13.1     | 19.9    | 22.2    |
| Income tax (provision) recovery                                                                                        | (12.5)                                | (1.4)    | (0.4)   | (2.6)    | 0.5    | 5.8     | (3.5)   | (4.7)   |
| Non – controlling interest                                                                                       | -                                                    | -     | -    | (0.5)    | (4.2)   | (2.6)    | (3.9)   | (4.0)   |
| (Loss) earnings from continuing operations                                                                             | (84.1)                                | (1.5)    | 4.1    | (18.8)    | 11.2    | 16.4     | 12.5    | 13.5    |
| Net (loss) earnings                                                                                                    | (84.1)%                                              | (1.5)% | 4.1% | (18.8)% | 8.1% | 3.7% | 7.1% | 8.4% |
|                                                                                                                        |                                                      |  |  |  |  |  |  |  |  |

 

 

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**Results of Operations**

 

Upon the passage of the Unlawful Internet gambling Enforcement Act of            2006 on October 13, 2006, OPIL immediately ceased processing settlement transactions            originating from United States customers that may be viewed as related to online            gaming, which accounted for approximately 81% of revenues of the gaming payment            processing services segment for the year ended December 31, 2006. Since the passage of            the Act, our revenues and profitability from Optimal Payments have been adversely            affected and we expect that this will continue for at least the short-term.

 

On November 7, 2007 the Company completed the acquisition of WowWee , a            privately-held Hong Kong based designer, developer, marketer and distributor of            technology based consumer robotic, toy and entertainment products. The results of            WowWee were consolidated with those of the Company from the date of            acquisition.

 

In 2006 and 2005, WowWee’s revenues were approximately $117.0            million and $131.0 million, respectively, and earnings before interest, taxes,            depreciation and amortization were approximately $5.0 million and $27.5 million,            respectively. The results of WowWee are subject to seasonal variability with a            significant portion of revenues generated in the third and fourth quarters of each            calendar year.

 

***2007 Compared with 2006***

 

Revenues decreased by $68.6 million from $191.9 million during the year            ended December 31, 2006 to $123.3 million during the year ended December 31, 2007. The            decrease in revenues was due primarily to the cessation, in October 2006, of the U.S.            based gaming portion of OPIL’s payment processing business. The decrease was            partially offset by the acquisition of WowWee in November 2007. Optimal Payments            generated $112.0 million of revenue in 2007 and WowWee represented $11.3 million of our            revenue since the November 2007 acquisition, which was after the peak selling season.            Over 50% of WowWee’s revenues are generated in the third and fourth            quarters.

 

Transaction processing and cost of sales decreased by $16.2 million,            from $94.9 million during the year ended December 31, 2006 to $78.7 million during the            year ended December 31, 2007. The decrease in transaction processing costs was due            primarily to the cessation, in October 2006 of the U.S. based gaming portion of            OPIL’s payment processing business, partially offset by higher cost of sales            beginning after our acquisition of WowWee in November 2007.

 

Amortization of intangibles pertaining to transaction processing costs            and cost of sales increased by $1.9 million, from $12.1 million during the year ended            December 31, 2006 to $14.0 million during the year ended December 31, 2007. The            increase in amortization is due primarily to the intangible assets acquired in            connection with our acquisition of WowWee in November 2007.

 

Selling, general and administrative expenses decreased by $15.9 million,            from $47.6 million during the year ended December 31, 2006 to $31.7 million during the            year ended December 31, 2007. The decrease in selling, general and administrative            expenses is due primarily to the cessation in October 2006 of the U.S. based gaming            portion of OPIL’s payment processing business. Approximately $3.0 million of            these expenses are attributed to WowWee.

             

The stock-based compensation pertaining to selling, general and            administrative expense is attributable to the accounting for the fair value of stock            options and restricted share units granted. Stock-based compensation expense for the            year ended December 31, 2007 increased by $4.6 million, from $1.7 million in the year            ended December 31, 2006 to $6.3 million in the year ended December 31, 2007. As a            result of our acquisition of all of the issued and outstanding ordinary shares of OPIL            held by non-controlling shareholders in February 2007, all of the unvested restricted            share units became exercisable and the remaining unamortized compensation cost of $6.0            million was recognized in 2007.

 

39

 

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Research and development expense remained constant at approximately $3.4            million during the years ended December 31, 2007 and 2006. Research and development            expenses are comprised primarily of personnel-related expenditures associated with the            development of new solutions and the enhancement of existing Optimal Payments            offerings.

 

Operating lease expenses decreased by $0.3 million from $1.5 million            during the year ended December 31, 2006 to $1.2 million during the year ended December            31, 2007, as a result of prior restructuring.

 

Restructuring costs of $1.6 million were incurred during the year ended            December 31, 2006. These costs related primarily to employee termination benefits and            costs of leased premises no longer utilized, as a result of a restructuring of our            operations and cost base undertaken following the enactment of the Unlawful Internet            Gambling Enforcement Act of 2006. There were no restructuring costs in 2007.

 

Amortization of property and equipment increased by $0.4 million, from            $1.5 million during the year ended December 31, 2006 to $1.9 million during the year            ended December 31, 2007, principally due to the addition of capital assets as a result            of the WowWee acquisition.

 

We tested Optimal Payments’ goodwill for impairment at December            31, 2007. We revised our forecast for the next five years to reflect higher merchant            attrition and lower growth expectations for this segment. At December 31, 2007, a            goodwill impairment loss of $22.6 million was recognized in Optimal Payments. The            impairment loss represents the estimated amount by which the carrying amount of this            asset exceeded its fair value. The fair value was determined using discounted cash flow            projections prepared by management.

 

The provision for income taxes was $6.0 million for the year ended            December 31, 2007 compared to $1.1 million for the year ended December 31, 2006. In            2007, after taking into consideration items not deductible for tax, our effective tax            rate was closer to the Canadian combined federal and provincial rate than in 2006,            since earnings from the foreign jurisdictions declined as a result of the enactment of            the Unlawful Internet Gambling Enforcement Act of 2006. In 2006, a significant portion            of our earnings were generated in a foreign jurisdiction with an effective tax rate            significantly lower than the Canadian combined federal and provincial rate. Significant            components of our 2007 tax provision include the effect of the goodwill impairment loss            in the amount of $7.2 million and of stock-based compensation in the amount of $2.0            million, which are not deductible for tax. As a result of the goodwill impairment loss,            we also amortized $4.4 million of the “other asset” as a future tax            expense. Other significant components of our 2007 provision are the change in the            valuation allowance of $3.3 million, which reflects an increase in the benefit of            losses not recorded, and an increase of $2.7 million caused by a decrease in Canadian            future tax rates. Significant components of our 2006 tax provision included the            differences in tax rates of foreign jurisdictions of $5.3 million and the effect of the            recognition of previously unrecognized tax assets of $3.8 million.

 

Our tax provision includes the effect of future taxes on unrealized            foreign exchange gains and losses, which arise upon the conversion into Canadian            dollars of net monetary assets and liabilities denominated in U.S. dollars for purposes            of determining taxable income under Canadian income tax regulations. Since the U.S.            dollar is our measurement currency and our consolidated financial statements are            presented in U.S. dollars, these foreign exchange gains/losses do not impact earnings            before income taxes. In 2007, our tax provision includes a future tax recovery of $3.6            million related to unrealized foreign exchange compared to a recovery of $0.3 million            in 2006.

 

With respect to future income tax assets, as at December 31, 2007 we            have recorded a valuation allowance of approximately $28.5 million (2006 - $23.9            million) related to assets that we determined were not more likely than not to be            realized. Our ability to ultimately realize these future income tax assets is dependent            upon our future profitability within the allowable carry-forward period, thus creating            sufficient taxable income to realize the benefit of these assets.

 

Our net loss in 2007 was $36.5 million (or $1.51 per share - basic and            diluted), compared to net earnings of $12.8 million ($0.54 per share – basic and            $0.50 per share – diluted) in 2006.

 

EBITDA was $8.5 million (or $0.35 per diluted share) for 2007 compared            to EBITDA of $43.0 million (or $1.69 per diluted share) for 2006.

 

40

 

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A reconciliation of this non-GAAP financial information is presented in            the table below. We use non-GAAP measures to assess our operating performance.            Securities regulations require that companies caution readers that earning and other            measures adjusted to a basis other than GAAP do not have standardized meanings and are            unlikely to be comparable to similar measures used by other companies. Accordingly,            they should not be considered in isolation. We use EBITDA to measure our performance            from one period to the next without the variation caused by certain adjustments that            could potentially distort the analysis of trends in our operating performance, and            because we believe it provides meaningful information on our financial condition and            operating results.

 

EBITDA, as we use it, is calculated as earnings before investment            income, taxes and depreciation and amortization and excludes the impacts of impairment            loss, non-controlling interest, stock-based compensation and discontinued operations.            We believe it is useful to exclude these items as they are either non-cash expenses,            items that cannot be influenced by management in the short term, or items that do not            impact core operating performance. Excluding these items does not imply they are            necessarily non-recurring.

 

| Reconciliation of Non-GAAP Financial                                Information                                   |
|-------------------------------------------------------------------------------------------------------------------|
| (expressed                                in thousands of U.S. dollars, except per share amounts)                 |
|                                                                                                              |   |   |   |   |
|                                                                                                              |   | **Twelve months ended** |
|                                                                                                              |   | **December 31,** |
|                                                                                                              |   | **2007** |   | **2006** |
|                                                                                                              |   | Unaudited |   | Unaudited |
|                                                                                                              |   |   |   |   |
| Net (loss) earnings                                                                                               | $ | (36,511) | $ | 12,779  |
|                                                                                                              |   |   |   |   |
| Add (deduct):                                                                                                     |   |   |   |   |
| Impairment loss                                                                                                   |   | 22,552  |   | 1,910  |
| Amortization of intangibles pertaining to                                transaction processing and cost of sales |   | 13,971  |   | 12,129  |
| Amortization of property and equipment                                                                            |   | 1,908  |   | 1,520  |
| Stock-based compensation pertaining to selling,                                general and administration         |   | 6,257  |   | 1,707  |
| Non-controlling interest                                                                                          |   | 159  |   | 6,934  |
| Investment income                                                                                                 |   | (5,831) |   | (8,388) |
| Income tax provision                                                                                              |   | 5,985  |   | 1,070  |
| Loss from discontinued operations                                                                                 |   | -   |   | 9,023  |
| Loss on disposal of net assets from discontinued                                operations                        |   | -   |   | 4,283  |
|                                                                                                              |   |   |   |   |
| EBITDA                                                                                                            | $ | 8,490  |   | 42,967  |
|                                                                                                              |   |   |   |   |
| Diluted shares                                                                                                    |   | 24,179  |   | 25,439  |
|                                                                                                              |   |   |   |   |
| EBITDA per diluted share                                                                                          | $ | 0.35  | $ | 1.69  |

 

 

 

 

41

 

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***2006 Compared with 2005***

 

Revenues increased by $47.0 million from $144.9 million in the year            ended December 31, 2005 to $191.9 million in the year ended December 31, 2006. The            increase in revenues is due primarily to organic growth, as well as the following            acquisitions which were completed during fiscal 2005:

 

|   | **•** | On May 6, 2005, Optimal Payments                            acquired a portfolio of merchant processing from United Bank Card,                            Inc.; and |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | On October 6, 2005, Optimal Payments                            acquired a portfolio of U.S. merchant processing contracts and                            associated sales channel contracts from Moneris Solutions,                            Inc. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

Transaction processing and cost of sales increased by $27.4 million,            from $67.5 million in the year ended December 31, 2005 to $94.9 million in 2006. The            increase in transaction processing costs is due primarily to increased transaction            processing activity as a result of organic growth and the acquisitions described            above.

 

Amortization of intangibles pertaining to transaction processing cost of            sales increased by $4.3 million, from $7.8 million in the year ended December 31, 2005            to $12.1 million in the year ended December 31, 2006. The increase in amortization is            due primarily to the intangible assets acquired through the business acquisitions            described above.

             

Selling, general and administrative expenses increased by $11.9 million,            from $35.7 million in the year ended December 31, 2005 to $47.6 million in the year            ended December 31, 2006. The increase in selling, general and administrative expenses            resulted primarily from the business acquisitions described above.

             

Stock-based compensation pertaining to selling, general and            administrative expense is attributable to the accounting for the fair value of stock            options and restricted share units granted. Stock-based compensation expense for the            year ended December 31, 2006 decreased by $18.5 million, from $20.2 million in the year            ended December 31, 2005 to $1.7 million in the year ended December 31, 2006. The            decrease in stock-based compensation results primarily from our decision taken on            November 7, 2005 to accelerate the vesting of all unvested stock options outstanding            under our stock option plan and the concurrent decision of FireOne Group plc to            accelerate the vesting of all unvested restricted share units outstanding under its            restricted share unit plan. The stock-based compensation for 2006 is associated with            the issuance of additional stock options under our stock option plan, and the issuance            of additional restricted share units by FireOne Group plc under its restricted share            unit plan.

 

Research and development expenses increased by $0.7 million, from $2.7            million in the year ended December 31, 2005 to $3.4 million in the year ended December            31, 2006. Research and development expenses are comprised primarily of            personnel-related expenditures associated with the development of new solutions and the            enhancement of existing offerings.

 

Operating lease expenses increased by $0.4 million, from $1.1 million in            the year ended December 31, 2005 to $1.5 million in the year ended December 31,            2006.

 

Restructuring costs of $1.6 million were incurred during the year ended            December 31, 2006. These costs related primarily to employee termination benefits and            costs of leased premises no longer utilized, as a result of a restructuring of            operations and cost base undertaken following the enactment of the Unlawful Internet            gambling Enforcement Act of 2006. Restructuring costs of $3.3 million were recorded in            the year ended December 31, 2005 representing the cost of the financial obligations            pursuant to an employment contract.

 

Amortization of property and equipment increased by $0.2 million, from            $1.3 million in the year ended December 31, 2005 to $1.5 million in the year ended            December 31, 2006.

 

As a result of the enactment of the Unlawful Internet Gambling            Enforcement Act of 2006 and the resulting significant negative impact on the business            of FireOne Group plc and its subsidiaries, we performed our impairment testing for            long-lived assets and goodwill, and as a result, an impairment loss of $1.9 million            related to customer relationships was recognized. The impairment loss represents the            estimated amount by which the carrying amount of this asset exceeded its fair value.            The fair value was determined using cash flow projections prepared by            management.

 

42

 

----

 

The provision for income taxes was $1.1 million for the year ended            December 31, 2006 compared to $11.4 million for the year ended December 31, 2005. In            2006, a significant portion of our earnings were generated in a foreign jurisdiction            with an effective tax rate significantly below the Canadian combined federal and            provincial rate. In 2006, we recognized previously unrecognized tax assets that we            determined were more likely than not of being realized. Significant components of our            2006 tax provision included the effect of differences in tax rates of foreign            jurisdictions in the amount of $5.3 million, and the recognition of tax assets of $3.8            million. Significant components of our 2005 tax provision included the utilization of            previously unrecognized tax assets of approximately $10.0 million and amortization of            “other asset” in the amount of $3.3 million recorded as a result of the            sale of a non-controlling interest in FireOne Group plc, and the effect of            non-deductible stock-based compensation in the amount of $5.9 million.

 

Our tax provision includes the effect of future taxes on unrealized            foreign exchange gains and losses, which arise upon the conversion into Canadian            dollars of net monetary assets and liabilities denominated in U.S. dollars for purposes            of determining taxable income under Canadian income tax regulations. Since the U.S.            dollar is our measurement currency and our consolidated financial statements are            presented in U.S. dollars, these foreign exchange gains/losses do not impact earnings            before income taxes. In 2006, our tax provision includes a future tax recovery of $0.3            million related to unrealized foreign exchange compared to a recovery of $0.4 million            in 2005.

 

Our net earnings in 2006 were $12.8 million (or $0.54 per share - basic            and $0.50 per share - diluted), compared to net earnings of $0.6 million ($0.03 per            share – basic and $0.02 per share – diluted) in 2005.

             

EBITDA was $43.0 million (or $1.69 per diluted share) for 2006 compared            to EBITDA of $65.1 million (or $2.57 per diluted share) for 2005.

 

A reconciliation of this non-GAAP financial information is presented in            the table below. We use non-GAAP measures to assess our operating performance.            Securities regulations require that companies caution readers that earning and other            measures adjusted to a basis other than GAAP do not have standardized meanings and are            unlikely to be comparable to similar measures used by other companies. Accordingly,            they should not be considered in isolation. We use EBITDA to measure our performance            from one period to the next without the variation caused by certain adjustments that            could potentially distort the analysis of trends in our operating performance, and            because we believe it provides meaningful information on our financial condition and            operating results.

 

EBITDA, as we use it, is calculated as earnings before investment            income, taxes and depreciation and amortization and excludes the impacts of impairment            loss, non-controlling interest, stock-based compensation and discontinued operations.            We believe it is useful to exclude these items as they are either non-cash expenses,            items that cannot be influenced by management in the short term, or items that do not            impact core operating performance. Excluding these items does not imply they are            necessarily non-recurring.

 

 

43

 

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| Reconciliation of Non-GAAP Financial                                Information                                   |
|-------------------------------------------------------------------------------------------------------------------|
| (expressed                                in thousands of U.S. dollars, except per share amounts)                 |
|                                                                                                              |   |   |   |   |
|                                                                                                              |   | **Twelve months ended** |
|                                                                                                              |   | **December 31,** |
|                                                                                                              |   | **2006** |   | **2005** |
|                                                                                                              |   | Unaudited |   | Unaudited |
|                                                                                                              |   |   |   |   |
| Net earnings                                                                                                      | $ | 12,779  | $ | 577  |
|                                                                                                              |   |   |   |   |
| Add (deduct):                                                                                                     |   |   |   |   |
| Impairment loss                                                                                                   |   | 1,910  |   | - |
| Amortization of intangibles pertaining to                                transaction processing and cost of sales |   | 12,129  |   | 7,833  |
| Amortization of property and equipment                                                                            |   | 1,520  |   | 1,324  |
| Stock-based compensation pertaining to selling,                                general and administration         |   | 1,707  |   | 20,191  |
| Non-controlling interest                                                                                          |   | 6,934  |   | 4,181  |
| Investment income                                                                                                 |   | (8,388) |   | (2,973) |
| Income tax provision                                                                                              |   | 1,070  |   | 11,388  |
| Loss from discontinued operations                                                                                 |   | 9,023  |   | 22,355  |
| Loss on disposal of net assets from discontinued                                operations                        |   | 4,283  |   | 188  |
|                                                                                                              |   |   |   |   |
| EBITDA                                                                                                            | $ | 42,967  |   | 65,064  |
|                                                                                                              |   |   |   |   |
| Diluted shares                                                                                                    |   | 25,439  |   | 25,345  |
|                                                                                                              |   |   |   |   |
| EBITDA per diluted share                                                                                          | $ | 1.69  | $ | 2.57  |

 

 

 

 

**Liquidity and Capital Resources**

 

As at December 31, 2007, cash and cash equivalents, cash held as            reserves, short-term investments, short-term investments held as reserves, and            settlement assets totaled $73.0 million (including $8.6 million held as reserves),            compared to $204.7 million as at December 31, 2006 (including $22.1 million held as            reserves). The decrease in cash and cash equivalents, and short-term investments is            primarily due to the acquisition of WowWee, the acquisition of all the issued and            outstanding ordinary shares of OPIL held by non-controlling shareholders, the reduction            of customer reserves, the seizure of cash by the U.S. Attorney’s Office in            connection with its ongoing investigation of the U.S. Internet gambling industry (see            “Significant Developments in Our Business in 2007”) presented as long-term            restricted cash on the consolidated balance sheet, the repayment of bank indebtedness,            a decrease in cash generated from operations, and the purchase of capital assets. As            described above, a significant portion of cash and cash equivalents, and short-term            investments have a corresponding liability as these cash amounts are derived from            reserves and security deposits which are due to customers (see Our Industry Segments            – Optimal Payments).

As at December 31, 2007, our cash and cash equivalents, cash held as            reserves, short-term investments, short-term investments held as reserves and            settlement assets positions, net of bank indebtedness and customer reserves and            security deposits, totaled $51.6 million (see “*Financial            Condition*” above).

Operating activities used $37.3 million of cash and cash equivalents in            2007, as compared to generating $5.2 million in 2006. This decrease is due mainly to a            reduction in cash generated from operations, and increased use of cash from operating            assets and liabilities. The decrease in cash from operating assets and liabilities is            due mainly to the seizure of cash by the U.S. Attorney’s Office, partially offset            by reduced payments made out regarding customer reserves and security            deposits.

 

44

 

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Financing activities used $8.6 million of cash in 2007, compared to            using $1.7 million in 2006. In 2006 we repurchased common shares in connection with our            share repurchase program for $2.3 million; OPIL paid a dividend of $4.8 million, and we            received proceeds of $5.2 million on the exercise of stock options and warrants. In            2007, we repaid the bank indebtedness of $8.6 million.

             

Investing activities used $11.1 million of cash in 2007, compared with            cash generated of $6.8 million in 2006. The decrease of $17.9 million can be explained            primarily by the following:

             

|   | Increases: |
|--------|------------|

 

|   | **•** | In 2007, $48.4 million more cash was generated on the                            maturity of short-term investments ($59.1 million compared to                            $10.7 million in 2006); |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

Decreases:

             

|   | **•** | In 2007, $46.1 million of cash was used in the                            acquisition of WowWee; |
|--------|------------|--------------------------------------------------------------------------------------------------|

|   | **•** | In 2007 $16.5 million was used to repurchase the                            ordinary shares of OPIL; |
|--------|------------|------------------------------------------------------------------------------------------------------|

|   | **•** | Transaction costs of $2.9 million in 2007 related to                            the acquisition of WowWee and the repurchase of the non controlling                            interest in OPIL. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

We believe that our cash, cash equivalents and short-term investments            will be adequate to meet our needs for at least the next 12 months.

             

We have no financial obligations of significance, including any            off-balance sheet arrangements, other than long-term lease commitments for our premises            in the United States, Canada and Hong Kong. These are summarized in note 16 (a) of the            notes to our consolidated financial statements.

             

The timing of our contractual commitments during the next five years and            thereafter, related to our operating leases, is as follows (in thousands of U.S.            dollars):

 

             

| **Contractual Obligations** |  

**Total** |  

**2008** |  

**2009 to                            2010** |  

**2011 to                            2012** |  

**Thereafter** |
|-----------------------------|-------------------|------------------|-----------------------------------------------------|-----------------------------------------------------|------------------------|
|  

Operating Leases    | $4,685            | $1,570           | $2,212                                              | $792                                                | $111                   |

 

 

We have granted a letter of guarantee, issued by a highly rated            financial institution to indemnify a third party, in the event we do not perform its            contractual obligations. As at December 31, 2007, the maximum potential liability under            this letter of guarantee was $1,487 (Cdn$1,500).

 

45

 

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| **ITEM 7A.** | **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT                            MARKET RISK** |
|--------------|-------------------------------------------------------------------------------------------|

 

The table below provides information about our financial instruments            that are sensitive to changes in interest rates and foreign currency exchange            rates.

 

**Interest rate and foreign currency exchange rate sensitivity            table**

 

|                                                                                                                                                                                           | **December                            31, 2007** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------|
|                                                                                                                                                                                           | **Carrying**                                     | **Fair** |
|                                                                                                                                                                                           | **Value**                                   | **Value(1)** |
|                                                                                                                                                                                           | **(thousands of U.S. dollars)**                  |
|                                                                                                                                                                                           |                                             |   |   |   |
| Notes denominated in U.S. dollars, with a weighted                            average effective yield of 4.43%, maturing between March 11, 2008 and                            April 24, 2008. | $                                                | 12,477 | $ | 12,477 |
|                                                                                                                                                                                           |                                             |   |   |   |
| Held as reserves

Notes denominated in U.S. dollars, with a weighted                            average effective yield of 4.53%, maturing on January 28,                            2008.     |                                             | 1,710 |   | 1,710 |
|                                                                                                                                                                                           |                                             |   |   |   |
| **TOTAL:**                                                                                                                                                                                     | $                                                | 14,187 | $ | 14,187 |
|                                                                                                                                                                                                |                                                  |  |  |  |  |

 

| (1)   | Fair value has                            been determined based upon quoted market values as at December 31,                            2007. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------|

             

We are exposed to foreign currency exchange rate fluctuations resulting            from certain expenses paid from Canadian operations in Canadian dollars, while a            significant portion of our revenues are earned in U.S. dollars. If the Canadian dollar            strengthens in relation to the U.S. dollar, the effective cost of our expenses (as            reported in U.S. dollars) will increase. We have never tried to hedge our exchange rate            risk, do not plan to do so and may not be successful should we attempt to do so in the            future. We are also exposed to interest rate fluctuation risk, which we do not            systematically manage. We presently invest in short-term investment grade            paper.

 

 

46

 

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| **ITEM 8.** | **FINANCIAL STATEMENTS AND SUPPLEMENTARY                            DATA** |
|-------------|----------------------------------------------------------------------------|

             

             

             

             

             

Consolidated Financial Statements of

             

**OPTIMAL GROUP INC.**

             

Three years ended December 31, 2007

(expressed in U.S. dollars)

             

             

             

 

47

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING            FIRM**

To            the Board of Directors of Optimal Group Inc.:

We            have audited the accompanying consolidated balance sheets of Optimal Group Inc. and            subsidiaries (the “Company”) as of December 31, 2007 and 2006 and the            related consolidated statements of operations and comprehensive (loss) income,            shareholders’ equity and cash flows for each of the years in the three-year            period ended December 31, 2007. These consolidated financial statements are the            responsibility of the Company’s management. Our responsibility is to express an            opinion on these consolidated financial statements based on our audits.

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

In            our opinion, the consolidated financial statements referred to above present fairly, in            all material respects, the financial position of Optimal Group Inc. and subsidiaries as            of December 31, 2007 and 2006, and the results of their operations and their cash flows            for each of the years in the three-year period ended December 31, 2007, in conformity            with Canadian generally accepted accounting principles.

Canadian generally accepted accounting principles vary in certain            significant respects from U.S. generally accepted accounting principles. Information            relating to the nature and effect of such differences is presented in note 24 to the            consolidated financial statements.

We            have also audited, in accordance with the standards of the Public Company Accounting            Oversight Board (United States), the Company’s internal control over financial            reporting as of December 31, 2007, based on criteria established in*Internal Control - Integrated Framework issued by the**Committee of Sponsoring Organizations of the Treadway            Commission*(*COSO*), and our            report dated March 13, 2008 expressed an unqualified opinion on the effectiveness of            internal control over financial reporting.

 

/s/            KPMG LLP

Chartered Accountants

 

Montréal, Canada

March 13, 2008

 

48

 

----

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING            FIRM**

To            the Board of Directors of Optimal Group Inc.:

We            have audited Optimal Group Inc.’s (the “Company”) internal control            over financial reporting as of December 31, 2007, based on criteria established            in*Internal Control - Integrated Framework**issued by the Committee of Sponsoring Organizations of the Treadway            Commission (COSO).*The Company’s management is            responsible for maintaining effective internal control over financial reporting and for            its assessment of the effectiveness of internal control over financial reporting,            included in the accompanying Management’s Report on Internal Control over            Financial Reporting appearing under Item 9A of the Company’s Form 10-K for the            year ended December 31, 2007. Our responsibility is to express an opinion on the            Company’s internal control over financial reporting based on our audit based on            the assessed risk.

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

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

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

 

 

49

 

----

 

 

 

 

 

The            Company acquired substantially all of the assets and liabilities of Wow Wee Limited            (“WowWee”) in November 2007, and management excluded from its assessment of            the effectiveness of the Company’s internal control over financial reporting as            of December 31, 2007 WowWee’s internal control over financial reporting            associated with total assets of $27,111,000 and total revenues of $11,311,000 included            in the consolidated financial statements of the Company as at and for the year ended            December 31, 2007. Our audit of internal control over financial reporting of the            Company also excluded an evaluation of the internal control over financial reporting of            WowWee.

In            our opinion, the Company maintained, in all material respects, effective internal            control over financial reporting as of December 31, 2007, based on criteria            established in*Internal Control - Integrated            Framework**issued by the Committee of Sponsoring            Organizations of the Treadway Commission (COSO)*.

We            also have audited, in accordance with the standards of the Public Company Accounting            Oversight Board (United States), the consolidated balance sheets of Optimal Group Inc.            and subsidiaries as of December 31, 2007 and 2006, and the related consolidated            statements of operations and comprehensive (loss) income, shareholders’ equity            and cash flows for each of the years in the three-year period ended December 31,            2007, and our report dated March 13, 2008 expressed an unqualified opinion on those            consolidated financial statements.

 

/s/            KPMG LLP

Chartered Accountants

 

Montréal, Canada

March 13, 2008

 

 

50

 

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**AUDITORS’ REPORT TO THE SHAREHOLDERS**

 

We            have audited the consolidated balance sheets of Optimal Group Inc. and subsidiaries            (the ”Company”) as at December 31, 2007 and 2006 and the            consolidated statements of operations and comprehensive (loss) income,            shareholders’ equity and cash flows for each of the years in the three-year            period ended December 31, 2007. 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, 2007 and 2006            and the results of its operations and its cash flows for each of the years in the            three-year period ended December 31, 2007 in accordance with Canadian generally            accepted accounting principles.

 

/s/            KPMG LLP

 

Chartered Accountants

 

Montréal, Canada

March 13, 2008

 

51

 

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**OPTIMAL GROUP INC.**

Consolidated Financial Statements

             

Three years ended December 31, 2007

(expressed in U.S. dollars)

 

**Financial Statements**

|   | Consolidated Balance                            Sheets | 53 |
|--------|--------------------------------------------------------|----|

|   | Consolidated Statements of                            Operations and Comprehensive (Loss) Income | 54 |
|--------|--------------------------------------------------------------------------------------------------|----|

|   | Consolidated Statements of                            Shareholders’ Equity | 55 |
|--------|----------------------------------------------------------------------------------|----|

|   | Consolidated Statements of                            Cash Flows | 56 |
|--------|------------------------------------------------------------------|----|

|   | Notes to Consolidated                            Financial Statements | 57 |
|--------|-----------------------------------------------------------------------|----|

             

             

52

 

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| **OPTIMAL GROUP INC.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                      |          |                      |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|---------------|---------------------------|
| Consolidated Balance Sheets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                      |          |                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                      |          |                      |
| December 31, 2007 and 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                      |          |                      |
| (expressed in thousands of U.S. dollars)                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                      |          |                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                      |          |                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | 2007                 |          | 2006                 |
| Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                      |          |                      |
| Current assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                      |          |                      |
| Cash                            and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                              | $      | 47,193               | $             | 103,922              |
| Cash                            held as reserves                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | 6,869                |          | 18,960               |
| Short-term investments (note 8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | 12,477               |          | 71,621               |
| Short-term investments held as reserves (note                            8)                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | 1,710                |          | 3,110                |
| Settlement assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | 4,715                |          | 7,061                |
| Accounts and other receivables (note 9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | 18,513               |          | 10,250               |
| Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | 3,103                |          | –    |
| Income taxes receivable and refundable investment tax                            credits                                                                                                                                                                                                                                                                                                                                                                                                                          |   | 4,169                |          | 1,025                |
| Prepaid expenses and deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | 1,958                |          | 1,119                |
| Future income taxes (note 19)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | 714                  |          | 2,192                |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                      | 101,421  |                      | 219,260  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                      |          |                      |
| Restricted cash (note 16 (f))                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | 19,183               |          | –    |
| Property and equipment (note 10)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | 4,670                |          | 2,121                |
| Goodwill (note 11)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | 66,210               |          | 49,243               |
| Intangible assets (note 11)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | 86,858               |          | 56,798               |
| Future income taxes (note 19)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | 6,200                |          | 2,692                |
| Other asset (note 6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | 5,739                |          | 10,423               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                      |          |                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | $      | 290,281              | $             | 340,537              |
| Liabilities and Shareholders’ Equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                      |          |                      |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                      |          |                      |
| Bank indebtedness (note 12)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | $      | –    | $             | 8,581                |
| Accounts payable and accrued liabilities (note                            13)                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | 47,083               |          | 23,362               |
| Customer reserves and security deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | 21,324               |          | 61,897               |
| Income taxes payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | 7,251                |          | 5,573                |
| Future income taxes (note 19)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | 1,270                |          | 382                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                      | 76,928   |                      | 99,795  |
| Non-controlling interest                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | –    |          | 16,392               |
| Future income taxes (note 19)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | 11,648               |          | 4,968                |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                      |          |                      |
| Shareholders’ equity:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                      |          |                      |
| Share capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | 211,998              |          | 202,252              |
| Warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | 2,696                |          | –    |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | 29,561               |          | 23,169               |
| Deficit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | (41,066)                  |          | (4,555)                   |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | (1,484)                   |          | (1,484)                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                      | 201,705  |                      | 219,382  |
| Commitments, contingencies and guarantees (note                            16)                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                      |          |                      |
| Subsequent event (note 26)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                      |          |                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | $      | 290,281              | $             | 340,537              |
|  

See accompanying notes                            to consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Approved by the Board of Directors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| /s/ HOLDEN L. OSTRIN                            Director                                                                                            /s/ NEIL S. WECHSLER Director |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |        |                           |               |                           |  |

             

 

53

 

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|                                                                                    | **OPTIMAL GROUP INC.**                                                                                                       |
|-----------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------|
|                                                                                    | Consolidated Statements of Operations and Comprehensive                            (Loss) Income                             |
|                                                                                    |                                                                                                                         |
|                                                                                    | Three-year period ended December 31, 2007                                                                                    |
|                                                                                    | (expressed in thousands of U.S. dollars, except share                            and per share amounts)                      |
|                                                                                    |                                                                                                                         |
|                                                                                    |                                                                                                                         | 2007  | 2006  | 2005  |   |
|                                                                                    |                                                                                                                         |   |   |   |   |   |   |   |
|                                                                                    | Revenues                                                                                                                     | $ | 123,328  | $ | 191,893  | $ | 144,898  |   |
|                                                                                    |                                                                                                                         |   |   |   |   |   |   |   |
|                                                                                    | Expenses:                                                                                                                    |   |   |   |   |   |   |   |
|                                                                                    | Transaction processing and cost of sales                                                                                     |   | 78,685  |   | 94,906  |   | 67,495  |   |
|                                                                                    | Selling, general and administrative                                                                                          |   | 31,679  |   | 47,553  |   | 35,689  |   |
|                                                                                    | Amortization of intangibles pertaining to transaction                            processing and cost of sales                |   | 13,971  |   | 12,129  |   | 7,833  |   |
|                                                                                    | Amortization of property and equipment                                                                                       |   | 1,908  |   | 1,520  |   | 1,324  |   |
|                                                                                    | Stock-based compensation pertaining to selling,                            generaland administrative (note 18 (b))           |   | 6,257  |   | 1,707  |   | 20,191  |   |
|                                                                                    | Research and development (note 17)                                                                                           |   | 3,278  |   | 3,388  |   | 2,659  |   |
|                                                                                    | Operating leases                                                                                                             |   | 1,196  |   | 1,498  |   | 1,103  |   |
|                                                                                    | Restructuring costs (note 18 (a))                                                                                            |   | -    |   | 1,581  |   | 3,299  |   |
|                                                                                    | Impairment loss (note 11)                                                                                                    |   | 22,552  |   | 1,910  |   | -    |   |
|                                                                                    |                                                                                                                         |   | 159,526  |   | 166,192  |   | 139,593  |   |
|                                                                                    |                                                                                                                         |   |   |   |   |   |   |   |
|                                                                                    | (Loss) earnings from continuing operations before                            undernoted items                                |   | (36,198) |   | 25,701  |   | 5,305  |   |
|                                                                                    |                                                                                                                         |   |   |   |   |   |   |   |
|                                                                                    | Investment income                                                                                                            |   | 5,831  |   | 8,388  |   | 2,973  |   |
|                                                                                    | Gain on sale of interest in OPIL (note 6)                                                                                    |   | –    |   | –    |   | 30,411  |   |
|                                                                                    |                                                                                                                         |   |   |   |   |   |   |   |
|                                                                                    | (Loss) earnings from continuing operations before income                            taxes andnon-controlling interest        |   | (30,367) |   | 34,089  |   | 38,689  |   |
|                                                                                    |                                                                                                                         |   |   |   |   |   |   |   |
|                                                                                    | Income tax provision (note 19)                                                                                               |   | (5,985) |   | (1,070) |   | (11,388) |   |
|                                                                                    |                                                                                                                         |   |   |   |   |   |   |   |
|                                                                                    | (Loss) earnings from continuing operations before                            non-controlling interest                        |   | (36,352) |   | 33,019  |   | 27,301  |   |
|                                                                                    |                                                                                                                         |   |   |   |   |   |   |   |
|                                                                                    | Non-controlling interest                                                                                                     |   | (159) |   | (6,934) |   | (4,181) |   |
|                                                                                    |                                                                                                                         |   |   |   |   |   |   |   |
|                                                                                    | (Loss) earnings from continuing operations                                                                                   |   | (36,511) |   | 26,085  |   | 23,120  |   |
|                                                                                    |                                                                                                                         |   |   |   |   |   |   |   |
|                                                                                    | Loss from discontinued operations, net of income taxes                            (note 7 (b) (i))                           |   | -    |   | (9,023) |   | (22,355) |   |
|                                                                                    |                                                                                                                         |   |   |   |   |   |   |   |
|                                                                                    | Loss on disposal of net assets from discontinued                            operations, net of income taxes (note 7 (b) (i)) |   | -    |   | (4,283) |   | (188) |   |
|                                                                                    |                                                                                                                         |   |   |   |   |   |   |   |
|                                                                                    | Net (loss) earnings and comprehensive (loss)                            income                                               | $ | (36,511) | $ | 12,779  | $ | 577  |   |
|                                                                                    |                                                                                                                         |   |   |   |   |   |   |   |
|                                                                                    | Weighted average number of shares:                                                                                           |   |   |   |   |   |   |   |
|                                                                                    | Basic                                                                                                                        |   | 24,179,134  |   | 23,628,604  |   | 22,869,401  |   |
|                                                                                    | Plus impact of stock options and warrants                                                                                    |   | -    |   | 1,810,527  |   | 2,475,219  |   |
|                                                                                    |                                                                                                                         |   |   |   |   |   |   |   |
|                                                                                    | Diluted                                                                                                                      |   | 24,179,134  |   | 25,439,131  |   | 25,344,620  |   |
|                                                                                    |                                                                                                                         |   |   |   |   |   |   |   |
|                                                                                    | (Loss) earnings per share:                                                                                                   |   |   |   |   |   |   |   |
|                                                                                    | Continuing operations:                                                                                                       |   |   |   |   |   |   |   |
|                                                                                    | Basic                                                                                                                        | $ | (1.51) | $ | 1.10  | $ | 1.01  |   |
|                                                                                    | Diluted                                                                                                                      |   | (1.51) |   | 1.03  |   | 0.91  |   |
|                                                                                    | Discontinued operations:                                                                                                     |   |   |   |   |   |   |   |
|                                                                                    | Basic                                                                                                                        |   | -    |   | (0.56) |   | (0.98) |   |
|                                                                                    | Diluted                                                                                                                      |   | -    |   | (0.53) |   | (0.89) |   |
|                                                                                    | Net:                                                                                                                         |   |   |   |   |   |   |   |
|                                                                                    | Basic                                                                                                                        |   | (1.51) |   | 0.54  |   | 0.03  |   |
|                                                                                    | Diluted                                                                                                                      |   | (1.51) |   | 0.50  |   | 0.02  |   |
|                                                                                    |                                                                                                                         |   |   |   |   |   |   |   |
|                                                                                    |                                                                                                                         |   |
|                                                                                    |                                                                                                                         |
| See accompanying notes to consolidated financial                            statements. |                                                                                                                         |
|                                                                                         |                                                                                                                              |  |  |  |  |  |  |  |  |  |  |

             

 

54

 

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| **OPTIMAL GROUP INC.**                                                                                                 |
|------------------------------------------------------------------------------------------------------------------------|
| Consolidated Statements of Shareholders’                            Equity                                       |
|                                                                                                                   |
| Three-year period ended December 31, 2007                                                                              |
| (expressed in thousands of U.S. dollars, except share                            amounts)                              |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   | Accu-  |   |   |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   | mulated  |   |   |
|                                                                                                                   |   |   |   |   |   |   | Addi-  |   |   |   | other  |   |   |
|                                                                                                                   |   |   |   |   |   |   | tional  |   |   |   | compre-  |   |   |
|                                                                                                                   | Class “A” shares |   |   |   | paid-in  |   |   |   | hensive  |   |   |
|                                                                                                                   | Number  |   | Dollars  |   |  

Warrants  |   | capital  |   | Deficit  |   | loss  |   | Total  |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance, December 31, 2004                                                                                             | 22,251,097  | $ | 184,191  |  

$ |  

–    | $ | 10,557  | $ | (16,583) | $ | (1,484) | $ | 176,681  |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercise of stock    options and                            warrants:                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash proceeds                                                                                                          | 1,047,829  |   | 7,508  |   | –    |   | –    |   | –    |   | –    |   | 7,508  |
| Ascribed value                                                                                                         | –    |   | 3,633  |   | –    |   | (3,633) |   | –    |   | –    |   | –    |
| Ascribed value credited to non-controlling interest from                            exercise of restricted share units | –    |   | –    |   | –    |   | (1,636) |   | –    |   | –    |   | (1,636) |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cancellation of shares pursuant to stock buyback program                            (note 14)                          | (21,800) |   | (183) |   | –    |   | –    |   | (253) |   | –    |   | (436) |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   | –    |
| Stock-based compensation                            (note 18 (b))                                            | –    |   | –    |   | –    |   | 20,596  |   | –    |   | –    |   | 20,596  |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings                                                                                                           | –    |   | –    |   | –    |   | –    |   | 577  |   | –    |   | 577  |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance, December 31, 2005                                                                                             | 23,277,126  |   | 195,149  |   |  

–    |   | 25,884  |   | (16,259) |   | (1,484) |   | 203,290  |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercise of stock options and                            warrants:                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash proceeds                                                                                                          | 713,073  |   | 5,172  |   | –    |   | –    |   | –    |   | –    |   | 5,172  |
| Ascribed value                                                                                                         | –    |   | 3,120  |   | –    |   | (3,120) |   | –    |   | –    |   | –    |
| Ascribed value credited to non-controlling interest from                            exercise of restricted share units | –    |   | –    |   | –    |   | (2,296) |   | –    |   | –    |   | (2,296) |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cancellation of shares pursuant to stock buyback program                            (note 14)                          | (141,109) |   | (1,189) |   | –    |   | –    |   | (1,075) |   | –    |   | (2,264) |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock-based compensation                            (note 18 (b))                                            | –    |   | –    |   | –    |   | 1,707  |   | –    |   | –    |   | 1,707  |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock dividend of restricted share units issued by OPIL                            to non-controlling interest         | –    |   | –    |   | –    |   | 994  |   | –    |   | –    |   | 994  |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings                                                                                                           | –    |   | –    |   | –    |   | –    |   | 12,779  |   | –    |   | 12,779  |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance, December 31, 2006                                                                                             | 23,849,090  |   | 202,252  |   |  

–    |   | 23,169  |   | (4,555) |   | (1,484) |   | 219,382  |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shares issued on acquisition of WowWee (note                            7)                                             | 2,169,197  |   | 10,000  |   | –    |   | –    |   | –    |   | –    |   | 10,000  |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Warrants issued on acquisition of WowWee (note                            7)                                           | –    |   | –    |   | 2,696 |   | –    |   | –    |   | –    |   | 2,696  |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercise of stock options:                                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash proceeds                                                                                                          | 18,261  |   | 87  |   | –    |   | –    |   | –    |   | –    |   | 87  |
| Ascribed value                                                                                                         | –    |   | 95  |   | –    |   | (95) |   | –    |   | –    |   | –    |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cancellation of shares pursuant to stock buyback program                            (note 14)                          | (53,400) |   | (436) |   | –    |   | 230  |   | –    |   | –    |   | (206) |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock-based compensation                            (note 18 (b))                                            | –    |   | –    |   | –    |   | 6,257  |   | –    |   | –    |   | 6,257  |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                                               | –    |   | –    |   | –    |   | –    |   | (36,511) |   | –    |   | (36,511) |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance, December 31, 2007                                                                                             | 25,983,148  | $ | 211,998  |  

$ |  

2,696 | $ | 29,561  | $ | (41,066) | $ | (1,484) | $ | 201,705  |
|                                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| See accompanying notes to consolidated financial                            statements.                                |

             

 

55

 

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| **OPTIMAL GROUP INC.**                                                                                  |
|---------------------------------------------------------------------------------------------------------|
| Consolidated Statements of Cash Flows                                                                   |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars)                                                                |
|                                                                                                    |
|                                                                                                    | 2007  | 2006  | 2005  |   |
|                                                                                                    |   |   |   |   |   |   |   |
| Cash flows (used in) from operating                            activities:                              |   |   |   |   |   |   |   |
| Net (loss) earnings                                                                                     | $ | (36,511) | $ | 12,779  | $ | 577  |   |
| Add:   loss from discontinued                            operations                           |   | -    |   | 9,023  |   | 22,355  |   |
| loss on disposal of net assets from discontinued                            operations                  |   | -    |   | 4,283  |   | 188  |   |
|                                                                                                    | Net (loss) earnings from continuing                            operations |   | (36,511) |   | 26,085  |   | 23,120  |   |
| Adjustments for items not affecting cash:                                                               |   |   |   |   |   |   |   |
| Non-controlling interest                                                                                |   | 159  |   | 6,934  |   | 4,181  |   |
| Amortization                                                                                            |   | 15,879  |   | 13,649  |   | 9,157  |   |
| Gain on settlement of litigation (note 16                            (c))                               |   | (1,612) |   | -    |   | -    |   |
| Future income taxes                                                                                     |   | 4,366  |   | (7,106) |   | 3,035  |   |
| Stock-based compensation                                                                                |   | 6,257  |   | 1,707  |   | 20,191  |   |
| Foreign exchange                                                                                        |   | (333) |   | (390) |   | 559  |   |
| Impairment loss                                                                                         |   | 22,552  |   | 1,910  |   | -    |   |
| Write-down of property and equipment                                                                    |   | -    |   | 301  |   | -    |   |
| Gain on sale of interest in OPIL                                                                        |   | -    |   | -    |   | (30,411) |   |
| Net change in operating assets and liabilities (note 23                            (a))                 |   | (48,046) |   | (37,855) |   | 33,525  |   |
|                                                                                                    |   |   | (37,289) |   | 5,235  |   | 63,357  |   |
|                                                                                                    | Operating cash flows (used in) discontinued                            operations |   | -    |   | (5,032) |   | (10,041) |   |
|                                                                                                    |   |   | (37,289) |   | 203   |   | 53,316  |   |
| Cash flows (used in) from financing                            activities:                              |   |   |   |   |   |   |   |
| Proceeds from exercise of RSUs in OPIL                                                                  |   | 58  |   | 24  |   | 16  |   |
| (Decrease) increase in bank indebtedness                                                                |   | (8,581) |   | 159  |   | (480) |   |
| Repurchase of Class “A” shares                                                              |   | (206) |   | (2,264) |   | (436) |   |
| Proceeds from issuance of Class “A”                            shares                       |   | 87  |   | 5,172  |   | 7,508  |   |
| Payment of dividend by OPIL to minority                            interest                             |   | -    |   | (4,796) |   | -    |   |
|                                                                                                    |   |   | (8,642) |   | (1,705) |   | 6,608  |   |
|                                                                                                    |   |   |   |   |   |   |   |
| Cash flows (used in) from investing                            activities:                              |   |   |   |   |   |   |   |
| Acquisition of WowWee, net of cash of $483 (note                            7)                          |   | (46,087) |   | -    |   | -    |   |
| Additional consideration for acquisition of                            MCA                              |   | (804) |   | -    |   | -    |   |
| Repurchase of OPIL ordinary shares                                                                      |   | (16,463) |   | -    |   | -    |   |
| Purchase of property, equipment and intangible                            assets                        |   | (4,744) |   | (4,272) |   | (2,050) |   |
| Net proceeds from maturity of short-term                            investments                         |   | 59,144  |   | 10,740  |   | 5,852  |   |
| Proceeds from note receivable                                                                           |   | 709  |   | 384  |   | 138  |   |
| Transaction costs                                                                                       |   | (2,903) |   | -    |   | (6,553) |   |
| Proceeds from sale of interest in OPIL                                                                  |   | -    |   | -    |   | 44,146  |   |
| Acquisition of NPS, net of cash of $126                                                                 |   | -    |   | -    |   | (3,000) |   |
| Acquisition of MCA, including acquisition costs of                            $49                       |   | -    |   | -    |   | (3,722) |   |
| Acquisition of UBC, including acquisition costs of                            $277                      |   | -    |   | -    |   | (44,277) |   |
| Acquisition of Moneris, including acquisition costs of                            $266                  |   | -    |   | -    |   | (18,266) |   |
| Decrease in cash held in escrow                                                                         |   | -    |   | -    |   | 3,536  |   |
|                                                                                                    |   |   | (11,148) |   | 6,852  |   | (24,196) |   |
|                                                                                                    | Investing cash flows (used in) discontinued                            operations |   | –    |   | (87) |   | (260) |   |
|                                                                                                    |   | (11,148) |   | 6,765  |   | (24,456) |   |
|                                                                                                    |   |   |   |   |   |   |   |
| Effect of exchange rate changes on cash and cash                            equivalents during the year |   | 350  |   | 423  |   | (169) |   |
|                                                                                                    |   |   |   |   |   |   |   |
| Net (decrease) increase in cash and cash                            equivalents                         |   | (56,729) |   | 5,686  |   | 35,299  |   |
|                                                                                                    |   |   |   |   |   |   |   |
| Cash and cash equivalents, beginning of year                                                            |   | 103,922  |   | 98,236  |   | 62,937  |   |
|                                                                                                    |   |   |   |   |   |   |   |
| Cash and cash equivalents, end of year                                                                  | $ | 47,193  | $ | 103,922  | $ | 98,236  |   |
|                                                                                                    |   |   |   |   |   |   |   |
|                                                                                                         |  |  |  |  |  |  |  |  |

             

| Supplemental disclosure of cash flow information (note                            23).          |
|-------------------------------------------------------------------------------------------------|
|  

See accompanying notes to consolidated financial                            statements. |

 

 

56

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements                                                              |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **1.** | **Nature of                            operations:** |
|--------|------------------------------------------------------|

Optimal Group Inc. (the “Company”) is incorporated under the            Canada Business Corporations Act. The Company’s principal activities are to            provide payment processing services and to design, develop, market and distribute            innovative high-tech consumer robotic, toy and entertainment products.

             

| **2.** | **Basis of                            presentation:** |
|--------|-------------------------------------------------------|

As a result of the sale of the hardware maintenance and repair services            business segment effective September 30, 2006 as described in note 7 (b)(i),            the results of this discontinued operation are presented separately under discontinued            operations in the consolidated statements of operations and comprehensive (loss) income            for the prior periods. The balance sheet presents the current assets and liabilities            related to the discontinued operation for current and prior years.

             

| **3.** | **Changes in                            accounting policies:** |
|--------|----------------------------------------------------------------|

|   | (a) | New accounting policies: |
|--------|-----|--------------------------|

Effective January 1, 2007, the Company adopted the Canadian Institute of            Chartered Accountants (CICA) Handbook Section 1530,*Comprehensive Income*, CICA Handbook Section            3251,*Equity*, CICA Handbook Section            3855,*Financial Instruments – Recognition and            Measurement*, CICA Handbook Section 3861,*Financial Instruments – Disclosure and            Presentation*, and CICA Handbook Section 3865,*Hedges*. Sections 3855, 3861 and 3865            provide comprehensive requirements for the recognition and measurement of financial            instruments, as well as standards on when and how hedge accounting may be applied.            Handbook Section 3251 establishes standards for the presentation of equity and changes            in equity during the reporting period and requires the Company to present separately            equity components and changes in equity arising from (i) net earnings; (ii) other            comprehensive income; (iii) other changes in retained earnings; (iv) changes in            contributed surplus and (v) changes in share capital. A new consolidated statement of            changes in shareholders’ equity is presented in these consolidated financial            statements. Handbook Section 1530 also establishes standards for reporting and            displaying comprehensive income. Comprehensive income is defined as the change in            equity from transactions and other events from non-owner sources. Other comprehensive            income refers to items recognized in comprehensive income but that are excluded from            net income calculated in accordance with generally accepted accounting            principles.

Under these new standards, all financial instruments are classified into            one of the following five categories: held-for-trading, held-to-maturity investments,            loans and receivables, available-for-sale financial assets or other financial            liabilities. Upon initial recognition, all financial assets and liabilities are            recognized at fair value. Subsequent to initial recognition, all financial instruments,            including derivatives, are included in the consolidated balance sheet and are measured            at fair market value with the exception of loans and receivables, held-to-maturity            investments and other financial liabilities, which are measured at amortized cost.            Subsequent measurement and recognition of changes in fair value of financial            instruments depend on their initial classification. Held-for-trading financial            investments are measured at fair value, and all gains and losses are included in net            income in the period in which they arise. Available-for-sale financial instruments are            measured at fair value with revaluation gains and losses included in other            comprehensive income until the asset is removed from the balance sheet.

             

57

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **3.** | **Changes in                            accounting policies (continued):** |
|--------|----------------------------------------------------------------------------|

|   | (a) | New accounting policies (continued): |
|--------|-----|--------------------------------------|

The standards require derivative instruments to be recorded as either            assets or liabilities measured at their fair value unless exempted from derivative            treatment as a normal purchase and sale. Certain derivatives embedded in other            contracts must also be measured at fair value. All changes in the fair value of            derivatives are recognized in earnings unless specific hedge criteria are met, which            requires that a company must formally document, designate and assess the effectiveness            of transactions that receive hedge accounting. The Company chose to review all            contracts in place on January 1, 2007, that were entered into after January 1,            2003, for any embedded derivatives required to be separated from the base contract and            accounted for at fair value.

As a result of the adoption of these standards, the Company has            classified its cash equivalents, short-term investments, cash and short-term            investments held as reserves, and restricted cash as available for sale. The Company            has classified accounts and other receivables and settlement assets as loans and            receivables, and accounts payable and accrued liabilities, and customer reserves and            security deposits as other financial liabilities, all of which are measured at            amortized cost. The adoption of these new standards also resulted in the            reclassification of the amount of $1,484 previously recorded in “Cumulative            translation adjustment” to “Accumulated other comprehensive loss” on            the consolidated balance sheets. The adoption of these standards had no impact on the            consolidated statements of operations.

|   | (b) | Future accounting pronouncements: |
|--------|-----|-----------------------------------|

The following accounting standards were recently issued by the CICA. The            Company is currently evaluating the impact of the adoption of these new standards on            its consolidated financial statements.

Section 1535,*Capital            Disclosures*, establishes guidelines for disclosure of both            qualitative and quantitative information that enables users of financial statements to            evaluate the entity’s objectives, policies and processes for managing capital.            This new standard relates to disclosure only and will not impact the financial results            of the Company. This standard is effective January 1, 2008.

Section 3862,*Financial Instruments -            Disclosure*, describes the required disclosure for the            assessment of the significance of financial instruments for an entity’s financial            position and performance and of the nature and extent of risk arising from financial            instruments to which the entity is exposed and how the entity manages those risks.            Section 3863,*Financial Instruments –            Presentation,*establishes standards for presentation of            financial instruments and non-financial derivatives. It carries forward the            presentation related requirements of Section 3861,*Financial            Instruments - Disclosure and Presentation*. These new            standards relate to disclosure only and will not impact the financial results of the            Company. These standards are effective January 1, 2008.

 

58

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

             

| **3.** | **Changes in                            accounting policies (continued):** |
|--------|----------------------------------------------------------------------------|

|   | (b) | Future accounting pronouncements                            (continued): |
|--------|-----|--------------------------------------------------------------------------|

In 2005, the Accounting Standards Board of Canada (AcSB) announced that            accounting standards in Canada are to converge with International Financial Reporting            Standards (IFRS). In May 2007, the CICA published an updated version of its            “Implementation Plan for Incorporating International Financial Reporting            Standards into Canadian GAAP”. This plan includes an outline of the key decisions            that the CICA needs to make as it implements the Strategic Plan for publicly            accountable enterprises that will converge generally accepted accounting principles            (GAAP) in Canada with IFRS. While IFRS uses a conceptual framework similar to Canadian            GAAP, there are significant differences in accounting policy which must be addressed.            These standards are effective for fiscal years beginning, on or after January 1,            2011.

In June 2007, the CICA issued Section 3031,*Inventories*, which replaces Section 3030            and harmonizes the Canadian standards related to inventories with IFRS. This Section            provides changes to the measurement and more extensive guidance on the determination of            cost, including allocation of overhead; narrows the permitted cost formulas; and            expands the disclosure requirements to increase transparency. This Section applies to            interim and annual financial statements for fiscal years beginning on or after January            1, 2008. The adoption of this standard is not expected to have a significant impact on            the consolidated financial statements.

             

| **4.** | **Significant                            accounting policies:** |
|--------|-----------------------------------------------------------------|

These consolidated financial statements have been prepared in accordance            with Canadian GAAP. These principles conform, in all material respects, with U.S. GAAP,            except as described in note 24. The significant accounting policies of the Company            are summarized as follows:

|   | (a) | Principles of consolidation: |
|--------|-----|------------------------------|

These consolidated financial statements include the accounts of the            Company’s wholly-owned subsidiaries. All intercompany balances and transactions            have been eliminated on consolidation.

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

Cash and cash equivalents consist of cash on hand and balances with            financial institutions, and highly liquid debt instruments with original terms to            maturity of three months or less.

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

Short-term investments include investments with maturities of less than            one year and are recorded at fair value with revaluation gains and losses, if any,            included in other comprehensive income.

 

59

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **4.** | **Significant                            accounting policies (continued):** |
|--------|-----------------------------------------------------------------------------|

|   | (d) | Cash and short-term investments held as                            reserves: |
|--------|-----|------------------------------------------------------------------------------|

The Company has agreements with various financial institutions for the            settlement of payment transactions. Under the terms of these agreements, the Company is            required to maintain certain amounts as reserves, which may be applied against any            amounts for which the financial institutions would be entitled to reimbursement.            Certain amounts charged by the financial institutions are charged to the            Company’s customers.

|   | (e) | Settlement assets: |
|--------|-----|--------------------|

Settlement assets result from timing differences in the Company’s            settlement process. These timing differences arise primarily as a result of settlement            amounts due from financial institutions that are members of the card associations and            debit networks. These amounts are typically funded to the Company within days from the            transaction processing date.

|   | (f) | Customer reserves and security deposits: |
|--------|-----|------------------------------------------|

Customer reserves and security deposits include balances required from            merchants to provide for amounts for which the Company would be entitled to            reimbursement under its contractual arrangements. Customer reserves and security            deposits relate to merchant collateral and outstanding payments due to merchant            customers.

|   | (g) | Inventories: |
|--------|-----|--------------|

Inventories are stated at the lower of cost and market value. Cost is            established based on an average cost method. Market value is defined as net realizable            value.

|   | (h) | Research and investment tax credits: |
|--------|-----|--------------------------------------|

Research and investment tax credits are recorded as a reduction of the            related expense or the cost of the assets acquired. Tax credits are given recognition            when reasonable assurance exists that they will be realized.

|   | (i) | Property and equipment: |
|--------|-----|-------------------------|

Property and equipment are recorded at cost. Amortization is provided            for over the estimated useful lives of the assets using the straight-line method at the            following annual rates:

             

|                            |                 |
|---------------------------------|----------------------|
| Computer equipment and software | 33% - 50%       |
| Equipment                       | 10% - 33%       |
| Moulds                          | 33% - 50%       |
| Leasehold improvements          | Lower of lease  |
|                            | term and        |
|                            | economic life   |
|                            |                 |

             

 

60

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **4.** | **Significant                            accounting policies (continued):** |
|--------|-----------------------------------------------------------------------------|

|   | (j) | Goodwill and other intangible assets: |
|--------|-----|---------------------------------------|

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.

Goodwill is not amortized but is tested for impairment annually, or more            frequently, if events or changes in circumstances indicate that the asset may 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 not            required. The second step is performed 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 impairment            loss, if any. When the carrying amount of the reporting unit’s goodwill exceeds            the implied fair value of goodwill, an impairment loss is recognized in an amount equal            to the excess and is presented as a separate line item on the consolidated statement of            operations.

Other intangible assets:

Intangible assets acquired either individually or with a group of other            assets are initially recognized and measured at cost. The cost of a group of intangible            assets, including those acquired in a business combination that meet the specified            criteria for recognition apart from goodwill, is allocated to the individual assets            based on their fair values.

Intangible assets with finite useful lives are amortized using the            straight-line method over the following periods:

             

|                                          |                  |
|-----------------------------------------------|-----------------------|
| Customer relationships and service agreements | 24 - 120 months  |
| ISO/ISA relations                             | 84 months        |
| Intellectual property                         | 36 months        |
| Tradename                                     | 60 months        |
| Other                                         | 36 - 84 months   |
|                                          |                  |

             

 

61

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **4.** | **Significant                            accounting policies (continued):** |
|--------|-----------------------------------------------------------------------------|

|   | (j) | Goodwill and other intangible assets                            (continued): |
|--------|-----|------------------------------------------------------------------------------|

Other intangible assets            (continued):

As at December 31, 2007, estimated amortization expense for each of the            next five years is expected to be as follows:

             

|   |   |   |
|--------|--------|--------|
| 2008   | $      | 19,045 |
| 2009   |   | 17,778 |
| 2010   |   | 16,508 |
| 2011   |   | 14,391 |
| 2012   |   | 8,781  |
|   |   |   |

             

Estimated future amortization expense is based on the amount of other            intangible assets recorded as of December 31, 2007. Actual amounts will increase            or decrease if additional amortizable intangible assets are acquired or            disposed.

|   | (k) | Impairment of long-lived assets: |
|--------|-----|----------------------------------|

Long-lived assets, consisting of property and equipment and intangible            assets with finite useful lives, are reviewed whenever events or changes in            circumstances indicate that the carrying amount of an asset may not be recoverable. An            impairment is recognized for long-lived assets when the carrying amount of an asset to            be held and used exceeds the sum of the undiscounted cash flows expected from its use            and disposal; the impairment recognized is measured as the amount by which the carrying            amount of the asset exceeds its fair value.

|   | (l) | Income taxes: |
|--------|-----|---------------|

The Company provides for income taxes using the asset and liability            method of tax allocation. Under this method, future income tax assets and liabilities            are determined based on deductible or taxable temporary differences between financial            statement values and tax values of assets and liabilities using enacted or            substantively enacted income tax rates expected to be in effect for the year in which            the differences are expected to reverse.

The Company establishes a valuation allowance against future income tax            assets if, based on available information, it is more likely than not that some or all            of the future income tax assets will not be realized.

             

62

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **4.** | **Significant                            accounting policies (continued):** |
|--------|-----------------------------------------------------------------------------|

|   | (m) | Revenue recognition: |
|--------|-----|----------------------|

Payment service revenues are generated from fees charged to merchants            for payment processing services as well as from consumers who utilized the            Company’s former electronic wallet offering. Merchants are charged a discount fee            or rate, which is based upon the merchant’s monthly charge volume and risk            profile, and this fee is calculated as a percentage of the dollar amount of each            transaction. Generally, higher discount rates are charged for card-not-present            transactions than for card-present transactions in order to compensate for the higher            cost of underwriting and managing the increased chargeback risk associated with such            transactions. Other payment service revenues are derived from a variety of fixed            transaction or services fees, including fees for monthly minimum charge volume            requirements, statement fees, annual fees and fees for other miscellaneous services,            such as handling chargebacks. Consumers who utilized the electronic wallet were charged            a fixed transaction fee for each deposit made to their account. Discount and other fees            related to payment transactions are recognized at the time the merchant’s            transactions are processed. Revenues derived from service fees are recognized at the            time the service is performed.

Where the Company is the primary party responsible for providing payment            processing services, revenue is recorded on a gross basis and amounts paid to the            acquiring processing suppliers are recorded as part of transaction processing expenses.            Where the Company is not the primary party in providing a merchant with payment            processing services, the Company records revenue net of amounts paid to the acquiring            processing supplier.

Revenue from the sale of consumer robotic, toy and entertainment            products is recognized when (i) persuasive evidence of an arrangement exists; (ii)            products are shipped to a customer who assumes risk of loss; (iii) collection of the            respective receivable is probable; and (iv) the sales price is fixed or determinable.            Accruals for customer discounts, rebates, incentives and allowances are recorded as the            related revenues are recognized.

|   | (n) | Reserve for losses on merchant accounts: |
|--------|-----|------------------------------------------|

Disputes between a cardholder and a merchant periodically arise as a            result of, among other things, consumer dissatisfaction with merchandise quality or            merchant services. Such disputes may not be resolved in the merchant’s favor. In            these cases, the transaction may be charged back to the merchant, which means the            transaction amount is refunded to the consumer and, in certain instances, charged to            the merchant. If the merchant has insufficient funds, the Company must bear the credit            risk for the full amount of the transaction. Management evaluates the risk for such            transactions and estimates the loss for disputed transactions based primarily on            historical experience and other relevant factors.

A reserve is maintained for merchant losses to absorb chargebacks and            other losses for merchant transactions that have been previously processed and on which            revenues have been recorded. Management analyzes the adequacy of its reserve for            merchant losses in each reporting period. The reserve for merchant losses comprises            specifically identifiable reserves for merchant transactions for which losses can be            estimated and an estimate of loss in the remaining portfolio, based on            experience.

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **4.** | **Significant                            accounting policies (continued):** |
|--------|-----------------------------------------------------------------------------|

|   | (n) | Reserve for losses on merchant accounts                            (continued): |
|--------|-----|---------------------------------------------------------------------------------|

The reserve for losses on merchant accounts is decreased by merchant            losses (arising from chargebacks) and is increased by provisions for merchant losses,            net of any recoveries. The net charge for the provision for merchant losses is included            in “Selling, general and administrative” expenses in the consolidated            statements of operations. As at December 31, 2007 and 2006, the reserve for losses on            merchant accounts is included in “Accounts payable and accrued            liabilities”.

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

The functional currency of the Company is the U.S. dollar and,            accordingly, the consolidated financial statements have been prepared in U.S. dollars.            Monetary assets and liabilities of the Canadian and foreign operations denominated in            currencies other than the U.S. dollar are translated into U.S. dollars at the rates of            exchange prevailing at the balance sheet dates. Other assets and liabilities            denominated in currencies other than the U.S. dollar are translated into U.S. dollars            at the rate of exchange prevailing when the assets were acquired or the liabilities            incurred. Revenue and expense transactions denominated in currencies other than the            U.S. dollar are translated into U.S. dollars at the average rate of exchange in effect            for the period during which the transaction occurred. Foreign exchange gains and losses            are included in the determination of net earnings (loss).

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

The fair value-based method is used to account for all transactions            whereby goods and services are received in exchange for stock-based compensation and            other stock-based payments. Under the fair value-based method, compensation cost is            measured at fair value at the date of grant and is expensed over the award’s            vesting periods, with a credit to additional paid-in capital.

|   | (q) | Research and development expenses: |
|--------|-----|------------------------------------|

Research costs, which include all costs incurred to establish            technological feasibility, are charged to operations in the period in which they are            incurred. Once technological feasibility has been established, development costs are            evaluated for deferral and subsequent amortization over the estimated period of            benefit. As at December 31, 2007 and 2006, the Company had no deferred development            costs.

|   | (r) | Earnings per share: |
|--------|-----|---------------------|

Basic earnings per share are determined using the weighted average            number of Class "A"shares outstanding during the period. Diluted            earnings per share are calculated using the treasury stock method. Diluted earnings per            share are computed in a manner consistent with basic earnings per share, except that            the weighted average shares outstanding are increased to include additional shares from            the assumed exercise of options and warrants, if dilutive. The number of additional            shares is calculated by assuming that outstanding options and warrants were exercised,            and that the proceeds from such exercises, including unrecognized compensation costs of            stock-based option grants attributed to future services, are used to repurchase Class            “A” shares at the average market price during the reporting            period.

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **4.** | **Significant                            accounting policies (continued):** |
|--------|-----------------------------------------------------------------------------|

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

The preparation of financial statements in conformity with GAAP requires            management to make estimates and assumptions that affect the reported amounts of assets            and liabilities and disclosures of contingent assets and liabilities at the date of the            financial statements and revenues and expenses during the reporting periods.            Significant areas requiring the use of management estimates and assumptions include:            determining the allowance for doubtful accounts and reserves for losses on merchant            accounts; estimating the useful lives of long-lived assets, including property and            equipment and intangible assets; estimating the fair value of identifiable intangibles            acquired in a business acquisition; estimating stock-based compensation costs;            assessing the recoverability of goodwill, long-lived assets, research and development            tax credits receivable and future tax assets; and the resolution of contingent            liabilities. The reported amounts and note disclosures are determined to reflect the            most probable set of economic conditions and planned courses of action. Financial            results as determined by actual events could differ from those estimates.

             

| **5.** | **Enactment of                            United States Unlawful Internet Gambling Enforcement Act of                            2006:** |
|--------|------------------------------------------------------------------------------------------------------------------------------------------|

On September 30, 2006, the United States Congress passed the Unlawful            Internet Gambling Enforcement Act of 2006 (the “Act”). The Act became law            in the United States on October 13, 2006. The Act prohibits any person engaged in the            business of betting or wagering from knowingly accepting any financial instrument in            connection with unlawful Internet gambling. The Act does not define unlawful Internet            gambling nor does it make unlawful any activities by financial institutions that are            not themselves gambling businesses. The Act directs the United States Federal Reserve            and the Department of the Treasury to develop regulations that would direct financial            institutions to identify and block certain types of financial transactions connected            with unlawful Internet gambling.

 

65

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **5.** | **Enactment of                            United States Unlawful Internet Gambling Enforcement Act of 2006                            (continued):** |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|

Upon the enactment of the Act, the Company immediately ceased processing            settlement transactions originating from United States consumers that may be viewed as            related to online gambling, which represented approximately 81% of the Company’s            total gaming payment processing services segment revenue for the year ended December            31, 2006. The enactment of the Act has had a significant negative impact on the            Company’s results as follows:

2007

In May 2007, the Company received a copy of warrants of seizure issued            by the U.S. Attorney’s Office against funds of certain payment processors that            were on deposit with two U.S. banks. These funds included $19,183 on deposit to the            credit of Company affiliates. The total amount seized is presented as long-term            restricted cash on the consolidated balance sheet. Refer to note 16 (f) –            Commitments, contingencies and guarantees.

2006

As a result of the significant negative impact on the business, an            impairment loss of $1,910 related to customer relationships was recorded. The            impairment loss represented the estimated amount by which the carrying amount of this            asset exceeded its fair value. The fair value was determined using cash flow            projections prepared by management.

The Company also tested the gaming payment processing services segment            for goodwill impairment. The fair value of the segment was estimated using the expected            present value of future cash flows. Management determined there was no impairment in            the goodwill related to this segment in 2006.

Estimated future cash flows were discounted using a rate reflecting the            uncertainty inherent in the continuing operations and the time value of money. Cash            flow projections were based on management’s estimates of expected cash flows from            ongoing operations.

The Company also embarked upon a restructuring of its operations and            cost base and as a result recorded a restructuring charge in 2006 in the amount of            $1,581 for associated costs, consisting primarily of employee termination benefits and            costs of leased premises no longer utilized. Of this amount, $228 (2006 - $601)            remained in accounts payable and accrued liabilities on the consolidated balance sheet            at December 31, 2007.

The Company continues to offer its multi-currency credit and debit card            processing to the online gambling industry originating from non-U.S. consumers and not            prohibited by the Act.

             

66

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **6.** | **Optimal                            Payments (Ireland) Limited – (“OPIL”, formerly                            FireOne Group plc):** |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|

In April 2005, the Company created OPIL and transferred to this            newly-created, wholly-owned Irish subsidiary and its subsidiaries, the net assets of            the payments processing business related to online gaming previously held in Optimal            Payments Inc. and its subsidiaries. On May 27, 2005, the Company completed the            placing of 10 million ordinary shares of OPIL, representing a 20% interest, with            institutional and other shareholders. The Company received gross proceeds of $44,146            (£24.1 million) as a result of this transaction. The ordinary shares of OPIL were            admitted for trading on the Alternative Investment Market (AIM) of the London Stock            Exchange plc on June 2, 2005.

The Company recognized a gain on sale of its 20% interest in OPIL of            $30,411, net of transaction costs of $6,643. The non-controlling interest in these            assets at the date of the transaction was $7,092.

On December 22, 2006, Optimal Acquisition Inc., a wholly-owned            subsidiary of the Company, made an offer to acquire all the issued and to be issued            ordinary shares of OPIL held by non-controlling shareholders (approximately 25% of the            total), at a price of £0.60 per share, representing a cash consideration of            $16,463. On February 23, 2007, Optimal Acquisition Inc. completed the acquisition of            all of the outstanding shares of OPIL, which as of that date became a wholly-owned            subsidiary of the Company. Effective February 23, 2007, a non-controlling interest            is no longer recorded in the consolidated financial statements. Transaction costs in            connection with this transaction were $1,748. The transaction was accounted for using            the purchase method. The Company recorded goodwill of $1,602 in connection with this            transaction.

As a result of the internal reorganization to transfer the payment            processing business related to online gaming to OPIL and its subsidiaries, the Company            incurred a tax charge in 2005 of $13,732, of which approximately $2,400 represented            taxes currently payable and the remainder represented the utilization of future tax            assets and investment tax credits previously recognized. Taxes paid or incurred as a            result of the transfer of net assets to OPIL and its subsidiaries have been recorded as            an “Other asset” in the consolidated balance sheets and would be recognized            when the Company’s interest in OPIL is transferred, by sale or otherwise, outside            of the consolidated group.

 

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----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **6.** | **Optimal                            Payments (Ireland) Limited – (“OPIL”, formerly                            FireOne Group plc) (continued):** |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

As at December 31, 2007, the balance of Other asset, net of            amortization, is $5,739. In 2005, the Company amortized $3,270 of this asset as a            future tax expense as a result of the sale of a 20% interest held by the Company            referred to above, and the vesting of restricted shares units issued by OPIL. In 2007,            the Company amortized a further $236 (2006 - $39) of this Other asset as a future tax            expense and recorded a dilution loss of $159 (2006 - $148), which is included in            “Non-controlling interest” in the consolidated statements of operations.            The Company’s interest in OPIL was effectively diluted to 75.9% from the original            80% as a result of the vesting of the restricted share units issued by OPIL and the            issuance of restricted share units as a dividend equivalent. As a result of the            goodwill impairment loss relating to the payment processing segment referred to in note            11, the Company also amortized $4,448 of this asset as a future tax expense in 2007,            representing the estimated portion of this asset that was realized in 2007.

             

| **7.** | **Business                            acquisitions and disposals:** |
|--------|---------------------------------------------------------------------|

|   | (a) | Acquisitions: |
|--------|-----|---------------|

|   | (i) | 2007 acquisitions: |
|--------|-----|--------------------|

Wow Wee Limited:

On November 7, 2007, the Company completed its previously announced            acquisition of substantially all of the assets of Wow Wee Limited, a privately-held            Hong Kong-based developer, marketer and supplier of technology-based, consumer robotic,            toy and entertainment products, as well as substantially all of the assets of WowWee            Marketing, Inc., with offices in California, and Wow Wee Group Company, with            offices in Canada (collectively, “WowWee”). WowWee Marketing, Inc. and Wow            Wee Group Company were service providers to Wow Wee Limited in the operation of            its business. The Company believes that the acquisition will provide the WowWee            business with greater financial and operational resources to grow both in North America            and internationally, and that the Company will be able to build upon the existing            consumer-focused franchise of the business, by capitalizing on its corporate brands            through the development of a cross-platform entertainment media strategy.

The total purchase price was $60,421, consisting of cash consideration            of $46,570, the issuance of 2,169,197 Class"A"shares with a fair value of $10,000, 820,000 warrants to purchase            820,000 Class “A” shares having an estimated fair value of $2,696 and            transaction costs of approximately $1,155. The warrants have an exercise price of $5.56            per share and are exercisable for a period of seven years.

 

68

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **7.** | **Business                            acquisitions and disposals (continued):** |
|--------|---------------------------------------------------------------------------------|

|   | (a) | Acquisitions (continued): |
|--------|-----|---------------------------|

|   | (i) | 2007 acquisitions (continued): |
|--------|-----|--------------------------------|

Wow Wee Limited (continued):

The acquisition was accounted for using the purchase method, and the            results of WowWee were consolidated with those of the Company from the date of            acquisition. The Company has allocated the purchase price on a preliminary basis to the            assets acquired and the liabilities assumed based on management’s best estimate            of their fair values and taking into account all relevant information available at that            time. Since the Company is still in the process of finalizing the valuation of certain            intangible assets and other assets acquired and liabilities assumed at the date of            acquisition, the allocation of the purchase price is subject to change. The Company            expects to finalize the allocation of the purchase price by the end of 2008. The            following table presents the estimated fair value of the assets purchased and            liabilities assumed from WowWee on November 7, 2007.

             

|                                     |   |   |
|------------------------------------------|--------|--------|
| Assets acquired:                         |   |   |
| Cash and cash equivalents                | $      | 483    |
| Accounts receivable                      |   | 8,295  |
| Inventories                              |   | 5,568  |
| Income tax receivable                    |   | 2,966  |
| Prepaid expenses and deposits            |   | 771    |
| Property and equipment                   |   | 2,457  |
| Customer relationships                   |   | 21,171 |
| Intellectual property                    |   | 5,520  |
| Tradename                                |   | 14,797 |
| Goodwill                                 |   | 37,113 |
|                                     |   |   | 99,141 |
|                                     |   |   |
| Liabilities assumed:                     |   |   |
| Accounts payable and accrued liabilities |   | 32,425 |
| Future income taxes                      |   | 6,295  |
|                                     |   |   | 38,720 |
|                                     |   |   |
| Net assets acquired                      | $      | 60,421 |
|                                          |        |        |  |

             

| Consideration:                         |   |   |
|----------------------------------------|--------|--------|
| Cash                                   | $      | 46,570 |
| 2,169,197 Class “A” shares |   | 10,000 |
| Warrants                               |   | 2,696  |
| Transaction costs                      |   | 1,155  |
|                                   |   |   |
| Total purchase price                   | $      | 60,421 |

             

 

69

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **7.** | **Business                            acquisitions and disposals (continued):** |
|--------|---------------------------------------------------------------------------------|

|   | (a) | Acquisitions (continued): |
|--------|-----|---------------------------|

|   | (i) | 2007 acquisitions (continued): |
|--------|-----|--------------------------------|

Wow Wee Limited (continued):

Goodwill recorded in connection with this transaction is not expected to            be deductible for tax purposes.

The fair value of the warrants was estimated using the Black-Scholes            model using the following assumptions: exercise price $5.56, share price $5.48,            volatility 56%, risk-free rate 3.74%, and dividend yield 0%.

|   | (ii) | Supplementary information: |
|--------|------|----------------------------|

The following unaudited pro forma financial information reflects the            consolidated results of operations as if the acquisition of WowWee had taken place on            January 1, 2007. The pro forma financial information is not necessarily indicative            of the results of operations as it would have been, had the transactions been reflected            on the assumed date. No effect has been given for synergies that may have been realized            through the acquisition.

             

|                                       |   |          |
|--------------------------------------------|--------|---------------|
| Pro forma revenues                         | $      | 221,424  |
| Pro forma net loss                         |   | (46,643)      |
| Pro forma basic and diluted loss per share |   | (1.79)        |
|                                       |   |          |

             

|   | (iii) | 2005 acquisitions: |
|--------|-------|--------------------|

**In 2005, Optimal Payments Inc., (“OPI”), a wholly-owned            subsidiary of the Company, made the**following            acquisitions:

|   | (a) | On January 1, 2005, OPI acquired the                            operating assets of Merchant Card Acceptance Corp. and its affiliated                            companies, Precision Management Consulting Inc. and Merchant Card                            Interactive Corp. (collectively, “MCA”), for cash                            consideration of $3,722 paid at the date of acquisition, plus $804 of                            additional cash consideration paid in 2007 based on the attainment of                            specified operational targets. The amount of contingent consideration                            paid in 2007 was recognized as additional goodwill. MCA is an                            independent sales organization providing Canadian-based merchants with                            credit card and Interac PIN-based debit card acceptance. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

70

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **7.** | **Business                            acquisitions and disposals (continued):** |
|--------|---------------------------------------------------------------------------------|

|   | (a) | Acquisitions (continued): |
|--------|-----|---------------------------|

|   | (iii) | 2005 acquisitions (continued): |
|--------|-------|--------------------------------|

|   | (b) | On May 6, 2005, OPI acquired a                            portfolio of merchant processing from United Bank Card, Inc.,                            (“UBC”) for cash consideration of $44,277. Pursuant to the                            agreement, UBC has guaranteed the Company a minimum contribution margin                            applicable to each of the 15 quarters following the closing date. UBC                            is required to maintain an irrevocable revolving standby letter of                            credit, to serve as collateral for the above guarantee. The original                            amount of the revolving standby letter of credit of $10,000 has been                            reduced to $600 as of December 31, 2007, and will continue to be                            reduced semi-annually up to June 2008, at which point it will be                            eliminated. In addition, UBC’s shareholder has provided a                            personal guarantee as additional security for maintaining the minimum                            contribution margin under the agreement. The original personal                            guarantee was $2,500, but has been increased to $8,000 as of December                            31, 2007, and will increase semi-annually up to $8,500 by June 2008.                            UBC will continue to perform certain customer service obligations for a                            period of three years, at no cost to OPI in the first and second years,                            for a fixed monthly fee per merchant in the third year, and thereafter                            for a fee to be negotiated. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (c) | On October 6, 2005, OPI acquired a                            portfolio of U.S. merchant processing contracts and associated sales                            channel contracts from Moneris Solutions Inc. (“Moneris”),                            for cash consideration of $18,266. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

All of the above acquisitions are related to the payment processing            services segment.

The acquisition of MCA was accounted for by using the purchase method,            and the acquisitions of UBC and Moneris were accounted for as acquisition of assets.            The following table summarizes the estimated fair value of the assets acquired at the            date of acquisition:

             

|                       |   | MCA                  |   | UBC                  |   | Moneris              |   | Total  |
|----------------------------|--------|---------------------------|--------|---------------------------|--------|---------------------------|--------|--------|
|                       |   |                      |   |                      |   |                      |   |   |
| Assets acquired:           |   |                      |   |                      |   |                      |   |   |
| Property and equipment     | $      | 145                  | $      | –    | $      | –    | $      | 145    |
| Inventory                  |   | 23                   |   | –    |   | –    |   | 23     |
| Supplier contract          |   | 779                  |   | –    |   | –    |   | 779    |
| Customer relationships     |   | –    |   | 43,777               |   | 11,086               |   | 54,863 |
| Customer service agreement |   | –    |   | 500                  |   | –    |   | 500    |
| ISO/ISA relationships      |   | –    |   | –    |   | 7,180                |   | 7,180  |
| Goodwill                   |   | 3,579                |   | –    |   | –    |   | 3,579  |
|                       |   |                      |   |                      |   |                      |   |   |
|                       | $      | 4,526                | $      | 44,277               | $      | 18,266               | $      | 67,069 |

             

 

71

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **7.** | **Business                            acquisitions and disposals (continued):** |
|--------|---------------------------------------------------------------------------------|

|   | (b) | Disposals: |
|--------|-----|------------|

|   | (i) | Sale of hardware maintenance and repair services                            segment: |
|--------|-----|--------------------------------------------------------------------------------------|

Effective September 30, 2006, the Company sold its Canadian hardware            maintenance and repair services segment for cash consideration of $200. On June 30,            2005, the Company sold the net assets relating to the U.S. operations of Systech,            comprised mainly of inventory and customer contracts, for cash consideration of $777.            These divestitures were made in accordance with the Company’s strategy of            identifying opportunities that can generate superior returns while selling assets that            do not generate acceptable returns.

The results of operations for this business segment are included in            discontinued operations in the consolidated statements of operations, and the remaining            assets and liabilities of the segment are classified as discontinued in the            consolidated balance sheets.

The following table summarizes the book value of the assets and            liabilities at September 30, 2006 and June 30, 2005 relating to the businesses sold by            the Company:

             

|                                     | September 30, 2006  | June 30, 2005  |
|------------------------------------------|-------------------------------|--------------------------|
|                                     |                          |                     |   |   |
| Current assets:                          |                          |                     |   |   |
| Accounts receivable                      | $                             | 3,733               | $ | 12  |
| Inventories                              |                          | 2,074               |   | 743  |
| Prepaid expenses and deposits            |                          | 807                 |   | -    |
|                                     |                          |                     | 6,614  |   | 755  |
|                                     |                          |                     |   |   |
| Long-term assets:                        |                          |                     |   |   |
| Property and equipment                   |                          | 2,546               |   | 67  |
| Intangible assets                        |                          | -         |   | 143  |
|                                     |                          |                     | 2,546  |   | 210  |
|                                     |                          |                     |   |   |
| Current liabilities:                     |                          |                     |   |   |
| Accounts payable and accrued liabilities |                          | 4,014               |   | –    |
| Deferred revenues                        |                          | 395                 |   | –    |
| Obligations under capital lease          |                          | 268                 |   | –    |
|                                     |                          |                     | 4,677  |   | -    |
|                                     |                          |                     |   |   |
| Net assets sold                          |                          | 4,483               |   | 965  |
|                                     |                          |                     |   |   |
| Proceeds from sale                       |                          | 200                 |   | 777  |
|                                     |                          |                     |   |   |
| Net loss on sale of net assets           | $                             | (4,283)                  | $ | (188) |
|                                     |                          |                     |   |   |
|                                          |                               |                          |  |  |  |

             

 

72

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

             

| **7.** | **Business                            acquisitions and disposals (continued):** |
|--------|---------------------------------------------------------------------------------|

|   | (b) | Disposals (continued): |
|--------|-----|------------------------|

|   | (i) | Sale of hardware maintenance and repair services                            segment (continued): |
|--------|-----|--------------------------------------------------------------------------------------------------|

The results of operations of these businesses for the years ended            December 31, 2006 and 2005 were as follows:

             

|                                                                           |   | 2006           |         | 2005    |
|--------------------------------------------------------------------------------|--------|---------------------|--------------|--------------|
|                                                                           |   |                |         |         |
| Revenue                                                                        | $      | 25,879         | $            | 41,461  |
|                                                                           |   |                |         |         |
| Costs and expenses:                                                            |   |                |         |         |
| Service costs and cost of sales                                                |   | 21,767         |         | 34,511  |
| Selling, general and administrative                                            |   | 6,954          |         | 9,044   |
| Amortization of property, equipment and                            intangibles |   | 259            |         | 1,826   |
| Stock-based compensation                                                       |   | -    |         | 2,212   |
| Operating leases                                                               |   | 1,825          |         | 3,169   |
| Foreign exchange                                                               |   | 333            |         | 721     |
| Impairment losses                                                              |   | -    |         | 12,447  |
| Restructuring                                                                  |   | 3,414          |         | 266     |
|                                                                           |   |                | 34,552  |         | 64,196  |
|                                                                           |   |                |         |         |
| Loss before income taxes                                                       |   | (8,673)             |         | (22,735)     |
|                                                                           |   |                |         |         |
| Income tax (provision) recovery                                                |   | (350)               |         | 380     |
|                                                                           |   |                |         |         |
| Net loss from discontinued operations                                          | $      | (9,023)             | $            | (22,355)     |
|                                                                                |        |                     |              |              |  |

             

The results of operations include management assumptions and adjustments            related to cost allocations, which are inherently subjective.

             

| **8.** | **Short-term                            investments:** |
|--------|--------------------------------------------------------|

             

|                                                                                                                                                                                                                                                                                               |   | 2007    |   | 2006    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|--------|--------------|
|                                                                                                                                                                                                                                                                                               |   |         |   |         |
| Notes denominated in U.S. dollars with a weighted                            average effective yield of 4.43% (2006 - 4.95%), maturing between March                            11, 2008 and April 24, 2008 (2006 - matured between January 11, 2007                            and April 3, 2007) | $      | 12,477  | $      | 71,621  |

             

Held as reserves

             

| Notes denominated in U.S. dollars with a weighted                            average effective yield of 4.53% (2006 - 5.11%), maturing on January                            28, 2008 (2006 - matured on January 31, 2007 and June 30,                            2007) | $ | 1,710  | $ | 3,110  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---|-------------|---|-------------|

             

 

73

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **9.** | **Accounts and                            other receivables:** |
|--------|----------------------------------------------------------------|

             

|                                                                                                               |   | 2007                 |   | 2006    |
|--------------------------------------------------------------------------------------------------------------------|--------|---------------------------|--------|--------------|
|                                                                                                               |   |                      |   |         |
| Trade accounts receivable, net of provision for doubtful                            accounts

of $765 (2006 - nil) | $      | 16,199               | $      | 4,262   |
| Other                                                                                                              |   | 2,314                |   | 4,482   |
| Current assets related to discontinued                            operations                                       |   | –    |   | 1,506   |
|                                                                                                               |   |                      |   |         |
|                                                                                                               | $      | 18,513               | $      | 10,250  |

             

| **10.** | **Property and                            equipment:** |
|---------|--------------------------------------------------------|

             

|                            |   | 2007   |         | 2006                 |
|---------------------------------|--------|-------------|--------------|---------------------------|
|                            |   |        |         |                      |
| Cost:                           |   |        |         |                      |
| Equipment                       | $      | 535    | $            | 441                  |
| Computer equipment and software |   | 3,840  |         | 3,772                |
| Leasehold improvements          |   | 1,705  |         | 1,414                |
| Moulds                          |   | 4,016  |         | –    |
|                            |   |        | 10,096  |                      | 5,627  |
|                            |   |        |         |                      |
| Accumulated amortization:       |   |        |         |                      |
| Equipment                       |   | 270    |         | 216                  |
| Computer equipment and software |   | 3,005  |         | 2,576                |
| Leasehold improvements          |   | 1,069  |         | 714                  |
| Moulds                          |   | 1,082  |         | –    |
|                            |   |        | 5,426   |                      | 3,506  |
|                            |   |        |         |                      |
| Net book value                  | $      | 4,670  | $            | 2,121                |
|                                 |        |             |              |                           |  |

             

             

74

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **11.** | **Goodwill and                            other intangible assets:** |
|---------|----------------------------------------------------------------------|

             

| December 31, 2007                   |
|-----------------------------------------------|
|                                          | Gross  |   |   |
|                                          |   | carrying  |   | Accumulated  |   | Net book  |
|                                          |   | amount  |   | amortization  |   | value  |
|                                          |   |   |   |   |   |   |
| Goodwill                                      | $ | 66,210  | $ | –    | $ | 66,210  |
|                                          |   |   |   |   |   |   |
| Customer relationships and service agreements |   | 86,482  |   | 25,502  |   | 60,980  |
| ISO/ISA relations                             |   | 7,180  |   | 2,308  |   | 4,872  |
| Intellectual property                         |   | 5,520  |   | 307  |   | 5,213  |
| Tradename                                     |   | 14,798  |   | 493  |   | 14,305  |
| Other                                         |   | 6,134  |   | 4,646  |   | 1,488  |
|                                          |   | 120,114  |   | 33,256  |   | 86,858  |
|                                          |   |   |   |   |   |   |
|                                          | $ | 186,324  | $ | 33,256  | $ | 153,068  |

             

             

| December 31, 2006                   |
|-----------------------------------------------|
|                                          | Gross  |   |   |
|                                          |   | carrying  |   | Accumulated  |   | Net book  |
|                                          |   | amount  |   | amortization  |   | value  |
|                                          |   |   |   |   |   |   |
| Goodwill                                      | $ | 49,243  | $ | –    | $ | 49,243  |
|                                          |   |   |   |   |   |   |
| Customer relationships and service agreements |   | 63,324  |   | 15,331  |   | 47,993  |
| ISO/ISA relations                             |   | 7,180  |   | 1,282  |   | 5,898  |
| Other                                         |   | 6,136  |   | 3,229  |   | 2,907  |
|                                          |   | 76,640  |   | 19,842  |   | 56,798  |
|                                          |   |   |   |   |   |   |
|                                          | $ | 125,883  | $ | 19,842  | $ | 106,041  |

             

 

75

 

----

 

 

             

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **11.** | **Goodwill and                            other intangible assets (continued):** |
|---------|----------------------------------------------------------------------------------|

             

Changes in goodwill and other intangible assets were as            follows:

|                                                       |           |                      | Customer       |                      |               |                      |         |                      |   |                      |   |                      |   |
|------------------------------------------------------------|----------------|---------------------------|---------------------|---------------------------|--------------------|---------------------------|--------------|---------------------------|--------|---------------------------|--------|---------------------------|--------|
|                                                       |           |                      | relationships  |                      |               |                      |         |                      |   |                      |   |                      |   |
|                                                       |           |                      | and service    | ISO/ISA              | Intellectual  |                      | Trade-  |                      |   |                      |   |
|                                                       | Goodwill  | agreements           | relations      | property             |               | name                 |         | Other                |   | Total                |
|                                                       |           |                      |                |                      |               |                      |         |                      |   |                      |   |                      |   |   |
| Balance,                            December 31, 2005 | $              | 49,243               | $                   | 56,997               | $                  | 6,924                | $            | –    | $      | –    | $      | 3,926                | $      | 117,090  |
|                                                       |           |                      |                |                      |               |                      |         |                      |   |                      |   |                      |   |   |
| Acquisitions                                               |           |                      |                |                      |               |                      |         |                      |   |                      |   |                      |   |   |
| Other                                                      |           | –    |                | 2,750                |               | –    |         | –    |   | –    |   | 240                  |   | 2,990  |
|                                                       |           |                      |                |                      |               |                      |         |                      |   |                      |   |                      |   |   |
| Impairment loss                                            |           | –    |                | (1,910)                   |               | –    |         | –    |   | –    |   | –    |   | (1,910) |
|                                                       |           |                      |                |                      |               |                      |         |                      |   |                      |   |                      |   |   |
| Amortization                                               |           | –    |                | (9,844)                   |               | (1,026)                   |         | –    |   | –    |   | (1,259)                   |   | (12,129) |
|                                                       |           |                      |                |                      |               |                      |         |                      |   |                      |   |                      |   |   |
| Balance,                            December 31, 2006 |           | 49,243               |                | 47,993               |               | 5,898                |         | –    |   | –    |   | 2,907                |   | 106,041  |
|                                                       |           |                      |                |                      |               |                      |         |                      |   |                      |   |                      |   |   |
| Acquisitions:                                              |           |                      |                |                      |               |                      |         |                      |   |                      |   |                      |   |   |
| MCA                                                        |           | 804                  |                | –    |               | –    |         | –    |   | –    |   | –    |   | 804  |
| WowWee note

   7 (a))                           |           | 37,113               |                | 21,171               |               | –    |         | 5,520                |   | 14,797               |   | –    |   | 78,601  |
| OPIL

 (note 6)                                       |           | 1,602                |                | –    |               | –    |         | –    |   | –    |   | –    |   | 1,602  |
| Other                                                      |           | –    |                | 2,250                |               | –    |         | –    |   | –    |   | 293                  |   | 2,543  |
|                                                       |           |                      |                |                      |               |                      |         |                      |   |                      |   |                      |   |   |
| Impairment loss                                            |           | (22,552)                  |                | –    |               | –    |         | –    |   | –    |   | –    |   | (22,552) |
|                                                       |           |                      |                |                      |               |                      |         |                      |   |                      |   |                      |   |   |
| Amortization                                               |           | –    |                | (10,434)                  |               | (1,026)                   |         | (307)                     |   | (492)                     |   | (1,712)                   |   | (13,971) |
|                                                       |           |                      |                |                      |               |                      |         |                      |   |                      |   |                      |   |   |
| Balance,                            December 31, 2007 | $              | 66,210               | $                   | 60,980               | $                  | 4,872                | $            | 5,213                | $      | 14,305               | $      | 1,488                | $      | 153,068  |

 

The Company tested the payment processing segment for impairment at            December 31, 2007. The Company revised its forecast for the next five years to reflect            higher merchant attrition and lower growth expectations for this segment. At December            31, 2007, a goodwill impairment loss of $22,552 was recognized in the payment            processing segment. The fair value of the segment was estimated using the expected            present value of future cash flows.

Included in “Other acquisitions” for the years ended            December 31, 2007 and 2006 is the purchase of various merchant payment processing            agreements, and a software licensing agreement, entitling the Company to future            revenues.

             

 

76

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **12.** | **Bank                            indebtedness:** |
|---------|---------------------------------------------------|

In 2006, the Company had credit facilities available in the amount of            approximately $11,241 (CA$13,100) which could have been utilized in the form of loans,            bankers’ acceptances or letters of guarantee. At December 31, 2006, the            Company utilized $8,581 (CA$10,000) of the facilities in borrowings and $1,802            (CA$2,100) through the issuance of letters of guarantee. The borrowings were due on            demand and bore interest either at the bank’s prime rate or the market rate for            bankers’ acceptances plus an acceptance fee of 0.75% per annum. The facilities            were secured by a first ranking moveable hypothec on certain short-term investments.            All borrowings were repaid in the year. In 2007, the Company did not renew its credit            facility.

             

| **13.** | **Accounts                            payable and accrued liabilities:** |
|---------|--------------------------------------------------------------------------|

             

|                                                                              |   | 2007    |   | 2006    |
|-----------------------------------------------------------------------------------|--------|--------------|--------|--------------|
|                                                                              |   |         |   |         |
| Trade accounts payable                                                            | $      | 16,963  | $      | 318     |
| Accrued trade liabilities                                                         |   | 10,653  |   | 7,088   |
| Accrued salaries and benefits                                                     |   | 3,966   |   | 6,211   |
| Reserve for merchant losses and chargebacks                                       |   | 3,907   |   | 5,830   |
| Other                                                                             |   | 9,816   |   | 1,952   |
| Current liabilities related to discontinued                            operations |   | 1,778   |   | 1,963   |
|                                                                              |   |         |   |         |
|                                                                              | $      | 47,083  | $      | 23,362  |

             

             

77

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **14.** | **Share                            capital:** |
|---------|-----------------------------------------------|

The Company’s authorized share capital consists of an unlimited            number of Class ”A” shares, and Class ”B” and            Class ”C” preference shares.

|   | – | The Class “A” shares are designated as                            common shares. |
|--------|---------|----------------------------------------------------------------------------------------------|

|   | – | The Class “B” preference                            shares are voting, non-participating and redeemable at the option of                            the Company for the amount paid up thereon. In the event of the                            liquidation, dissolution or wind-up of the Company, the Class                            “B” preference shares rank in priority to all other                            classes. |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | – | The Class “C” preference                            shares are issuable in series with rights, privileges, restrictions and                            conditions designated by the directors. In the event of the                            liquidation, dissolution or wind-up of the Company, the                            Class ”C” preference shares rank in priority to the                            common shares. |
|--------|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

No Class “B” or Class “C” shares have been            issued.

On November 6, 2006, the Board of Directors approved a stock buyback            program which authorized the Company to purchase up to 1,100,000 of its issued and            outstanding Class “A” shares.

On November 6, 2007, the Board of Directors renewed the stock buyback            program authorizing the Company to purchase up to 5% of its outstanding Class            “A” shares. The Company may purchase the Class “A” shares on            the open market through the facilities of the Nasdaq Stock Market over the course of 12            months commencing November 21, 2007 and ending November 20, 2008. All shares purchased            under the stock buyback program will be cancelled. The purchase of 53,400 such shares,            having a book value of $436, was settled in 2007 for a total consideration of $206 and            such shares were cancelled. The excess of the book value of the shares over the            purchase price, in the amount of $230, was credited to contributed surplus. During            2006, the purchase of 141,109 Class “A” shares, having a book value of            $1,189, was settled for a total consideration of $2,264 and such shares were cancelled.            The excess of the purchase price over book value of the shares, in the amount of            $1,075, was charged to the deficit. In 2005, the purchase of 21,800 Class            “A” shares, having a book value of $183, was settled for cash consideration            of $436 and such shares were cancelled. The excess of the purchase price over the book            value of the shares, in the amount of $253, was charged to the deficit.

             

78

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **15.** | **Stock                            options and warrants:** |
|---------|------------------------------------------------------------|

|   | (a) | Optimal Group Inc.: |
|--------|-----|---------------------|

The Company has a stock option plan that provides for the granting of            options to employees and directors for the purchase of the Company’s Class            “A” shares to be issued from treasury. Options may be granted by the Board            of Directors for terms of up to ten years. The Board of Directors establishes the            exercise period, vesting terms and other conditions for each grant at the grant date.            The maximum number of options that may be granted under the plan is 9,000,000. Options            may be granted with exercise prices at the then current market price. Options currently            outstanding under the plan expire either five or seven years after the date of            grant.

Details of outstanding stock options are as follows:

             

|                                   |            |   | Weighted   |
|----------------------------------------|-----------------|--------|-----------------|
|                                   |            |   | average    |
|                                   |            |   | exercise   |
|                                   | Number of  |   | price      |
|                                   | options    |   | per share  |
|                                   |            |   |            |
| Options outstanding, December 31, 2004 | 4,586,926  | $      | 7.10       |
|                                   |            |   |            |
| Expired/cancelled                      | (21,667)        |   | 7.10       |
| Exercised                              | (190,636)       |   | 7.10       |
|                                   |            |   |            |
| Options outstanding, December 31, 2005 | 4,374,623  |   | 7.10       |
|                                   |            |   |            |
| Granted                                | 67,500     |   | 9.36       |
| Expired/cancelled                      | (2,285)         |   | 7.10       |
| Exercised                              | (506,667)       |   | 7.10       |
|                                   |            |   |            |
| Options outstanding, December 31, 2006 | 3,933,171  |   | 7.14       |
|                                   |            |   |            |
| Granted                                | 1,636,000  |   | 4.21       |
| Expired/cancelled                      | (30,630)        |   | 9.31       |
|                                   |            |   |            |
| Options outstanding, December 31, 2007 | 5,538,541  | $      | 6.26       |
|                                        |                 |        |                 |  |

 

 

79

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **15.** | **Stock                            options and warrants (continued):** |
|---------|------------------------------------------------------------------------|

|   | (a) | Optimal Group Inc. (continued): |
|--------|-----|---------------------------------|

At December 31, 2007, 5,538,541 (2006 - 67,500; 2005 - none) stock            options could potentially dilute basic earnings per share in the future. They were not            included in the computation of diluted earnings per share because to do so would have            been anti-dilutive.

There are 3,877,541 stock options exercisable at December 31, 2007 with            a weighted average exercise price per share of $7.11.

The following table summarizes information about the options outstanding            and exercisable at December 31, 2007:

             

| Options outstanding Options exercisable |
|-----------------------------------------|
|                                    |   | Weighted |   |   |   |   |   |   |   |   |
|                                    |   | average |   |   |   | Weighted |   |   |   | Weighted |
|                                    |   | remaining |   |   |   | average |   |   |   | average |
|                                    |   | contractual |   |   |   | exercise |   |   |   | exercise |
| Exercise                                |   | life |   |   |   | price per |   |   |   | price per |
| price/share:                            |   | (years) |   | Number |   | share |   | Number |   | share |
|                                    |   |   |   |   |   |   |   |   |   |   |
|   $7.10                            |   | 1.33 |   | 3,865,041 | $ | 7.10 |   | 3,865,041 | $ | 7.10 |
| $9.36                                   |   | 3.97 |   | 37,500 |   | 9.36 |   | 12,500 |   | 9.36 |
| $4.21                                   |   | 6.88 |   | 1,636,000 |   | 4.21 |   | –   |   | –   |
|                                    |   |   |   |   |   |   |   |   |   |   |
|                                    |   |   |   | 5,538,541 | $ | 6.26 |   | 3,877,541 | $ | 7.11 |

             

At December 31, 2007, there are 820,000 warrants outstanding,            exercisable at a price of $5.56 up until November 2014. All of these warrants could            potentially dilute basic earnings per share in the future.

|   | (b) | Terra Payments Inc.: |
|--------|-----|----------------------|

Under the terms of the 2004 Combination Agreement with Terra Payments            Inc. (“Terra”), the Company assumed Terra’s stock option plan,            whereby stock options governed by this plan would be exercisable for the            Company’s Class “A” shares. The exercise price and number of options            outstanding on April 6, 2004, the effective date of the acquisition of Terra, were            adjusted based on the exchange ratio of 0.4532 of the Company’s Class            “A” shares for each share of Terra.

 

80

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **15.** | **Stock                            options and warrants (continued):** |
|---------|------------------------------------------------------------------------|

|   | (b) | Terra Payments Inc. (continued): |
|--------|-----|----------------------------------|

Details of the stock options outstanding under the Terra plan as at            December 31, 2007 are as follows:

             

| U.S. dollar exercise                            price      | Canadian dollar exercise price |
|-------------------------------------------------------------------------------------|--------------------------------|
|                                                                                |                           |   |
|                                                                                |                           | Weighted average  |
|                                                                                |                           | Exercise price  |   | exercise price  |
|                                                                                | Number                    | per share  | Number  | per share  |
|                                                                                |                           |   |   |   |   |   |
| Balance, December 31, 2004                                                          | 217,451                   | $ | 7.43  | 534,083  | $ | 14.34  |
|                                                                                |                           |   |   |   |   |   |
| Expired/cancelled                                                                   | –         |   | –    | (35,540) |   | 107.15  |
| Exercised                                                                           | –         |   | –    | (174,400) |   | 6.17  |
|                                                                                |                           |   |   |   |   |   |
| Balance, December 31, 2005                                                          | 217,451                   |   | 7.43  | 324,143  |   | 8.56  |
|                                                                                |                           |   |   |   |   |   |
| Expired/cancelled                                                                   | –         |   | –    | (19,317) |   | 10.31  |
| Exercised                                                                           | (83,338)                       |   | 7.43  | (123,068) |   | 8.84  |
|                                                                                |                           |   |   |   |   |   |
| Balance, December 31, 2006                                                          | 134,113                   |   | 7.43  | 181,758  |   | 8.19  |
|                                                                                |                           |   |   |   |   |   |
| Expired/cancelled                                                                   | –         |   | –    | (22,788) |   | 10.24  |
| Exercised                                                                           | –         |   | –    | (18,261) |   | 5.12  |
|                                                                                |                           |   |   |   |   |   |
| Balance, December 31, 2007                                                          | 134,113                   | $ | 7.43 | 140,709  | $ | 8.26  |

             

All of these options were fully vested at December 31, 2005.

All U.S. dollar exercise price options are exercisable at $7.43 per            share. The Canadian dollar exercise price options outstanding as at December 31, 2007            are as follows:

             

| Options outstanding      |
|--------------------------|
|                     |   | Weighted  |   | Weighted  |
|                     |   | average  |   | average  |
|                     |   | remaining  |   | exercise  |
|                     |   | contractual life  |   | price  |
| Range of exercise prices | Number  | (years)  |   | per share  |
|                     |   |   |   |   |
| $3.75 to $5.63           | 41,185 | 0.53 | $ | 5.25 |
| $6.09 to $8.83           | 44,462 | 0.76 |   | 7.76 |
| $9.49 to $10.92          | 55,062 | 1.08 |   | 10.90 |
|                     |   |   |   |   |
|                     | 140,709 | 0.82 | $ | 8.26 |

 

 

81

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **15.** | **Stock                            options and warrants (continued):** |
|---------|------------------------------------------------------------------------|

|   | (b) | Terra Payments Inc. (continued): |
|--------|-----|----------------------------------|

These options expire on various dates up to April 2009.

The 134,113 options outstanding with a U.S. dollar exercise price of            $7.43 have a remaining contractual life of 1.3 year as at December 31, 2007.

As at December 31, 2007 and December 31, 2006, there were 21,978 and            22,003 warrants outstanding, respectively, with a weighted average exercise price of            CA$0.01, and expiring on dates up to March 2008. During fiscal 2007, a total of 25            warrants expired.

There are Terra options to acquire 274,822 Class “A” shares            (2006 - 70,246; 2005 - 577) and Terra warrants to acquire 21,978 Class"A"shares that could potentially dilute basic earnings per share in the            future that were not included in the computation of diluted earnings per share for the            year ended December 31, 2007 because to do so would have been            anti-dilutive.

|   | (c) | Optimal Payments (Ireland) Limited -                            (“OPIL”, formerly FireOne Group plc): |
|--------|-----|-------------------------------------------------------------------------------------------------------------------|

OPIL established a restricted share unit plan whereby eligible            individuals were awarded rights to receive ordinary shares in OPIL to be issued from            treasury for a nominal consideration. The plan was administered by OPIL’s            remuneration committee. Awards were made to eligible individuals at the discretion of            the remuneration committee, vested in accordance with a specified vesting schedule and            were to terminate seven years from the date of award.

In May 2005, OPIL made an initial award of 2,443,750 restricted share            units to employees, officers and directors of OPIL and the Company. In November 2005,            an additional 56,248 restricted share units were awarded to the non-executive directors            of OPIL. As at December 31, 2005, all restricted share units were fully vested            (refer to note 18 (b) (ii)). In May 2006, an aggregate of 1,299,000 restricted share            units were awarded to directors, officers and employees of OPIL and the Company. These            restricted share units had an estimated fair value of $8,049 on the grant date which            was being amortized over the vesting period. Since restricted share units are            exercisable at a nominal amount, the estimated fair value was determined using            OPIL’s share price at the date of grant. The vesting period of these restricted            share units was one third on the first anniversary of the award, an additional one            third on the second anniversary of the award and the remaining one third on the third            anniversary of the award. In addition, in May and August 2006, an aggregate of 73,116            and 126,788 restricted share units, respectively, having a fair value of $460 and $534,            were awarded to restricted share unit holders as a dividend equivalent.

 

82

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **15.** | **Stock                            options and warrants (continued):** |
|---------|------------------------------------------------------------------------|

|   | (c) | Optimal Payments (Ireland) Limited -                            (“OPIL”, formerly FireOne Group plc)                            (continued): |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------|

Changes in restricted share units were as follows:

             

|                                       | RSUs outstanding          | Non-vested RSUs |
|--------------------------------------------|---------------------------|-----------------|
|                                       |                      |            | Weighted  |   |   | Weighted  |
|                                       |                      |            | average  |   |   | average  |
|                                       |                      |            | fair value  |   |   | fair value  |
|                                       | Number               |            | per unit  | Number  |   | per unit  |
|                                       |                      |            |   |   |   |   |
| Restricted share units,

December 31, 2005 | 1,793,667            | $               | 2.47  | –    | $ | –    |
|                                       |                      |            |   |   |   |   |
| Granted                                    | 1,299,000            |            | 6.23  | 1,299,000  |   | 6.23  |
| Exercised                                  | (981,517)                 |            | 2.64  | –    |   | –    |
| Expired/cancelled                          | (78,343)                  |            | 6.14  | (78,343) |   | 6.14  |
| Dividend equivalent                        | 199,904              |            | 4.97  | 111,883  |   | 4.93  |
|                                       |                      |            |   |   |   |   |
| Restricted share units,

December 31, 2006 | 2,232,711            |            | 4.71  | 1,332,540  |   | 6.13  |
|                                       |                      |            |   |   |   |   |
| Exercised                                  | (2,232,711)               |            | 4.71  | (1,332,540) |   | 6.13  |
|                                       |                      |            |   |   |   |   |
| Restricted share units,

December 31, 2007 | –    | $               | –    | –    | $ | –    |

             

As a result of the Company’s acquisition of all of the issued            ordinary shares of OPIL held by non-controlling shareholders in February 2007, all of            the unvested restricted share units became exercisable. All of the restricted share            units were exercised by the holders in connection with this transaction. In addition,            in the first quarter of 2007, the remaining unamortized compensation cost of $5,967            related to unvested restricted share units was recognized by the Company. No restricted            share units remain outstanding subsequent to this transaction.

             

83

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **16.** | **Commitments,                            contingencies and guarantees:** |
|---------|---------------------------------------------------------------------------|

|   | (a) | Operating leases: |
|--------|-----|-------------------|

The Company has entered into operating leases for its premises and            certain office equipment. Minimum lease payments are approximately as            follows:

             

|       |   |   |
|------------|--------|--------|
| 2008       | $      | 1,570  |
| 2009       |   | 1,197  |
| 2010       |   | 1,015  |
| 2011       |   | 402    |
| 2012       |   | 390    |
| Thereafter |   | 111    |
|       |   |   |
|       | $      | 4,685  |

             

In addition, the Company is also responsible for operating costs and            taxes under the operating leases.

             

|   | (b) | On March 11, 2005, and again on June                            30, 2005, the Company received a letter from Fujitsu claiming recovery                            of expenses allegedly incurred and forecast by Fujitsu to be incurred                            in relation to the operation of the Company’s former U-Scan®                            self-checkout business. In December 2005, the Company was notified by                            Fujitsu of its intention to arbitrate its claim. In February 2007,                            Fujitsu initiated arbitration proceedings. After consultation with                            counsel, the Company believes that there is no basis for these claims                            and intends to vigorously defend its position. Management is unable to                            determine the resolution of this matter or estimate the ultimate                            liability, if any, related thereto. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | (c) | The Company was pursuing the recovery                            of funds withdrawn from a Terra bank account by one of its credit card                            suppliers for various service charges assessed pertaining to periods                            prior to December 31, 2001, on the belief that these charges                            were largely unsubstantiated. The Company’s claim, which was                            being pursued through legal recourse, was settled and received in July                            2007 for $3,000. The Company recorded a gain of approximately $1,600 as                            a result of the settlement in the second quarter, representing the                            difference between the settlement amount and the carrying amount of the                            receivable. The gain has been recorded in selling, general and                            administrative expenses in the consolidated statements of operations                            and comprehensive (loss) income for the year ended December 31,                            2007. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

84

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **16.** | **Commitments,                            contingencies and guarantees (continued):** |
|---------|---------------------------------------------------------------------------------------|

|   | (d) | The Company is party to litigation                            arising in the normal course of operations. The Company does not expect                            the resolution of such matters to have a material adverse effect on its                            financial position or results of operations. However, the results of                            legal proceedings cannot be predicted with certainty. Should the                            Company fail to prevail in any of these legal matters or should several                            legal matters be resolved against the Company in the same reporting                            period, the consolidated operating results of a particular reporting                            period could be materially adversely affected. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (e) | In the sale or other disposition of                            assets out of the ordinary course of business, in addition to possible                            indemnification relating to failure to perform covenants and breach of                            representations and warranties, the Company might agree to indemnify                            the buyer against claims from its past conduct of its business.                            Typically, the term and amount of such indemnification will be limited                            by agreement. No provision has been made in these financial statements                            with respect to this item as the Company does not expect to make any                            payments for these items and the standby liability is                            nominal. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (f) | As previously announced, immediately                            following the enactment of the Unlawful Internet Gambling Enforcement                            Act of 2006 (the “Act”) on October 13, 2006, the                            Company’s then majority-owned subsidiary, OPIL, ceased to process                            settlement transactions originating from United States consumers. This                            represented a substantial portion of its revenues derived from                            processing transactions from online gambling. The Company is exposed to                            adverse consequences as a result of possible enforcement proceedings,                            governmental investigations or lawsuits initiated against it in                            jurisdictions where online gambling is or becomes restricted or                            prohibited. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Following announcements by the U.S. Attorney’s Office in the            Southern District of New York relating to its investigation of the U.S. Internet            gambling industry, the Company announced on May 8, 2007 that it has initiated            discussions with the U.S. Attorney’s Office in the Southern District of New York            and is in the process of responding to a voluntary request for information issued by            the U.S. Attorney’s Office. In connection with such ongoing investigation, the            Company announced on May 11, 2007 that it had received a copy of warrants of seizure            issued by the U.S. Attorney’s Office against funds of certain payment processors            that were on deposit with two U.S. banks. These funds included $19,183 on deposit to            the credit of Company affiliates. The total amount seized of $19,183 is presented as            restricted cash on the consolidated balance sheets. No provision has been recorded by            the Company for this matter because the outcome of these discussions and the amount of            loss, if any, are not currently determinable.

While best estimates have been used for reporting financial statement            items subject to measurement uncertainty, management considers that it is possible that            changes in future conditions in the near term could require a material change in the            recognized amounts of certain assets and liabilities. “Near term” is            considered to be within one year from the date of the financial statements.

|   | (g) | The Company has granted a letter of                            guarantee, issued by a highly rated financial institution to indemnify                            a third party in the event the Company does not perform its contractual                            obligations. As at December 31, 2007, the maximum potential                            liability under this letter of guarantee was $1,487                            (CA$1,500). |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

85

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **16.** | **Commitments,                            contingencies and guarantees (continued):** |
|---------|---------------------------------------------------------------------------------------|

|   | (g) | (continued): |
|--------|-----|--------------|

As at December 31, 2007, the Company recorded no liability with respect            to this guarantee, as the Company does not expect to make any payment for the            aforementioned item. Management believes that the fair value of the non-contingent            obligations, to stand ready to perform in the event that specified triggering events or            conditions occur, approximates the cost of obtaining the letter of            guarantee.

             

| **17.** | **Research and                            development expenses:** |
|---------|-------------------------------------------------------------------|

             

|                                    |   | 2007   |   | 2006   |   | 2005   |
|-----------------------------------------|--------|-------------|--------|-------------|--------|-------------|
|                                    |   |        |   |        |   |        |
| Gross research and development expenses | $      | 3,683  | $      | 3,586  | $      | 3,315  |
| Less research tax credits               |   | (405)       |   | (198)       |   | (656)       |
|                                    |   |        |   |        |   |        |
|                                    | $      | 3,278  | $      | 3,388  | $      | 2,659  |

             

| **18.** | **Other                            charges:** |
|---------|-----------------------------------------------|

|   | (a) | Restructuring costs: |
|--------|-----|----------------------|

2006:

As a result of the enactment of the United States Unlawful Internet            Gambling Enforcement Act of 2006 on October 13, 2006, the Company immediately ceased            processing settlement transactions originating from United States consumers and            embarked upon a restructuring of its operations and cost base. A restructuring charge            in the amount of $1,581, for associated costs such as employee termination benefits and            costs of leased premises no longer utilized, was recorded in 2006. As at December 31,            2007, $228 (2006 - $601) was included in “Accounts payable and accrued            liabilities” in the consolidated balance sheet.

During 2006, restructuring costs of $3,414 were incurred related to the            discontinued operations of the hardware maintenance and repair services segment. The            restructuring costs related primarily to employee termination benefits, inventory            write-offs, costs of leased premises no longer utilized, and facility closure costs.            All these costs were fully paid in 2006 and 2007.

2005:

In 2005, the Company incurred charges of $3,299, representing the cost            of financial obligations pursuant to an employment contract. This amount was fully paid            in 2006.

             

86

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **18.** | **Other                            charges (continued):** |
|---------|-----------------------------------------------------------|

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

|   | (i) | Stock-based compensation expense in the consolidated                            statements of operations was comprised of: |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------|

             

|                                                                          |   | 2007                 |   | 2006                 |   | 2005                 |
|-------------------------------------------------------------------------------|--------|---------------------------|--------|---------------------------|--------|---------------------------|
|                                                                          |   |                      |   |                      |   |                      |
| Expense related to options granted in 2007                                    | $      | 277                  | $      | –    | $      | –    |
| Expense related to options granted in 2006                                    |   | 13                   |   | 30                   |   | –    |
| Expense related to options granted in 2004                                    |   | –    |   | –    |   | 14,516               |
| Expense related to OPIL restricted stock unit                            plan |   | 5,967                |   | 1,677                |   | 6,080                |
| Amortization of deferred compensation                                         |   | –    |   | –    |   | 1,807                |
|                                                                          |   |                      |   |                      |   |                      |
|                                                                          | $      | 6,257                | $      | 1,707                | $      | 22,403               |

             

|                    |   | 2007                 |   | 2006                 |   | 2005    |
|-------------------------|--------|---------------------------|--------|---------------------------|--------|--------------|
|                    |   |                      |   |                      |   |         |
| Presentation:           |   |                      |   |                      |   |         |
| Continuing operations   | $      | 6,257                | $      | 1,707                | $      | 20,191  |
| Discontinued operations |   | –    |   | –    |   | 2,212   |
|                    |   |                      |   |                      |   |         |
|                    | $      | 6,257                | $      | 1,707                | $      | 22,403  |

             

The fair value of stock options granted was determined at the date of            grant using the Black-Scholes option pricing model and the following weighted average            assumptions:

             

|                    | 2007   | 2006   | 2005   |
|-------------------------|--------|--------|--------|
|                    |   |   |   |
| Expected volatility     | 56.3%  | 50.9%  | NA     |
| Expected life in years  | 7      | 5      | NA     |
| Risk-free interest rate | 3.74%  | 4.5%   | NA     |
| Expected dividend rate  | 0%     | 0%     | NA     |
|                    |   |   |   |

             

The weighted average fair value of 1,636,000 (2006 - 67,500) stock            options granted in fiscal 2007 was $2.52 (2006 - $4.64) per option.

 

87

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **18.** | **Other                            charges (continued):** |
|---------|-----------------------------------------------------------|

|   | (b) | Stock-based compensation (continued): |
|--------|-----|---------------------------------------|

|   | (ii) | On November 7, 2005, the                            Company’s Board of Directors approved the accelerated vesting of                            all unvested stock options previously awarded to employees, officers                            and directors. As a result of the accelerated vesting, and the                            concurrent accelerated vesting of unvested OPIL restricted share units,                            the Company recorded additional stock-based compensation of                            approximately $14,100 in 2005. The primary purpose of the acceleration                            was the elimination of stock-based compensation expense in the same                            aggregate amount that would otherwise be required to be recognized over                            the period ending June 30, 2007. |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

In order to prevent unintended personal benefits to employees, officers            and directors, the Board imposed restrictions on any shares received through the            exercise of accelerated options held by those individuals. These restrictions prevented            the sale of any stock obtained through exercise of an accelerated option prior to the            earlier of the original vesting date or the individual’s termination of            employment. The Board of Directors of OPIL imposed a similar restriction upon the sale            of the ordinary shares underlying the OPIL restricted share units in respect of which            the vesting was accelerated.

             

| **19.** | **Income                            taxes:** |
|---------|----------------------------------------------|

The income tax provision differs from the amount computed by applying            the combined Canadian federal and Québec provincial tax rates to earnings before            income taxes. The reasons for the difference and the related tax effects are as            follows:

             

|                                                                                                                   |   | 2007           |   | 2006           |   | 2005           |
|------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|---------------------|--------|---------------------|
|                                                                                                                   |   |                |   |                |   |                |
| (Loss) earnings from continuing operations before income                            taxes and non-controlling interest | $      | (30,367)            | $      | 34,089         | $      | 38,689         |
|                                                                                                                   |   |                |   |                |   |                |
| Combined Canadian federal and provincial

income taxes at 32% (2006 - 32%; 2005 - 31%)                                 | $      | (9,723)             | $      | 10,915         | $      | 12,001         |
| Foreign exchange(1)                                                                                                    |   | (3,616)             |   | (342)               |   | (384)               |
| Utilization of previously unrecognized tax assets and                            non-taxable portion of gain           |   | –   |   | (3,758)             |   | (10,012)            |
| Change in valuation allowance                                                                                          |   | 3,268          |   | (1,789)             |   | 1,262          |
| Difference in tax rates in foreign                            jurisdictions                                            |   | (329)               |   | (5,309)             |   | 83             |
| Stock-based compensation not deductible                                                                                |   | 2,004          |   | 397            |   | 5,904          |
| Goodwill impairment loss not deductible                                                                                |   | 7,220          |   | –   |   | –   |
| Amortization of other asset                                                                                            |   | 4,684          |   | 39             |   | 3,270          |
| Change in future tax rates                                                                                             |   | 2,651          |   | 883            |   | (297)               |
| Permanent differences and other                                                                                        |   | (174)               |   | 34             |   | (439)               |
|                                                                                                                   |   |                |   |                |   |                |
| Income tax provision of continuing operations                                                                          | $      | 5,985          | $      | 1,070          | $      | 11,388         |

             

 

88

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **19.** | **Income taxes                            (continued):** |
|---------|----------------------------------------------------------|

|   | (1) | For purposes of calculating the                            income tax provision of the Company, a tax liability (recovery) is                            recognized on foreign exchange gains or losses which arise on the                            conversion into Canadian dollars of the net monetary assets denominated                            in U.S. dollars; such conversion is required for tax purposes. As these                            financial statements are presented in U.S. dollars, these foreign                            exchange gains or losses do not impact (loss) earnings before income                            taxes, even though the income tax provision would include a tax effect                            for these items. Future fluctuations in the foreign exchange rate                            between the Canadian and U.S. dollar will change the amount of the                            foreign exchange gains or losses and, thus, the provision for income or                            recovery taxes thereon. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

The provision for income taxes from continuing operations is composed of            the following:

             

|                 |   | 2007   |   | 2006   |   | 2005    |
|----------------------|--------|-------------|--------|-------------|--------|--------------|
|                 |   |        |   |        |   |         |
| Current income taxes | $      | 1,619  | $      | 8,176  | $      | 8,353   |
| Future income taxes  |   | 4,366  |   | (7,106)     |   | 3,035   |
|                 |   |        |   |        |   |         |
|                 | $      | 5,985  | $      | 1,070  | $      | 11,388  |

             

Income tax expense has been based on the following components of (loss)            earnings before income taxes from continuing operations and non-controlling            interest:

             

|     |   | 2007  |   | 2006    |   | 2005    |
|----------|--------|------------|--------|--------------|--------|--------------|
|     |   |       |   |         |   |         |
| Domestic | $      | (4,177)    | $      | (3,567)      | $      | 14,725  |
| Foreign  |   | (26,190)   |   | 37,656  |   | 23,964  |
|     |   |       |   |         |   |         |
|     | $      | (30,367)   | $      | 34,089  | $      | 38,689  |

             

 

89

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **19.** | **Income taxes                            (continued):** |
|---------|----------------------------------------------------------|

The future income tax balances are summarized as follows:

             

|                                    |   | 2007    |         | 2006    |
|-----------------------------------------|--------|--------------|--------------|--------------|
|                                    |   |         |         |         |
| Future income tax assets (liabilities): |   |         |         |         |
| Intangible assets                       | $      | 4,128   | $            | 1,678   |
| Non-capital losses                      |   | 25,984  |         | 23,796  |
| Capital losses                          |   | 2,629   |         | 1,049   |
| Reserves                                |   | 801     |         | 2,198   |
| Foreign exchange and other              |   | 3,822   |         | 1,864   |
|                                    |   |         | 37,364  |         | 30,585  |
|                                    |   |         |         |         |
| Less valuation allowance                |   | (28,475)     |         | (23,860)     |
|                                    |   |         | 8,889   |         | 6,725  |
|                                    |   |         |         |         |
| Intangible assets and other             |   | (14,893)     |         | (7,191)      |
|                                    |   |         |         |         |
| Net future income tax liability         | $      | (6,004)      | $            | (466)        |
|                                    |   |         |         |         |
| Presented as:                           |   |         |         |         |
| Current assets                          | $      | 714     | $            | 2,192   |
| Long-term assets                        |   | 6,200   |         | 2,692   |
| Current liabilities                     |   | (1,270)      |         | (382)        |
| Long-term liabilities                   |   | (11,648)     |         | (4,968)      |
|                                    |   |         |         |         |
|                                    | $      | (6,004)      | $            | (466)        |
|                                         |        |              |              |              |  |

             

In assessing the realizability of future tax assets, management            considers whether it is more likely than not that some portion or all of the future            income tax assets will be realized. The ultimate realization of future tax assets is            dependent upon the generation of future taxable income, the reversal of taxable            temporary differences, and/or tax planning strategies.

 

90

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **19.** | **Income taxes                            (continued):** |
|---------|----------------------------------------------------------|

The Company has losses carryforward available to reduce Canadian federal            and foreign taxable income. These losses expire as follows:

             

|                       |   | Foreign  |   | Canada  |
|----------------------------|--------|---------------|--------|--------------|
|                       |   |          |   |         |
| Loss carryforward:         |   |          |   |         |
| Expiry between 2007 - 2017 | $      | 345      | $      | 22,218  |
| Expiry 2018 - 2027         |   | 47,373   |   | 20,400  |
|                       |   |          |   |         |
|                       | $      | 47,718   | $      | 42,618  |

             

| **20.** | **Segmented                            information:** |
|---------|-------------------------------------------------------|

In 2006, the Company operated in two processing segments, namely gaming            payment services and payment services. On October 13, 2006, OPIL ceased processing            settlement transactions originating from United States customers that may be viewed as            related to on-line gaming, which represented approximately 81% of the Company’s            total gaming payment processing services revenue for the year ended December 31, 2006.            On February 23, 2007, the Company completed the acquisition of the OPIL shares and            reorganized its activities into one payment processing services segment beginning            January 1, 2007. As of November 7, 2007, as a result of the acquisition of the assets            of Wow Wee Limited as discussed in note 7 (a) (i), the Company also operates in the            consumer robotic, toy and entertainment products segment in addition to payment            processing.

In 2005, the Company operated in three segments that included hardware            maintenance and repair services. The net results of this segment are reported as            discontinued operations.

Comparative figures have been reclassified to conform with this new            presentation. Management measures the results of operations based on segment income            before income taxes adjusted for certain non-cash and non-recurring items provided by            each business segment.

 

91

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **20.** | **Segmented                            information (continued):** |
|---------|-------------------------------------------------------------------|

|   | (a) | Information on the operating segments is as                            follows: |
|--------|-----|---------------------------------------------------------------------------------|

             

|                                                                                                                   |   | Consumer          |             |          |               |
|------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------------|---------------|--------------------|
|                                                                                                                   |   | robotic, toy and  |             |          |               |
|                                                                                                                   |   | entertainment     | Payment     | Eliminations/ |               |
|                                                                                                                   |   | products          | processing  | unallocated   | Consolidated  |
|                                                                                                                   |   |                   |             |          |               |   |   |   |
| Year ended December 31,                            2007:                                                               |   |                   |             |          |               |   |   |   |
|                                                                                                                   |   |                   |             |          |               |   |   |   |
| Revenues                                                                                                               | $      | 11,311            | $                | 112,017  | $                  | –   | $ | 123,328  |
|                                                                                                                   |   |                   |             |          |               |   |   |   |
| Transaction processing and cost of sales                                                                               |   | 9,452             |             | 69,233   |               | –   |   | 78,685  |
| Selling, general and administrative                                                                                    |   | 3,042             |             | 27,080   |               | 1,557  |   | 31,679  |
| Research and development                                                                                               |   | 431               |             | 2,547    |               | 300  |   | 3,278  |
| Operating leases                                                                                                       |   | 96                |             | 1,100    |               | –   |   | 1,196  |
|                                                                                                                   |   | (1,710)                |             | 12,057   |               | (1,857) |   | 8,490  |
|                                                                                                                   |   |                   |             |          |               |   |   |   |
| Stock-based compensation                                                                                               |   | 22                |             | 5,981    |               | 254  |   | 6,257  |
| Impairment loss                                                                                                        |   | –      |             | 22,552   |               | –   |   | 22,552  |
| Amortization                                                                                                           |   | 1,784             |             | 14,081   |               | 14  |   | 15,879  |
|                                                                                                                   |   | (3,516)                |             | (30,557)      |               | (2,125) |   | (36,198) |
|                                                                                                                   |   |                   |             |          |               |   |   |   |
| Investment income                                                                                                      |   | 11                |             | 2,783    |               | 3,037  |   | 5,831  |
|                                                                                                                   |   |                   |             |          |               |   |   |   |
| (Loss) earnings from continuing operations before income                            taxes and non-controlling interest |   | (3,505)                |             | (27,774)      |               | 912  |   | (30,367) |
|                                                                                                                   |   |                   |             |          |               |   |   |   |
| Income tax recovery (provision)                                                                                        |   | 148               |             | (6,604)       |               | 471  |   | (5,985) |
| Non-controlling interest                                                                                               |   | –      |             | (159)         |               | –   |   | (159) |
|                                                                                                                   |   |                   |             |          |               |   |   |   |
| Net (loss) earnings from continuing                            operations                                              | $      | (3,357)                | $                | (34,537)      | $                  | 1,383  | $ | (36,511) |
|                                                                                                                   |   |                   |             |          |               |   |   |   |

             

In 2006 and 2005, the Company only operated in the payment processing            segment.

 

92

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **20.** | **Segmented                            information (continued):** |
|---------|-------------------------------------------------------------------|

|   | (a) | Information on the operating segments is as follows                            (continued): |
|--------|-----|---------------------------------------------------------------------------------------------|

             

|                                                                                                                                                            |   | Consumer             |             |                      |               |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|------------------|---------------------------|--------------------|
|                                                                                                                                                            |   | robotic, toy and     |             |                      |               |
|                                                                                                                                                            |   | entertainment        | Payment     | Eliminations/        |               |
|                                                                                                                                                            |   | products             | processing  | unallocated          | Consolidated  |
|                                                                                                                                                            |   |                      |             |                      |               |   |   |   |
| December 31,                            2007:                                                                                                                   |   |                      |             |                      |               |   |   |   |
|                                                                                                                                                            |   |                      |             |                      |               |   |   |   |
| Total assets                                                                                                                                                    | $      | 104,560              | $                | 140,050              | $                  | 45,671  | $ | 290,281  |
|                                                                                                                                                            |   |                      |             |                      |               |   |   |   |
| Total additions to goodwill for the year ended                            December 31, 2007                                                                     |   | 37,113               |             | 2,406                |               | –    |   | 39,519  |
|                                                                                                                                                            |   |                      |             |                      |               |   |   |   |
| Total                            additions to property and equipment and other intangibles for the year                            ended December 31, 2007 |   |                      |             |                      |               |   |   |   |
| -                            through business acquisition                                                                                                       |   | 43,945               |             | –    |               | –    |   | 43,945  |
| -                            other                                                                                                                              |   | 1,597                |             | 3,112                |               | 35  |   | 4,744  |
|                                                                                                                                                            |   |                      |             |                      |               |   |   |   |
| December 31,                            2006:                                                                                                                   |   |                      |             |                      |               |   |   |   |
|                                                                                                                                                            |   |                      |             |                      |               |   |   |   |
| Total assets                                                                                                                                                    |   | –    |             | 202,518              |               | 138,019  |   | 340,537  |
|                                                                                                                                                            |   |                      |             |                      |               |   |   |   |
| Total                            additions to property and equipment and other intangibles for the year                            ended December 31, 2006 |   | –    |             | 4,264                |               | 8  |   | 4,272  |
|                                                                                                                                                            |   |                      |             |                      |               |   |   |   |
|                                                                                                                                                            |   |                      |             |                      |               |   |   |   |
|                                                                                                                                                            |   |                      |             |                      |               |   |   |   |

             

Included in total assets under the unallocated column for 2006 are            $1,506 of assets of discontinued operations. There are no assets of discontinued            operations in 2007.

 

93

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **20.** | **Segmented                            information (continued):** |
|---------|-------------------------------------------------------------------|

|   | (b) | Geographic information is as follows: |
|--------|-----|---------------------------------------|

             

| Revenues                            |   | Property and equipment, goodwill and                            intangibles |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|
|                                                                                                                                                                       |   | 2007                                                                   |   | 2006  |   | 2005  |   |   | 2007  |   | 2006  |
|                                                                                                                                                                       |   |                                                                        |   |   |   |   |   |   |   |   |   |
| United States                                                                                                                                                              | $      | 86,928                                                                 | $ | 106,734  | $ | 70,020  |   | $ | 58,429  | $ | 64,445  |
| Central America                                                                                                                                                            |   | 13,539                                                                 |   | 62,665  |   | 53,260  |   |   | –    |   | –    |
| Canada                                                                                                                                                                     |   | 7,846                                                                  |   | 8,953  |   | 8,395  |   |   | 19,695  |   | 43,611  |
| Europe                                                                                                                                                                     |   | 11,598                                                                 |   | 8,840  |   | 5,530  |   |   | 1,649  |   | 106  |
| Hong Kong                                                                                                                                                                  |   | –                                                           |   | –   |   | –   |   |   | 77,965  |   | –   |
| Other                                                                                                                                                                      |   | 3,417                                                                  |   | 4,701  |   | 7,693  |   |   | –    |   | –    |
|                                                                                                                                                                       |   |                                                                        |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                       | $      | 123,328                                                                | $ | 191,893  | $ | 144,898  |   | $ | 157,738  | $ | 108,162  |

             

Revenues are attributed to countries based on the location of the            customers. The “Other” caption includes countries in Africa, Australia and            Asia (excluding Hong Kong).

|   | (c) | Major customers: |
|--------|-----|------------------|

The Company has no customers in the current and prior periods from which            10% or more of total revenue is derived.

             

| **21.** | **Related                            party transactions:** |
|---------|------------------------------------------------------------|

The Company paid consulting fees to a corporation controlled by a            director of the Company in the amount of $260 (2006 - $497; 2005 - $458).

The transactions have been recorded at the exchange amount, which is the            amount of consideration agreed to by the parties.

             

94

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **22.** | **Financial                            instruments:** |
|---------|-------------------------------------------------------|

|   | (a) | Credit risk: |
|--------|-----|--------------|

Credit risk results from the possibility that a loss may occur from the            failure of another party to perform according to the terms of the contract. Financial            instruments that potentially subject the Company to concentrations of credit risk            consist primarily of cash and cash equivalents, short-term investments, accounts            receivable and restricted cash. Cash is maintained with high-credit, quality financial            institutions. Short-term investments consist of discounted notes issued by high-credit,            quality corporations. Restricted cash represents funds seized that were on deposit to            the credit of company affiliates. Refer to note 16 (f). For accounts receivable,            management performs periodic credit evaluations. Allowances are maintained for credit            losses consistent with the credit risk, historical trends, general economic conditions            and other information.

Customers of the payments business consist of a diverse portfolio of            small and medium-sized merchants whose businesses frequently are newly established. As            of December 31, 2007 and 2006, the Company provided services to merchants located            across the world in a variety of industries. A significant portion of the            merchants’ transaction volume comes from card-not-present transactions, which is            subject to a higher risk of merchant losses. Management believes that the loss of any            single merchant would not have a material adverse effect on its financial condition or            results of operations.

|   | (b) | Interest rate risk: |
|--------|-----|---------------------|

The Company’s exposure to interest rate risk is as            follows:

             

|                                                                                         |                         |
|----------------------------------------------------------------------------------------------|------------------------------|
| Cash and cash equivalents                                                                    | Fixed interest rate     |
| Cash held as reserves                                                                        | Fixed interest rate     |
| Short-term investments and short-term investments held                            as reserve | Fixed interest rate     |
| Accounts receivable                                                                          | Non-interest bearing    |
| Restricted cash                                                                              | Non-interest bearing    |
| Bank indebtedness                                                                            | Variable interest rate  |
| Accounts payable and accrued liabilities                                                     | Non-interest bearing    |
| Customer reserves and security deposits                                                      | Non-interest bearing    |
|                                                                                         |                         |

             

|   | (c) | Fair value: |
|--------|-----|-------------|

Fair value estimates are made as of a specific point in time using            available information about the financial instrument. These estimates are subjective in            nature and often cannot be determined with precision.

The Company has determined that the carrying values of its short-term            financial assets and liabilities are reasonable estimates of their fair values due to            the relatively short periods to maturity of these instruments. The Company cannot            determine the fair value of the restricted cash. Refer to note 5.

 

95

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **22.** | **Financial                            instruments (continued):** |
|---------|-------------------------------------------------------------------|

|   | (d) | Foreign exchange: |
|--------|-----|-------------------|

A portion of the Company’s revenues are denominated in currencies            other than the U.S. dollar. This results in financial risk due to fluctuations in the            value of the U.S. dollar relative to these currencies. The Company does not use            derivative financial instruments to reduce its foreign exchange exposure. Fluctuations            in foreign exchange rates could cause unanticipated fluctuations in the Company’s            operating results.

             

| **23.** | **Supplemental                            disclosure of cash flow and other information:** |
|---------|--------------------------------------------------------------------------------------------|

|   | (a) | Net change in operating assets and                            liabilities: |
|--------|-----|----------------------------------------------------------------------------|

             

|                                                                                                |   | 2007    |   | 2006           |   | 2005           |
|-----------------------------------------------------------------------------------------------------|--------|--------------|--------|---------------------|--------|---------------------|
|                                                                                                |   |         |   |                |   |                |
| Cash and short-term investments held as                            reserves                         | $      | 13,491  | $      | 3,666          | $      | (4,894)             |
| Restricted cash                                                                                     |   | (19,183)     |   | -    |   | -    |
| Settlement assets                                                                                   |   | 2,346   |   | 13,666         |   | (6,352)             |
| Accounts receivable                                                                                 |   | 1,135   |   | (919)               |   | (3,791)             |
| Inventories                                                                                         |   | 2,465   |   | -    |   | -    |
| Income taxes receivable and refundable investment tax                            credits receivable |   | (178)        |   | 30             |   | (282)               |
| Prepaid expenses and deposits                                                                       |   | (68)         |   | (113)               |   | (262)               |
| Accounts payable and accrued liabilities                                                            |   | (8,704)      |   | (397)          |   | 7,363          |
| Income taxes payable                                                                                |   | 1,223   |   | (3,263)             |   | 6,895          |
| Customer reserves and security deposits                                                             |   | (40,573)     |   | (50,525)            |   | 34,848         |
|                                                                                                |   |         |   |                |   |                |
| Net change in operating assets and                            liabilities                           | $      | (48,046)     | $      | (37,855)            | $      | 33,525         |

             

|   | (b) | Cash paid for                            interest and income taxes: |
|--------|-----|---------------------------------------------------------------------|

             

| Interest     | $      | 99     | $      | 390     | $      | 178    |
|--------------|--------|-------------|--------|--------------|--------|-------------|
| Income taxes |   | 2,910  |   | 12,590  |   | 2,382  |
|         |   |        |   |         |   |        |

             

|   | (c) | Non-cash                            transactions: |
|--------|-----|---------------------------------------------------|

             

| Tax charge in connection with transfer of payments                            processing business related to online gaming to OPIL | $      | –    | $      | –    | $      | 13,732               |
|------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|--------|---------------------------|--------|---------------------------|
| Shares and warrants issued in connection with WowWee                            acquisition                                        |   | 12,696               |   | –    |   | –    |
|                                                                                                                               |   |                      |   |                      |   |                      |

             

 

96

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **23.** | **Supplemental                            disclosure of cash flow and other information                            (continued):** |
|---------|-----------------------------------------------------------------------------------------------------------------------------------|

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

             

|                                                                                                               |   | 2007                 |   | 2006     |   | 2005    |
|--------------------------------------------------------------------------------------------------------------------|--------|---------------------------|--------|---------------|--------|--------------|
|                                                                                                               |   |                      |   |          |   |         |
| Cash and cash equivalents consist of:                                                                              |   |                      |   |          |   |         |
| Cash balances with banks                                                                                           | $      | 47,193               | $      | 59,069   | $      | 55,636  |
| Short-term investments, bearing interest (2006 - 5.29%                            to 5.32%; 2005 - 3.80% to 4.26%) |   | –    |   | 44,853   |   | 42,600  |
|                                                                                                               |   |                      |   |          |   |         |
|                                                                                                               | $      | 47,193               | $      | 103,922  | $      | 98,236  |

             

|   | (e) | Foreign exchange: |
|--------|-----|-------------------|

Included in “selling, general and administrative expenses”            in the consolidated statement of operations is a foreign exchange loss of $1,190 in            2007 (2006 - loss of $160; 2005 - loss of $490).

             

| **24.** | **Canadian/U.S. reporting differences:** |
|---------|------------------------------------------|

The consolidated financial statements of the Company are prepared in            accordance with Canadian GAAP, which conform, in all material respects, with U.S. GAAP,            except as described below:

|   | (a) | Consolidated Balance Sheets: |
|--------|-----|------------------------------|

Differences between Canadian and U.S. GAAP in the presentation of share            capital, additional paid-in capital and deficit are as follows:

|   | (i) | Share capital: |
|--------|-----|----------------|

             

|                                                                                |   | 2007     |   | 2006     |
|-------------------------------------------------------------------------------------|--------|---------------|--------|---------------|
|                                                                                |   |          |   |          |
| Share capital in accordance with Canadian                            GAAP           | $      | 211,998  | $      | 202,252  |
| Stock-based compensation costs on options exercised                            (1): |   |          |   |          |
| Cumulative effect of prior years                                                    |   | 39,868   |   | 39,868   |
| Change in reporting currency (2)                                                    |   | 2,588    |   | 2,588    |
|                                                                                |   |          |   |          |
| Share capital in accordance with U.S. GAAP                                          | $      | 254,454  | $      | 244,708  |

             

 

97

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **24.** | **Canadian/U.S. reporting differences                            (continued):** |
|---------|---------------------------------------------------------------------------------|

|   | (a) | Consolidated Balance Sheets (continued): |
|--------|-----|------------------------------------------|

|   | (ii) | Additional paid-in capital: |
|--------|------|-----------------------------|

             

|                                                                                   |   | 2007    |   | 2006    |
|----------------------------------------------------------------------------------------|--------|--------------|--------|--------------|
|                                                                                   |   |         |   |         |
| Additional paid-in capital in accordance with Canadian                            GAAP | $      | 29,561  | $      | 23,169  |
| Stock-based compensation costs                            (1):                         |   |         |   |         |
| Cumulative effect of prior years                                                       |   | 68,757  |   | 68,757  |
| Stock-based compensation costs on options exercised                            (1):    |   |         |   |         |
| Cumulative effect of prior years                                                       |   | (39,868)     |   | (39,868)     |
| Change in reporting currency (2)                                                       |   | 968     |   | 968     |
|                                                                                   |   |         |   |         |
| Additional paid-in capital in accordance with U.S.                            GAAP     | $      | 59,418  | $      | 53,026  |

             

|   | (iii) | Deficit: |
|--------|-------|----------|

             

|                                                                     |   | 2007  |   | 2006  |
|--------------------------------------------------------------------------|--------|------------|--------|------------|
|                                                                     |   |       |   |       |
| Deficit in accordance with Canadian GAAP                                 | $      | (41,066)   | $      | (4,555)    |
| Stock-based compensation costs                            (1):           |   |       |   |       |
| Cumulative effect of prior years                                         |   | (68,757)   |   | (68,757)   |
| Stock-based compensation to non-employees                            (1) |   | (834)      |   | (834)      |
| Change in reporting currency (2)                                         |   | (1,189)    |   | (1,189)    |
|                                                                     |   |       |   |       |
| Deficit in accordance with U.S. GAAP                                     | $      | (111,846)  | $      | (75,335)   |

             

|   | (1) | Stock-based compensation: |
|--------|-----|---------------------------|

For U.S. GAAP purposes, the Company adopted Statement of Financial            Accounting Standards (SFAS) No-123R,*Share-based            Payments*, on January 1, 2006, which requires the expensing of            all options based on the grant date fair value, over the period during which the            employee is required to provide service. The Company adopted SFAS 123R using the            modified prospective approach, which requires application of the standard to all awards            granted, modified or cancelled after January 1, 2006 and to all awards for which            the requisite service has not been rendered as at such date. Previously, effective            January 1, 2003, the Company adopted the fair value recognition provisions of SFAS            123.

 

98

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **24.** | **Canadian/U.S. reporting differences                            (continued):** |
|---------|---------------------------------------------------------------------------------|

|   | (a) | Consolidated Balance Sheets (continued): |
|--------|-----|------------------------------------------|

|   | (iii) | Deficit                            (continued): |
|--------|-------|-------------------------------------------------|

|   | (1) | Stock-based compensation (continued): |
|--------|-----|---------------------------------------|

A description of the Company’s stock option plans and OPIL’s            restricted share unit plan is presented in note 15.

Additional disclosures required under SFAS 123R are as            follows:

             

|                                                                                      |   |                      |   | Terra     |   | OPIL                                  |
|-------------------------------------------------------------------------------------------|--------|---------------------------|--------|----------------|--------|--------------------------------------------|
|                                                                                      |   | Stock                |   | options   |   | restricted                            |
|                                                                                      |   | option               |   | and       |   | share                                 |
|                                                                                      |   | plan                 |   | warrants  |   | unit                            plan  |
|                                                                                      |   |                      |   |           |   |                                       |
| Aggregate intrinsic value:                                                                |   |                      |   |           |   |                                       |
| Options and restricted share units exercised during the                            period | $      | –    | $      | 59        | $      | 2,625                                 |
| Options and warrants outstanding and                            exercisable               |   | –    |   | 91        |   | –                     |
|                                                                                      |   |                      |   |           |   |                                       |

 

The aggregate intrinsic value for outstanding and exercisable options at            December 31, 2007 represented the pre-tax intrinsic value based on the Company’s            closing stock price at December 31, 2007, which would have been received by option            holders had they exercised their securities at that date.

|   | (2) | Change in reporting currency: |
|--------|-----|-------------------------------|

In 1998, the Company adopted the U.S. dollar as its reporting currency.            Under Canadian GAAP, at the time of change in reporting currency, the historical            financial statements were presented using a translation of convenience. Under U.S.            GAAP, the financial statements, including prior years, are translated according to the            current rate method. Accordingly, the cumulative translation account included as part            of accumulated other comprehensive income in shareholders’ equity under Canadian            GAAP does not exist for U.S. GAAP purposes.

|   | (b) | Accumulated other comprehensive income                            (loss): |
|--------|-----|---------------------------------------------------------------------------|

Accumulated other comprehensive income (loss) under U.S. GAAP, which            resulted solely from the translation of the financial statements up to June 30,            2000, the date the Company adopted the United States dollar as its measurement            currency, in accordance with the current rate method, is $(3,018) as at            December 31, 2007, 2006 and 2005.

 

99

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **24.** | **Canadian/U.S. reporting differences                            (continued):** |
|---------|---------------------------------------------------------------------------------|

|   | (c) | Supplementary information: |
|--------|-----|----------------------------|

Under U.S. GAAP, separate disclosure is required for the following            statement of operations item. There is no similar requirement under Canadian            GAAP.

             

|                |   | 2007  |   | 2006  |   | 2005  |
|---------------------|--------|------------|--------|------------|--------|------------|
|                |   |       |   |       |   |       |
| Advertising expense | $      | 72    | $      | 200   | $      | 177   |

             

|   | (d) | FIN 48 - Accounting for tax uncertainties: |
|--------|-----|--------------------------------------------|

For U.S. GAAP purposes, the Company adopted Financial Accounting            Standards Board Interpretation No. 48,*Accounting for            Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109            (FIN* *48).*FIN 48 clarifies the accounting for income taxes recognized in a            company’s financial statements in accordance with FASB statement No. 109. FIN 48            prescribes a more-likely-than-not recognition threshold for tax uncertainties. The            adoption of FIN 48 resulted in no adjustment to the liability for unrecognized tax            benefits. As of the date of adoption, the total amount of unrecognized tax benefits was            $11,300, of which $5,400 would impact the annual effective rate if realized. For U.S.            GAAP tax purposes, unrecognized tax benefits would be classified as non-current other            liabilities. The Company recognizes interest and penalties related to unrecognized tax            benefits in income tax expense. At December 31, 2007, the total liability for            unrecognized tax benefits was approximately $14,500, of which $8,200 would impact the            annual effective rate if realized. The increase during the year is represented by            foreign exchange fluctuations, additional interest and other increases to the            reserve.

The Company and its subsidiaries file income tax returns with federal            and provincial tax authorities within Canada. The Company’s foreign affiliates            file income tax returns in various jurisdictions, the most significant of which are            Ireland, the United Kingdom, the United States and Hong Kong. In general, the Company            is subject to examination by taxing authorities for years after 2000. The Canadian tax            authorities have commenced examinations of tax returns for certain Canadian            subsidiaries for the taxation years 2003 to 2006.

 

100

 

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| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **24.** | **Canadian/U.S. reporting differences                            (continued):** |
|---------|---------------------------------------------------------------------------------|

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

SFAS No. 141R, Business            Combinations:

In December 2007, the FASB issued a revised standard on accounting for            business combinations. The major changes to accounting for business combinations            include the following: all business acquisitions would be measured at fair value; the            existing definition of a business would be expanded; pre-acquisition contingencies            would be measured at fair value; most acquisition-related costs would be recognized as            expenses as incurred (they would no longer be part of the purchase consideration);            obligations for contingent consideration would be measured and recognized at fair value            at the acquisition date (measurement would no longer need to wait until the contingency            is settled); non-controlling interests would be measured at fair value at the date of            acquisition (i.e., 100% of the assets and liabilities would be measured at fair value            even when an acquisition is for less than 100%); goodwill, if any, arising on a            business combination reflects the excess of the fair value of the acquiree, as a whole,            over the net amount of the recognized identifiable assets acquired and liabilities            assumed, and would be allocated to the acquirer and the non-controlling interest. The            statement is effective for periods beginning on or after January 1, 2009. The Company            will apply the standard for acquisitions occurring after this date.

SFAS No. 157 - Fair value            measurements:

In September 2006, the FASB issued Statement of Financial Accounting            Standards (SFAS) No. 157,*Fair Value            Measurements*. SFAS No. 157 clarifies the principle that fair            value should be based on the assumptions market participants would use when pricing an            asset or liability and establishes a fair value hierarchy that prioritizes the            information used to develop those assumptions. Under the standard, fair value            measurements would be separately disclosed by level within the fair value hierarchy.            SFAS No. 157 is effective for financial statements issued for fiscal years beginning            after November 15, 2007 and interim periods within those fiscal years, with early            adoption permitted. The Company does not expect the adoption of SFAS No. 157 to            materially impact its consolidated financial statements.

SFAS No. 159 - Fair value option for financial assets and financial            liabilities:

This statement permits entities the option to measure financial            instruments at fair value (“fair value option”), thereby achieving an            offsetting effect for accounting purposes for certain changes in fair value of certain            related assets and liabilities without having to apply hedge accounting. The fair value            option is applied on an instrument-by-instrument basis to the entire instrument. Items            eligible for the fair value option are measured at fair value at specified election            dates. The Statement is effective for financial statements issued for fiscal years            after November 15, 2007. The Company does not expect the adoption of SFAS No. 159            to materially impact its consolidated financial statements.

 

101

 

----

 

| ****OPTIMAL GROUP                            INC.****                                                   |
|---------------------------------------------------------------------------------------------------------|
| Notes to Consolidated Financial Statements,                            Continued                        |
|                                                                                                    |
| Three-year period ended December 31, 2007                                                               |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts) |
|                                                                                                    |

 

| **24.** | **Canadian/U.S. reporting differences                            (continued):** |
|---------|---------------------------------------------------------------------------------|

|   | (e) | Recent accounting pronouncements                            (continued): |
|--------|-----|--------------------------------------------------------------------------|

SFAS No. 160 - Non-controlling interest in consolidated financial            statements:

In December 2007, the FASB issued a revised standard on accounting for            non-controlling interests and transactions with non-controlling interest holders in            consolidated financial statements. This statement specifies that non-controlling            interests are to be treated as a separate component of equity, not as a liability or            other item outside of equity. Because non-controlling interests are an element of            equity, increases and decreases in the parent’s ownership interest that leave            control intact are accounted for as capital transactions rather than as step            acquisitions or generating dilution gains or losses. The carrying amount of the            non-controlling interests is adjusted to reflect the changes in ownership interests,            and any difference between the amount by which the non-controlling interests are            adjusted and the fair value of the consideration paid or received is recognized            directly in equity attributable to the controlling interests.

This standard requires net income and comprehensive income to be            displayed for both the controlling and the non-controlling interests. Additional            required disclosures and reconciliations include a separate schedule that shows the            effects of any transactions with the non-controlling interests on the equity            attributable to the controlling interests.

The Statement is effective for periods beginning on or after December            15, 2008. SFAS No. 160 will be applied prospectively to all non-controlling interests,            including any that arose before the effective date. The Company does not expect the            adoption of SFAS No. 160 to materially affect its consolidated financial            statements.

             

| **25.** | **Comparative                            figures:** |
|---------|-----------------------------------------------------|

Certain of the comparative figures have been reclassified in order to            conform with the current year’s presentation.

             

| **26.** | **Subsequent event:** |
|---------|-----------------------|

In January 2008, WowWee Group Limited, a subsidiary of the Company,            entered into an agreement for credit facilities of up to approximately $5,200 (40,000            HKD). Interest is based on the interbank offer and rates in Hong Kong plus 0.75%. The            facilities are secured by a guarantee provided by the Company.

 

 

102

 

----

 

| **ITEM 9.** | **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON                            ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|---------------------------------------------------------------------------------------------------------------------|

 

|   | We have nothing to report under this item. |
|--------|--------------------------------------------|

 

 

| **ITEM 9A.** | **CONTROLS AND PROCEDURES** |
|--------------|-----------------------------|

 

***Conclusion Regarding the Effectiveness of Disclosure Controls and            Procedures***

 

Under the supervision and with the participation of our management,            including our chief executive officer and chief financial officer, we conducted an            evaluation of our disclosure controls and procedures, as such term is defined under            Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the            Exchange Act). Based on this evaluation, our principal executive officer and our            principal accounting officer concluded that our disclosure controls and procedures were            effective as of the end of the period covered by this annual report.

 

***Management’s Report on Internal Control Over Financial            Reporting***

 

Internal control over financial reporting is designed to provide            reasonable assurance regarding the reliability of financial reporting and preparation            of financial statements prepared for external purposes in accordance with generally            accepted accounting principles. Because of its inherent limitations, internal control            over financial reporting may not prevent or detect misstatements. Also, projections of            any evaluation of effectiveness to future periods are subject to the risk that controls            may become inadequate because of changes in conditions, or that the degree of            compliance with the policies or procedures may deteriorate.

 

Our management is responsible for establishing and maintaining adequate            internal control over financial reporting, as such term is defined in Exchange Act            Rules 13a-15(f). Under the supervision and with the participation of our management,            including our principal executive officer and principal accounting officer, we            conducted an evaluation of the effectiveness of our internal control over financial            reporting based on the framework in Internal Control - Integrated Framework issued by            the Committee of Sponsoring Organizations of the Treadway Commission. Based on our            evaluation under the framework in Internal Control - Integrated Framework, our            management concluded that our internal control over financial reporting was effective            as of December 31, 2007.

 

Management’s assessment of the effectiveness of our internal            control over financial reporting as of December 31, 2007 excluded WowWee, which we            acquired on November 7, 2007. WowWee is wholly-owned by us and its total assets and            total net sales represented less than 10% of our consolidated total assets and less            than 10% of our consolidated net sales, respectively, as of and for the year ended            December 31, 2007. Companies are allowed to exclude acquisitions from their assessment            of internal control over financial reporting during the first year of an acquisition            while integrating the acquired company under guidelines established by the Securities            and Exchange Commission. Other than with respect to the acquisition of WowWee, no            changes in our internal control over financial reporting occurred during our last            fiscal quarter that has materially affected, or is likely to materially affect, our            internal control over financial reporting.

 

KPMG LLP (“KPMG”), an independent registered public            accounting firm, has issued an attestation report on the effectiveness of internal            control over financial reporting as of December 31, 2007, and their report is included            herein.

 

| **ITEM 9B.** | **OTHER INFORMATION** |
|--------------|-----------------------|

 

|   | We have nothing to report under this item. |
|--------|--------------------------------------------|

 

 

103

 

----

 

**PART III**

 

| **ITEM 10.** | **DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE                            GOVERNANCE** |
|--------------|---------------------------------------------------------------------------------------|

 

|   | The names, ages and positions of our directors and                            executive officers are as follows: |
|--------|------------------------------------------------------------------------------------------------------------------|

             

| **Name**                                                   | **Age** | **Position**                                                                       |
|------------------------------------------------------------|---------|------------------------------------------------------------------------------------|
| Neil S. Wechsler                                           | 41      | Co-Chairman, Chief Executive Officer and                            Director       |
| Holden L. Ostrin                                           | 48      | Co-Chairman and Director                                                           |
| Gary S. Wechsler,                            C.A**.**      | 50      | Treasurer and Chief Financial Officer                                              |
| Leon P. Garfinkle                                          | 47      | Senior Vice-President, General Counsel and                            Secretary    |
| Douglas P. Lewin                                           | 38      | Senior Vice-President; President, Optimal Payments                            Inc. |
| O. Bradley McKenna, C.A                                    | 58      | Vice-President, Administration and Human                            Resources      |
| David S.                            Schwartz, C.A., C.F.A. | 38      | Chief Financial Officer, Optimal Payments                            Inc.          |
| Tommy Boman(1)(2)                                          | 69      | Director                                                                           |
| James S. Gertler(1) (3)                                    | 41      | Director                                                                           |
| Henry M. Karp                                              | 53      | Director                                                                           |
| Thomas D. Murphy(1)(2)                                     | 54      | Director                                                                           |
| Stephen J. Shaper                                          | 71      | Director                                                                           |
| Sydney Sweibel(2)(3)                                       | 57      | Director                                                                           |
| Jonathan J. Ginns(3)                                       | 43      | Director                                                                           |

|   |  (1) | Member of Compensation Committee |
|--------|-----------|----------------------------------|

|   | (2) | Member of the Nominating Committee |
|--------|-----|------------------------------------|

|   | (3) | Member of Audit Committee |
|--------|-----|---------------------------|

             

The number of directors of our company is currently set at nine, divided            into three classes. Messrs. Ostrin, Shaper and Boman, as members of a single class            of directors, have been elected to hold office until the close of our 2008 annual            meeting of shareholders; and Messrs. N. Wechsler, Gertler and Murphy, as members            of a single class of directors, have been elected to hold office until the close of our            2009 annual meeting of shareholders. Messrs. Karp, Ginns and Sweibel, as members            of a single class of directors, have been elected to hold office until the close of our            2010 annual meeting of shareholders;

             

Executive officers of our company are appointed annually and serve until            their successors are duly appointed and qualified.

 

There are no family relationships between any of our directors or            executive officers, except for Neil S. Wechsler and Gary S. Wechsler, who are            brothers.

 

|   | The business experience of our directors and                            executives officers for the past five years is as follows: |
|--------|------------------------------------------------------------------------------------------------------------------------------------|

 

|   | *Neil S. Wechsler*has                            been a director and executive officer of our company since June                            1995. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | *Holden L. Ostrin*has                            been a director and executive officer of our company since June                            1996. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | *Gary S. Wechsler,*C.A.                            has been the Treasurer and Chief Financial Officer of our company since                            May 1994. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | *Leon P. Garfinkle*has                            been our Senior Vice-President, General Counsel and Secretary since                            July 2000. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

*Douglas P. Lewin*has been our Senior            Vice-President since April 2004. Mr. Lewin is President of Optimal Payments Inc.            Prior to March 2006, he was Executive Vice-President of Optimal Payments Inc. and prior            to April 2004, he was Executive Vice-President of Terra Payments Inc.

             

*O. Bradley McKenna,*C.A. has been the            Vice-President, Administration and Human Resources of our company since June            1999.

             

 

104

 

----

 

 

*David S. Schwartz*, C.A., C.F.A. has been            the Chief Financial Officer of Optimal Payments Inc. since March 2007. Prior to March            2007, Mr. Schwartz was Chief Financial Officer of FireOne Group plc. Prior to May            2005, Mr. Schwartz was our Vice-President, Investor Relations and Chief Financial            Officer of Optimal Services Group Inc. Prior to April 2004, he was Chief Financial            Officer of Terra Payments Inc.

             

*Tommy Boman*has been a director of our            company since April 2004. Mr. Boman served as a director of Terra Payments Inc.            from March 2003 until April 2004. Prior to 1998, Mr. Boman was Vice-Chairman of            IMS International and President and Chief Executive Officer of IMS America, a market            research company for the pharmaceutical and healthcare industries.

             

*James S. Gertler*has been a director of our            company since November 1997. He is a managing member of Independent Outdoor            Advertising, LLC, an outdoor media company in the United States and is a principal of            the general partner of Signal International, an offshore rig repair, maintenance,            upgrade and conversion company in the Gulf of Mexico.

             

*Henry M. Karp*has been a director of our            company since June 1996. From June 1999 through December 2005, Mr. Karp was our            President and Chief Operating Officer.

             

*Thomas D. Murphy*has been a director of our            company since July 2000. Mr. Murphyis the President of Peak Tech Consulting, a            firm that specializes in information technology management and related benefit            realization.

 

*Stephen J. Shaper*has been a director of            our company since April 2004. Mr. Shaper served as a director of Terra Payments            Inc. from October 2000, and as Chairman from May 2002, until April 2004.            Mr. Shaper is a partner with Convergent Investors, a private equity venture            capital firm based in Houston, Texas.

 

*Sydney Sweibel*has been a director of our            company since October 2001. Since 1994, Mr. Sweibel has been a founding partner of            the law firm Sweibel Novek in Montreal, Quebec.

 

*Jonathan J. Ginns*has been a director of            our company since October 2001. Since 1996, Mr. Ginns has been Managing Partner of            ACON Investments, a Washington, D.C.-based private equity investment firm.

 

**Audit Committee Report**

 

*The following Audit Committee Report does not constitute soliciting            material and should not be deemed filed or incorporated by reference into any other            filing of ours under the 1933 Act or the Exchange Act, except to the extent we            specifically incorporate this Report by reference therein.*

 

In accordance with its written charter, the Audit Committee oversees our            financial reporting process on behalf of our Board of Directors. Management has the            primary responsibility for our consolidated financial statements and the overall            reporting process, including our system of financial controls. In fulfilling its            oversight responsibilities during fiscal 2007, the Audit Committee:

 

|   | **•** | discussed                            the quarterly and year-to-date financial information contained in each                            quarterly earnings announcement with senior members of our financial                            management and KPMG, independent auditors, prior to public                            release; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | reviewed our                            audited consolidated financial statements as of and for the year ended                            December 31, 2007, as well as the quarterly unaudited consolidated                            financial statements and earnings release with senior members of our                            financial management and KPMG; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | reviewed                            with our financial management and KPMG their judgments as to the                            quality, not just the acceptability, of our accounting                            principles; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | discussed with KPMG the                            overall scope and plan for their audit; |
|--------|------------|--------------------------------------------------------------------------------------------|

|   | **•** | reviewed our financial                            controls and financial reporting process; |
|--------|------------|---------------------------------------------------------------------------------------------|

|   | **•** | reviewed our litigation                            matters; |
|--------|------------|-------------------------------------------------------------|

             

105

 

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|   | **•** | reviewed                            significant financial reporting issues and practices, including                            judgmental items, change in accounting principles and disclosure                            practice; pre-approved all services performed by KPMG; met with KPMG,                            without management present, to discuss the results of their                            examinations, their evaluation of the effectiveness of internal control                            over financial reporting; and met with our financial management,                            without KPMG present, to discuss the quality of services provided by                            KPMG. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

In addition, the Audit Committee has discussed with KPMG their            independence from management and our company, including the matters in the written            disclosures required by the Independence Standards Board Standard No.1 Independence            Discussions with Audit Committee and any matters required to be discussed by Statement            on Auditing Standards No. 61 Communications with Audit Committees, as amended, and            considered whether the provision of all other non-audit services provided to us by KPMG            during fiscal 2007 was compatible with the auditors’ independence.

 

In reliance on the reviews and discussions referred to above and            representations by management that the consolidated financial statements were prepared            in accordance with Canadian generally accepted auditing standards and with the            standards of the Public Company Accounting Oversight Board (United States), the Audit            Committee recommended to our Board of Directors that our consolidated financial            statements be included in this annual report on Form 10-K for the fiscal year ended            December 31, 2007 for filing with the Commission. The Audit Committee selected KPMG as            our independent auditors for the fiscal year ending December 31, 2008.

 

|   | **THE AUDIT COMMITTEE** |
|--------|-------------------------|

 

|   | James S. Gertler, Chairman |
|--------|----------------------------|

|   | Jonathan J. Ginns |
|--------|-------------------|

|   | Sydney Sweibel |
|--------|----------------|

 

For more specific information concerning the role, independence and            responsibilities of our Audit Committee, pleaser refer to our Audit Committee Charter            included as Exhibit 99.1 to this Form 10-K.

 

**Audit Committee Financial Expert**

 

Our Board of Directors has determined that each of James S. Gertler,            Chairman of the Audit Committee, and Audit Committee member Jonathan J. Ginns is an            audit committee financial expert as defined by Item 407(d)(5) of Regulation S-K of the            Exchange Act, is financially sophisticated for the purpose of Nasdaq Rule 4350(d)(2)            and is independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the            Exchange Act.

 

**Section 16(a) Beneficial Ownership Reporting            Compliance**

 

Section 16(a) of the Exchange Act requires our executive officers            and directors, and persons who own more than 10% of a registered class of our equity            securities, to file reports of ownership and changes in ownership with the Commission.            Executive officers, directors and greater than 10% stockholders are required by the            Exchange Act to furnish us with copies of all Section 16(a) forms they file. Based            solely upon a review of the forms furnished to us, we believe that during 2007 our            executive officers and directors complied with all applicable Section 16(a) filing            requirements.

 

106

 

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**Complaint procedures for accounting and auditing            matters**

 

In accordance with Section 301 of the Sarbanes-Oxley Act of 2002 and            Rule 10A-3 under the Exchange Act, the Nasdaq Rules prohibit the listing of any company            whose audit committee does not, among other things, establish procedures for (a) the            receipt, retention, and treatment of complaints received by the company regarding            accounting, internal accounting controls, or auditing matters, and (b) the submission            by employees of the company on a confidential and anonymous basis, of concerns            regarding questionable accounting or auditing matters. Accordingly, our Audit Committee            has adopted complaint procedures that are in compliance with the Nasdaq            Rules.

 

**Code of Ethics**

 

We have adopted a code of business conduct and ethics for all directors            and employees (including officers) within the meaning of the regulations adopted by the            Commission under section 406 of the Sarbanes - Oxley Act of 2002. The code has been            designed to deter wrongdoing and promote: honest and ethical conduct, including the            ethical handling of actual or apparent conflicts of interest between personal and            professional relationships; full, fair, accurate, timely, and understandable disclosure            in reports and documents that we file with, or submit to, the Commission and in other            public communications made by us; compliance with applicable governmental laws, rules            and regulations; the prompt internal reporting of violations of the code to an            appropriate person or persons; and accountability for adherence to the code. The            application of the code to the persons it applies to may only be waived by our Board of            Directors in accordance with Commission regulations and the Sarbanes - Oxley Act of            2002. A copy of the code is available to the general public at our website atwww.optimalgrp.com.            In addition, we will disclose on our website any amendment to the code and any waiver            of the code that applies to our principal executive officer, principal financial            officer, principal accounting officer or controller, or any person performing similar            functions.

 

**Reporting Status**

 

Although we are incorporated under the Canada Business Corporations Act            and our headquarters are in Canada, we are not a foreign private issuer as defined in            Rule 3b-4 of the Exchange Act.

 

| **ITEM 11.** | **EXECUTIVE COMPENSATION** |
|--------------|----------------------------|

 

 

**COMPENSATION DISCUSSION AND ANALYSIS**

 

**Material factors underlying compensation policies and            decisions:**

 

***Objectives of the compensation program***

 

The Compensation Committee has overall responsibility with respect to            approving and monitoring our executive compensation plans, policies and programs. The            Committee’s objective is to promote an executive compensation program that            supports our overall objective of rewarding performance thereby enhancing shareholder            value. The goals of all executive compensation decision making is to:

             

|   | **•** | Offer market competitive total                            compensation opportunities to attract and retain talented                            executives. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | Provide strong links between our                            performance and total compensation earned – i.e., pay for                            performance. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | Emphasize our company’s                            long-term performance, thus enhancing shareholder value. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------|

             

107

 

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***Elements of compensation***

 

Executive compensation consists of salary, bonus and equity-based            instruments that are designed to reward behaviors consistent with each            component.

             

|   | **•** | Salary decisions are made in light of                            market conditions to ensure that our executives have competitive                            compensation allowing us to retain their knowledge and leadership. The                            salary of our Co-Chairman and Chief Executive Officer, our Treasurer                            and Chief Financial Officer and our three other most highly compensated                            executive officers (being our Named Executive Officers) has been                            established by contract and is subject to increase from time to time at                            the discretion of the Board. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | Bonus incentives are discretionary                            and are established on an annual basis by the Compensation Committee                            with Board approval. They are tied directly to our annual financial                            performance as it relates to revenue growth and financial performance                            and to qualitative metrics. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | **•** | Equity-based compensation is designed                            to reward decision-making that leads to the performance of our share                            price and thus increases shareholder value. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

***Management of compensation***

 

The Compensation Committee ascribes to the following guiding principles            in the management of compensation:

 

|   | 1) | Executive compensation should be                            designed to attract and retain the best executives for our                            company. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 2) | To retain our best executives, we                            need to offer an industry competitive compensation model; when                            compensation decisions are made, we seek to pay compensation at or near                            the 75th percentile for companies that we view as peers for                            compensation comparison purposes at the time such decisions are                            made. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 3) | Executive compensation will be evaluated along four                            dimensions: |
|--------|----|--------------------------------------------------------------------------------------------|

             

|   | a. | Cash compensation, e.g., annual                            salary and bonus incentives. Bonus incentives are discretionary and are                            designed to reward the executive for past performance at both the                            individual and team level. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | b. | Equity compensation, e.g., stock                            options as long-term incentives. These awards are inherently                            performance-based as the compensation element is tied to performance of                            our company’s stock price. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | c. | Benefits and perquisites, e.g.,                            health and life insurance. In general, the offerings should be                            consistent for all levels of executive management albeit the amount of                            the benefit may vary by individual. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | d. | Severance terms, e.g., all items that                            are triggered by a severance event, are consistent across executives                            but vary by amount. These are set forth in each executive’s                            employment contract. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 4) | Our compensation model should be only                            one of the driving factors in executive decision-making. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------|

             

|   | 5) | Compensation reviews, via either                            external consultants or internal analysis, should be completed in                            conjunction with compensation decision making, to ensure our model is                            consistent within our industry and with regulatory guidelines and                            trends. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

 

108

 

----

 

***Equity-based compensation***

 

It is the Compensation Committee’s objective to provide            equity-based compensation as part of the overall executive and employee compensation            plan to motivate long-term decisions that positively affect our stock performance. To            accomplish this, the Committee has engaged in the following actions:

 

|   | 1) | The Committee considers grants of                            options within the parameters of our stock option plan, which was                            adopted in February 1997 and amended twice, in April 2000 and October                            2001. Our shareholders have approved the adoption of the plan and each                            amendment to the plan. Options may be granted for a term of up to 10                            years and the Board determines the term during which such options may                            be exercised at the time of each grant of options. The conditions of                            vesting and exercise of the options are established by the Board when                            such options are granted including the option exercise price, which has                            traditionally been equal to the closing price for our stock on the date                            prior to the date of grant. However, under the terms of our stock                            option plan, the Board is permitted to grant options with a discounted                            exercise price provided that the discount is not greater than that                            permitted by law and by the regulations, rules and policies of the                            several securities authorities and stock exchanges or markets                            (including, without limitation, the Nasdaq Stock Market) to which we                            may then be subject. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 2) | The Committee works in conjunction                            with management to determine the appropriate allocation of the options                            across executives and employees. This grant program is then submitted                            to the Board for approval. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

In November 2007, our Board of Directors approved a grant of options            under our stock option plan to certain of our Named Executive Officers and to employees            of our recently acquired WowWee business segment. In recommending the option grant to            the Board, the Compensation Committee considered the levels of options granted to            officers and non-officers in April 2004, being the most recent general grant of options            under the stock option plan and the number of common shares remaining available for            issuance under the stock option plan.

             

***Bonus-based compensation***

 

Largely due to the passage of the United States Unlawful Internet            Gambling Enforcement Act of 2006, management was not in a position to forecast 2007            results of operations with any certainty and therefore no bonus plans or arrangements            were established for 2007. In early 2008, bonus payments to the management and            personnel of Optimal Payments were proposed to the Compensation Committee by management            of the company covering their service during 2007. The bonus proposal was approved,            partly in recognition of the financial performance of Optimal Payments and partly to            address retention issues that arose throughout the year following workforce reductions.            No bonuses were paid to Named Executive Officers, except Doug Lewin in his capacity as            officer of Optimal Payments.

 

|   | No bonus plan or arrangements have as yet been                            established for 2008. |
|--------|-------------------------------------------------------------------------------------------------|

 

***Material increase or decrease in compensation***

 

There were no material increases or decreases in cash compensation paid            to any of the Named Executive Officers in 2007.

 

***Performance Graph***

 

We have included a performance graph that compares the cumulative total            shareholder return on our common shares with the Nasdaq composite Index for the five            years ended December 31, 2007. The graph sets the beginning value of our common shares            and the Nasdaq Composite Index at $100 and assumes that all dividends are            reinvested.

 

 

109

 

----

 

***Setting Executive Compensation***

 

The Compensation Committee considers a number of factors in setting            compensation levels including peer company practices, general legal and regulatory            guidelines, overall industry practices and trends, specific financial performance,            personal and qualitative performance, and comparisons to overall compensation of all            employees.

 

Since no cash compensation decisions were made in 2007, no review of            executive compensation was conducted in 2007.

 

***Accelerated Vesting of FireOne Group RSUs in            2007***

 

In connection with our acquisition, through a wholly owned subsidiary,            of all of the outstanding shares of FireOne Group plc at a price of 60 pence sterling            per share, the Board of Directors of FireOne Group plc (now known as Optimal Payments            (Ireland) Limited) approved the accelerated vesting of all restricted share units            (“RSUs”) outstanding FireOne Group plc’s restricted share unit plan            in order that the holders of such RSUs could tender the underlying shares of FireOne            Group plc to the offer. Payments made in 2007 as a result of this vesting are disclosed            in our tables.

 

**COMPENSATION COMMITTEE REPORT**

 

The Compensation Committee of our company has reviewed and discussed the            Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with            management and, based on such review and discussions, the Compensation Committee            recommended to the Board that the Compensation Discussion and Analysis be included in            the company’s proxy statement and Annual Report on Form 10-K.

 

|   | **THE COMPENSATION COMMITTEE** |
|--------|--------------------------------|

 

|   | Thomas D. Murphy, Chairman |
|--------|----------------------------|

|   | Tommy Boman |
|--------|-------------|

|   | James Gertler |
|--------|---------------|

 

               

**2007 SUMMARY COMPENSATION TABLE**

 

| **Name                                and Principal Position** | **Year** | **Salary ($) (1)** | **Bonus ($)** | **Stock Awards ($)**            | **Option Awards****($)** | **Non-equity incentive plan                                compen-sation****($)** | **Change in pension value and non-qualified                                deferred compensation earnings ($)** | **All                                other compen-sation ($)**             | **Total ($)** |
|----------------------------------------------------------------|----------|--------------------|---------------|---------------------------------|--------------------------|-----------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------|---------------|
| Neil S.                                Wechsler Co-            |     |               |          |                            |                     |                                                                              |                                                                                                            |                                                                       |          |
| Chairman                                and Chief              | 2007     | 1,395,349          | 0             | 1,036,079**(2)**                | 65,009**(3)**            | 0                                                                                 | 0                                                                                                               | 0**(4)(5)**                                                                | 2,496,437     |
| Executive                                Officer               | 2006     | 1,322,401          | 410,000       | 272,652                    | 0                        | 0                                                                                 | 0                                                                                                               | 0                                            | 2,005,053     |
| Holden L.                                Ostrin                | 2007     | 1,395,349          | 0             | 1,036,079**(2)**                | 65,009**(3)**            | 0                                                                                 | 0                                                                                                               | 48,885**(5)(6)**                                                           | 2,545,322     |
| Co-Chairman                                                    | 2006     | 1,322,401          | 410,000       | 272,652                    | 0                        | 0                                                                                 | 0                                                                                                               | 46,534                                       | 2,051,587     |
| Gary S.                                Wechsler                |     |               |          |                            |                     |                                                                              |                                                                                                            |                                                                       |          |
| Treasurer                                and Chief             | 2007     | 680,233            | 0             | 394,697**(2)**                  | 30,337**(3)**            | 0                                                                                 | 0                                                                                                               | 0**(4)**                                                    | 1,105,267     |
| Financial                                Officer               | 2006     | 644,671            | 285,000       | 103,868     | 0                        | 0                                                                                 | 0                                                                                                               | 0                                            | 1,033,539     |
| Douglas P.                                Lewin                |     |               |          |                            |                     |                                                                              |                                                                                                            |                                                                       |          |
| President,                                Optimal              | 2007     | 360,269            | 139,535       | 394,697**(2)**                  | 0                        | 0                                                                                 | 0                                                                                                               | 12,950**(7)**                                          | 896,019       |
| Payments                                Inc.                   | 2006     | 321,458            | 392,312       | 103,868     | 0                        | 0                                                                                 | 0                                                                                                               | 16,348                                       | 833,986       |
| Leon P.                                Garfinkle               |     |               |          |                            |                     |                                                                              |                                                                                                            |                                                                       |          |
| Senior                                Vice-President           |     |               |          |                            |                     |                                                                              |                                                                                                            |                                                                       |          |
| General                                Counsel and             |     |               |          |                            |                     |                                                                              |                                                                                                            |                                                                       |          |
| Secretary **(8)**                                         | 2007     | 411,860            | 0             | 345,360**(2)**                  | 21,670**(3)**            | 0                                                                                 | 0                                                                                                               | 0**(4)**                                               | 778,890       |

 

 

 

110

 

----

 

| (1) | We pay salary in Canadian dollars.                            The average exchange rate used for 2006 and 2007 used to convert these                            salaries into dollars were: US$1.00=Cdn$1.1343 (2006) and                            US$1.00=Cdn$1.0750 (2007). |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Reflects the full amount of the                            previously unamortized accounting expense that was recognized for                            financial statement reporting purposes for 2007 in accordance with                            Statement of Financial Accounting Standards No. 123 (revised 2004)                            “Share-Based Payment” (“SFAS 123(R)”). In                            connection with an offer by Optimal Acquisition Inc., our subsidiary,                            for all the issued and outstanding shares of our then majority owned                            subsidiary, FireOne Group plc (based on the fair value of each FireOne                            share underlying the RSUs on the date of the grant – fair value                            was determined to be the exercise price at the date of the grant, as                            the exercise price of the RSU’s was a nominal amount). As a                            result of that transaction, all outstanding FireOne Group plc RSUs held                            by our employees became vested and were paid. The actual value realized                            by our executives was: Mr. Neil Wechsler $409,751, Mr. Ostrin                            $409,770, Mr. Gary Wechsler $167,571, Mr. Lewin $144,542 and                            Mr. Garfinkle $175,809, which amounts are disclosed below on our                            Option Exercises and Stock Vested table and the Non-Qualified Deferred                            Compensation table. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Reflects the expense recognized for                            financial statement reporting purposes for fiscal year 2007 in                            accordance with SFAS 123(R). We determined the fair value of the                            options issued using the Black-Scholes option pricing model with the                            following assumptions: Expected volatility - 56.31%, Expected life in                            years - 7, Risk-free interest rate - 3.74% and Expected dividend rate -                            0%. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | The dollar value of all perquisites and other                            personal benefits or property was less than $10,000. |
|-----|-------------------------------------------------------------------------------------------------------------------------------|

| (5) | Perquisites for both the Co-Chairman                            and Chief Executive Officer and the Co-Chairman include the payment of                            life insurance premiums. See “Executive Employment and Separation                            Agreements.” |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6) | The perquisites include the interest                            free benefit of a home loan granted in 1996 amounting to $4,451 and                            life insurance premiums amounting to $44,434. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (7) | The perquisites include life                            insurance premiums, a car allowance, parking, fitness subsidy and a                            payment by us to the executive calculated based on the                            executive’s contribution to his individual Registered Retirement                            Savings Plan. This employer payment is not tax deferred. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (8) | Mr. Garfinkle was not a Named                            Executive Officer in 2006; accordingly, only compensation for 2007 is                            shown in the Summary Compensation Table. Mr. Garfinkle has been                            the Company’s Senior Vice-President General Counsel and Secretary                            since July 2000. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**2007 GRANTS OF PLAN - BASED AWARDS**

 

|                                                                 |           | **All                                Other Stock Awards:****Number of Shares of Stock or Units****(#)** | **All                                Other Option****Awards:****Number of Securities****Underlying Options****(#)** | **Exercise or Base****Price of****Option****Awards****($/sh) (1)** | **Grant Date****Fair Value of Stock****and Option Awards****($)(2)** |
|----------------------------------------------------------------------|----------------|---------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------|----------------------------------------------------------------------|
| **Name**                                                             | **Grant Date** | **Maximum****(#)**                                                                                      |                                                                                                                |                                                               |                                                                 |
| Neil S.                                Wechsler                      |           |                                                                                                    |                                                                                                                |                                                               |                                                                 |
| Co-Chairman                                and                       |           |                                                                                                    |                                                                                                                |                                                               |                                                                 |
| Chief                                Executive Officer               | 11/12/07       | 0                                                                                                       | 375,000                                                                                                             | 4.21                                                               | 949,125                                                              |
| Holden L.                                Ostrin                      |           |                                                                                                    |                                                                                                                |                                                               |                                                                 |
| Co-Chairman                                                          | 11/12/07       | 0                                                                                                       | 375,000                                                                                                             | 4.21                                                               | 949,125                                                              |
| Gary S.                                Wechsler                      |           |                                                                                                    |                                                                                                                |                                                               |                                                                 |
| Treasurer                                and Chief Financial Officer | 11/12/07       | 0                                                                                                       | 175,000                                                                                                             | 4.21                                                               | 442,925                                                              |
| Douglas P.                                Lewin                      |           |                                                                                                    |                                                                                                                |                                                               |                                                                 |
| President,                                Optimal Payments Inc.      | -              | 0                                                                                                       | 0                                                                                                                   | 0                                                                  | 0                                                                    |
| Leon P.                                Garfinkle                     |           |                                                                                                    |                                                                                                                |                                                               |                                                                 |
| Senior                                Vice-President,                |           |                                                                                                    |                                                                                                                |                                                               |                                                                 |
| General                                Counsel and Secretary         | 11/12/07       | 0                                                                                                       | 125,000                                                                                                             | 4.21                                                               | 316,375                                                              |

 

 

             

| (1) | The Board established the exercise price for stock                            options based on the closing market price per common share on the                            trading day prior to the grant date. As a result, for these grants, the                            exercise price of $4.21 was higher than the closing price on the date                            of grant of $4.17 per share. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | The value of the stock awards is based on the fair                            value as of the grant date as determined under SFAS 123R. We determined                            the fair value using the Black-Scholes option pricing model with the                            following assumptions: Expected volatility - 56.31%, Expected life in                            years - 7, Risk-free interest rate - 3.74% and Expected dividend rate -                            0%. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

             

111

 

----

             

**OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END – DECEMBER 31,            2007**

 

|                                                   | **Option awards**                                                                                      | **Stock awards**                                                                                            |
|--------------------------------------------------------|--------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------|
| **Name**                                               | **Number of securities underlying unexercised                                options (#) Exercisable** | **Number of securities under-lying unexer-cised                                options (#) Unexerci-sable** | **Option exercise price ($) USD** | **Option expiration date** | **Number of shares or units of stock that have not                                vested (#)(2)** | **Market value of shares or units that have not                                vested (#)** | **Equity incentive plan awards: Number of unearned                                shares, units or other rights that have not vested                                (#)** | **Equity incentive plan awards: Market or payout                                value of unearned shares, units or other rights that have not                                vested ($)** |
| Neil S.                                Wechsler        |                                                                                                   |                                                                                                        |   |   |   |   |   |   |
| Co-Chairman                                and         | 0                                                                                                      | 375,000**(1)**                                                                                              | 4.21 | November                                12, 2014 |   |   |   |   |
| Chief                                Executive Officer | 870,000                                                                                                | 0                                                                                                           | 7.10 | April 29,                                2009 | 0 | 0 | 0 | 0 |
| Holden L.                                Ostrin        | 0                                                                                                      | 375,000**(1)**                                                                                              | 4.21 | November                                12, 2014 |   |   |   |   |
| Co-Chairman                                            | 870,000                                                                                                | 0                                                                                                           | 7.10 | April 29,                                2009 | 0 | 0 | 0 | 0 |
| Gary S.                                Wechsler        |                                                                                                   |                                                                                                        |   |   |   |   |   |   |
| Treasurer                                and Chief     | 0                                                                                                      | 175,000**(1)**                                                                                              | 4.21 | November                                12, 2014 |   |   |   |   |
| Financial                                Officer       | 420,000                                                                                                | 0                                                                                                           | 7.10 | April 29,                                2009 | 0 | 0 | 0 | 0 |
|                                                   | 121,039                                                                                                | 0                                                                                                           | 7.10 | April 29,                                2009 |   |   |   |   |
| Douglas P.                                Lewin        | 22,077                                                                                                 | 0                                                                                                           | 7.43 | April 4,                                2009 |   |   |   |   |
| President,                                Optimal      | 15,862                                                                                                 | 0                                                                                                           | 11.02 | January                                30, 2009 |   |   |   |   |
| Payments                                Inc.           | 1,889                                                                                                  | 0                                                                                                           | 5.37 | May 26,                                2008 | 0 | 0 | 0 | 0 |
| Leon P.                                Garfinkle       |                                                                                                   |                                                                                                        |   |   |   |   |   |   |
| Senior                                Vice-President,  |                                                                                                   |                                                                                                        |   |   |   |   |   |   |
| General                                Counsel and     | 0                                                                                                      | 125,000**(1)**                                                                                              | 4.21 | November                                12, 2014 |   |   |   |   |
| Secretary                                              | 125,000                                                                                                | 0                                                                                                           | 7.10 | April 29,                                2009 | 0 | 0 | 0 | 0 |

 

 

 

 

             

| (1) | 50% of the options issued will vest on November 12,                            2008 and 50% will vest on November 12, 2009. |
|-----|-----------------------------------------------------------------------------------------------------------------------------|

| (2) | In connection with an offer by Optimal Acquisition                            Inc., our subsidiary, for all the issued and outstanding shares of our                            then majority owned subsidiary, FireOne Group plc, all outstanding                            FireOne Group plc RSUs held by our employees became vested in January                            2007. As a result, the named executive officers had no outstanding                            stock awards at fiscal year end, December 31, 2007. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

**OPTION EXERCISES AND STOCK VESTED DURING 2007**

 

|                                                          | **Option Awards**                                                            | **Stock Awards**                   |
|---------------------------------------------------------------|------------------------------------------------------------------------------|------------------------------------|
| **Name**                                                      | **Number of shares acquired on exercise                                (#)** | **Value realized on exercise ($)** | **Number of shares acquired on vesting                                (#)**  | **Value realized on vesting                                ($)(1)** |
| Neil S.                                Wechsler Co-Chairman   |                                                                         |                               |   |   |
| and Chief                                Executive Officer    | 0                                                                            | 0                                  | 346,906 | 409,751 |
| Holden L.                                Ostrin               |                                                                         |                               |   |   |
| Co-Chairman                                                   | 0                                                                            | 0                                  | 346,922 | 409,770 |
| Gary S.                                Wechsler Treasurer     |                                                                         |                               |   |   |
| and Chief                                Financial Officer    | 0                                                                            | 0                                  | 141,870 | 167,571 |
| Douglas P.                                Lewin President,    |                                                                         |                               |   |   |
| Optimal                                Payments Inc.          | 0                                                                            | 0                                  | 122,373 | 144,542 |
| Leon P.                                Garfinkle              |                                                                         |                               |   |   |
| Senior                                Vice-President, General |                                                                         |                               |   |   |
| Counsel and                                Secretary          | 0                                                                            | 0                                  | 148,844 | 175,809 |

 

             

|   | (1) | In connection with an offer by                            Optimal Acquisition Inc., our subsidiary, for all the issued and                            outstanding shares of our then majority owned subsidiary, FireOne Group                            plc, all outstanding FireOne Group plc RSUs held by our employees                            became vested and the underlying shares were purchased on January 26,                            2007 for an amount equal to $1.18 per FireOne Group plc share. These                            RSU distributions are also disclosed below on the Non Qualified                            Deferred Compensation table for 2007 |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

112

 

----

             

**NONQUALIFIED DEFERRED COMPENSATION FOR 2007**

 

For purposes of this table, the Company treated RSUs issued by our            subsidiary, FireOne Group plc, as non-qualified deferred compensation, because            participants, other than U.S. taxpayers were allowed to select the date of payment. No            further non-qualified deferred compensation is offered by our company.

 

| **Name**                                     | **Executive Contributions in Last FY ($)** | **Registrant Contributions in Last FY                            ($)** | **Aggregate Earnings in Last FY ($)** | **Aggregate****Withdrawals/****Distributions ($)(1) (2)** | **Aggregate****Balance at Last****FYE ($)** |
|----------------------------------------------|--------------------------------------------|------------------------------------------------------------------------|---------------------------------------|-----------------------------------------------------------|---------------------------------------------|
| Neil S.                            Wechsler  | 0                                          | 0                                                                      | 0                                     | 409,751                                                   | 0                                           |
| Holden L.                            Ostrin  | 0                                          | 0                                                                      | 0                                     | 409,770                                                   | 0                                           |
| Gary S.                            Wechsler  | 0                                          | 0                                                                      | 0                                     | 167,571                                                   | 0                                           |
| Douglas P.                            Lewin  | 0                                          | 0                                                                      | 0                                     | 144,542                                                   | 0                                           |
| Leon P.                            Garfinkle | 0                                          | 0                                                                      | 0                                     | 175,809                                                   | 0                                           |

 

| (1) | In connection with an offer by                            Optimal Acquisition Inc., our subsidiary, for all the issued and                            outstanding shares of our then majority owned subsidiary, FireOne Group                            plc, all outstanding FireOne Group plc RSUs held by our employees                            became vested and the underlying shares were purchased on January 26,                            2007 for an amount equal to $1.18 per FireOne Group plc                            share. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Reflects the amounts actually                            realized which were less than unamortized accounting expense that was                            recognized for the financial statement reporting purposes for 2007 in                            accordance with SFAS 123(R). Please refer to footnote 2 of the 2007                            Summary Compensation Table. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

**FireOne Group plc Restricted Share Unit Plan**

 

The amounts set forth in the table above represent deferred compensation            in respect of RSUs of our subsidiary FireOne Group plc held by the Named Executive            Officers. Under the terms of the FireOne Group plc RSU plan, the executives were            awarded RSUs that vest over time. Following vesting, the shares underlying the RSUs are            delivered to the executive on a pre-determined fixed date if he is a U.S. taxpayer;            however, if the executive is not a U.S. taxpayer, he can elect when to receive such            shares and thus the shares constitute deferred compensation until the time of receipt            of such shares. The executive was required to pay a nominal “exercise            price” of 0.02 Euros per share at the time the executive received the shares. In            connection with an offer by Optimal Acquisition Inc., our subsidiary, for all the            issued and outstanding shares of our then majority owned subsidiary, FireOne Group plc,            all outstanding FireOne Group plc RSUs held by our employees became vested and the            underlying shares were purchased on January 26, 2007 for an amount equal to $1.18 per            FireOne Group plc share. No further non-qualified deferred compensation is offered by            our company.

 

**Executive Employment and Separation Agreements**

 

|   | We have entered into employment agreements with each                            of the Named Executive Officers. |
|--------|------------------------------------------------------------------------------------------------------------------|

 

***Neil S. Wechsler***

 

Our agreement with Mr. Wechsler was entered into on March 5, 2004.            Under the terms of his agreement, Mr. Wechsler receives a minimum annual salary            and is entitled to participate in any bonus plan for senior executives that might be            established by our Board of Directors, and we have agreed to pay or reimburse him for            the premiums for a life and disability term or whole life insurance policy with a            minimum coverage of $5.0 million, in addition to any other coverage previously paid for            or provided for by the company.

 

113

 

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If we terminate Mr. Wechsler’s employment other than for            cause or death or disability, or for any reason following the announcement of a change            of control, or if he terminates his employment for good reason (as defined in his            agreement) or for any reason following a change of control, (i) we will pay to him a            lump sum amount equal to two times the sum of the highest salary and bonus paid to him            during the term of his employment – as at December 31, 2007, this amount would            have totaled $4,088,268, (ii) all options held by him shall become immediately            exercisable and we will compensate him for the determined value of his options if he is            required by the terms of our option plan to exercise his options before their expiry            date due to the termination of his employment – as at December 31, 2007, the            exercise price of all options was greater than the market price therefore no amount            would be payable, (iii) the term insurance, for which we have been reimbursing            premiums, will be converted to a level deposit premium insurance policy to age 80, for            which we will pay the premiums – as at December 31, 2007, the total premium for            such a policy would have amounted to $1,112,085, and (iv) we will acquire medical            insurance coverage for Mr. Wechsler and his family for a period of five years,            equivalent to the coverage already enjoyed by him as a senior officer of our company            – as at December 31, 2007, the cost of such coverage would have been $27,989.            Mr. Wechsler’s agreement also provides for the forgiveness of any            indebtedness of his to the company if he leaves the employment of our company for any            reason – as at December 31, 2007, Mr. Wechsler was not indebted to our            company.

 

Mr. Wechsler’s agreement also contains a covenant on the part            of Mr. Wechsler not to compete with our company for a period of 24 months            following the date upon which he ceases to be an employee of our company.

 

***Holden L. Ostrin***

 

Our agreement with Mr. Ostrin was entered into on March 5, 2004.            Under the terms of his agreement, Mr. Ostrin receives a minimum annual salary and            is entitled to participate in any bonus plan for senior executives that might be            established by our Board of Directors, and we have agreed to pay or reimburse him for            the premiums for a life and disability term or whole life insurance policy with a            minimum coverage of $5.0 million, in addition to any other coverage previously paid for            or provided for by the company.

 

If we terminate Mr. Ostrin’s employment other than for cause            or death or disability, or for any reason following the announcement of a change of            control, or if he terminates his employment for good reason (as defined in his            agreement) or for any reason following a change of control, (i) we will pay to him a            lump sum amount equal to two times the sum of the highest salary and bonus paid to him            during the term of his employment – as at December 31, 2007, this amount would            have totaled $4,088,268, (ii) all options held by him shall become immediately            exercisable and we will compensate him for the determined value of his options if he is            required by the terms of our option plan to exercise his options before their expiry            date due to the termination of his employment – as at December 31, 2007, the            exercise price of all options was greater than the market price therefore no amount            would be payable, (iii) the term insurance, for which we have been reimbursing            premiums, will be converted to a level deposit premium insurance policy to age 80, for            which we will pay the premiums – as at December 31, 2007, the total premium for            such a policy would have amounted to $1,378,113, and (iv) we will acquire medical            insurance coverage for Mr. Ostrin and his family for a period of five years,            equivalent to the coverage already enjoyed by him as a senior officer of our company            – as at December 31, 2007, the cost of such coverage would have been $27,989.            Mr. Ostrin’s agreement also provides for the forgiveness of any indebtedness            of his to the company if he leaves the employment of our company for any reason –            as at December 31, 2007, Mr. Ostrin was indebted to our company in the amount of            $85,746 on account of a home loan granted to him in 1996.

 

Mr. Ostrin’s agreement also contains a covenant on the part            of Mr. Ostrin not to compete with our company for a period of 24 months following            the date upon which he ceases to be an employee of our company.

 

114

 

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***Gary S. Wechsler***

 

Our agreement with Mr. Wechsler was entered into on March 5, 2004.            Under the terms of his agreement, Mr. Wechsler receives a minimum annual salary            and is entitled to participate in any bonus plan for senior executives that might be            established by our Board of Directors, and we have agreed to pay or reimburse him for            the premiums for a life and disability term or whole life insurance policy with a            minimum coverage of $3.0 million, in addition to any other coverage previously paid for            or provided for by the company.

 

If we terminate Mr. Wechsler’s employment other than for            cause or death or disability, or for any reason following the announcement of a change            of control, or if he terminates his employment for good reason (as defined in his            agreement) or for any reason following a change of control, (i) we will pay to him a            lump sum amount equal to two times the sum of the highest salary and bonus paid to him            during the term of his employment – as at December 31, 2007, this amount would            have totaled $2,219,914, (ii) all options held by him shall become immediately            exercisable and we will compensate him for the determined value of his options if he is            required by the terms of our option plan to exercise his options before their expiry            date due to the termination of his employment – as at December 31, 2007, the            exercise price of all options was greater than the market price therefore no amount            would be payable, and (iii) the term insurance, for which we have been reimbursing            premiums, will be converted to a level deposit premium insurance policy to age 80, for            which we will pay the premiums – as at December 31, 2007, the total premium for            such a policy would have amounted to $897,893. Mr. Wechsler’s agreement also            provides for the forgiveness of any indebtedness of his to the company if he leaves the            employment of our company for any reason – as at December 31, 2007,            Mr. Wechsler was not indebted to our company.

 

Mr. Wechsler’s agreement also contains a covenant on the part            of Mr. Wechsler not to compete with our company for a period of 24 months            following the date upon which he ceases to be an employee of our company.

 

***Douglas P. Lewin***

 

Our agreement with Mr. Lewin was entered into on April 2, 2004, and            amended as of August 15, 2006. Under the terms of his agreement, Mr. Lewin            receives a minimum annual salary and shall be entitled to participate in any bonus plan            for senior executives that might be established by our Board of Directors.

 

If we terminate Mr. Lewin’s employment other than for cause            or death or disability, or for any reason following the announcement of a change of            control, or if he terminates his employment for good reason (as defined in his            agreement) or for any reason following a change of control, (i) we will pay to him a            lump sum amount equal to one and one-half times the sum of the highest salary and bonus            paid to him during the term of his employment – as at December 31, 2007, this            amount would have totaled $1,255,926, and (ii) all options held by him shall become            immediately exercisable and we will compensate him for the determined value of his            options if he is required by the terms of our option plan to exercise his options            before their expiry date due to the termination of his employment – as at            December 31, 2007, the exercise price of all options was greater than the market price            therefore no amount would be payable.

 

Mr. Lewin’s agreement also contains a covenant on the part of            Mr. Lewin not to compete with our company for a period of 12 months following the            date upon which he ceases to be an employee of our company.

 

***Leon P. Garfinkle***

 

Our agreement with Mr. Garfinkle was entered into on July 18, 2000.            Under the terms of his agreement, Mr. Garfinkle receives a minimum annual salary            and is entitled to participate in any bonus plan for senior executives that might be            established by our Board of Directors.

 

115

 

----

 

If we terminate Mr. Garfinkle’s employment other than for            cause or death or disability, or for any reason following the announcement of a change            of control, or if he terminates his employment for good reason (as defined in his            agreement) or for any reason following a change of control, we will pay to him a lump            sum amount equal to three times the sum of his then current annual salary and the most            recent annual bonus paid to him. As at December 31, 2007, this amount would have            totaled $2,145,513.

 

Mr. Garfinkle’s agreement also contains a covenant on the            part of Mr. Garfinkle not to compete with our company for a period of 24 months            following the date upon which he ceases to be an employee of our company.

 

**Compensation of Directors**

             

Each of our six non-executive directors receives an annual Board            retainer of $40,000 and $1,000 for each Board meeting attended. Those of our            non-executive directors who serve as members of a committee of our Board of Directors            receive additional compensation as follows: for service as member of either the audit            committee or the compensation committee, an annual retainer of $3,000 per committee            plus $1,000 for each committee meeting attended, and for service as member of the            nominating committee, an annual retainer of $2,000 plus $1,000 for each committee            meeting attended. In addition to their annual committee retainers, the chairmen of the            audit and compensation committees each receive an annual retainer of $4,000 and the            chairman of the nominating committee receives an annual retainer of $1,000.

 

**DIRECTOR COMPENSATION**

 

| **Name**                                     | **Year** | **Fees Earned or**

**Paid in Cash** | **Stock Awards**

**($) (1)** | **Option Awards****($) (3)(4)** | **Non-Equity Incentive****Plan Compensation ($)** | **Change in Pension Value****& Nonqualified Deferred****Compensation Earnings** | **All Other****Compen-sation ($)** | **Total ($)** |
|----------------------------------------------|----------|--------------------------------------|-------------------------------|---------------------------------|---------------------------------------------------|-------------------------------------------------------------------------------------|------------------------------------|---------------|
| Tommy Boman                                  | 2007     | $56,000                              | 0                             | $7,801                          | 0                                                 | 0                                                                                   | 0                                  | $63,801       |
| James S.                            Gertler  | 2007     | $67,000                              | 0                             | $7,801                          | 0                                                 | 0                                                                                   | 0                                  | $74,801       |
| Jonathan J.                            Ginns | 2007     | $52,000                              | 0                             | $7,801                          | 0                                                 | 0                                                                                   | 0                                  | $59,801       |
| Henry M. Karp                                | 2007     | $46,000                              | 0                             | $20,803                         | 0                                                 | 0                                                                                   | 0                                  | $66,803       |
| Thomas D.                            Murphy  | 2007     | $62,000                              | 0                             | $7,801                          | 0                                                 | 0                                                                                   | 0                                  | $69,801       |
| Sydney Sweibel                               | 2007     | $56,000                              | 0                             | $7,801                          | 0                                                 | 0                                                                                   | 0                                  | $63,801       |
| Stephen J.                            Shaper | 2007     | 0**(5)**                             | $296,022**(2)**               | $7,801                          | 0                                                 | 0                                                                                   | 272,349**(5)**                     | $576,172      |

             

| (1) | In connection with an offer by                            Optimal Acquisition Inc., our subsidiary, for all the issued and                            outstanding shares of our then majority owned subsidiary, FireOne Group                            plc, all outstanding FireOne Group plc RSUs held by our directors                            became vested in January 2007. There was no unamortized accounting                            expense that was recognized for financial statement reporting purposes                            for Messrs. Boman, Gertler, Ginns, Karp, Murphy and Sweibel for                            the year 2007, as the vesting of all of their RSU’s was                            accelerated in 2005 and all expenses were taken in that year.                            Mr. Shaper was awarded RSU’s in 2006. As a result, each                            director had no outstanding stock awards at fiscal year end, December                            31, 2007. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | This reflects the full amount of the                            previously unamortized accounting expense that was recognized for                            financial statement reporting purposes for 2007 in accordance with SFAS                            123(R). The full amount (based on the fair value of each FireOne Group                            plc share underlying the RSUs on the date of the grant – fair                            value was determined to be the exercise price at the date of the grant,                            as the exercise price of the RSU’s was a nominal amount) was                            recognized during 2007 in connection with an offer by Optimal                            Acquisition Inc., our subsidiary, for all the issued and outstanding                            shares of our then majority owned subsidiary, FireOne Group plc. As a                            result of that transaction, all outstanding FireOne Group plc RSUs held                            by the director became vested and was paid. The actual value realized                            by the director was $146,508. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | This reflects the expense recognized                            for financial statement reporting purposes for 2007 in accordance with                            SFAS 123(R) for grants during 2007. Each of Messrs. Boman,                            Gertler, Ginns, Murphy, Sweibel and Shaper received 45,000 stock                            options with a grant date fair value of $113,895 and Mr. Karp                            received 120,000 stock options with a grant date fair value of                            $303,720, the options were issued on November 12, 2007 and will vest in                            equal installments on the each of the first two anniversaries of the                            grant. We determined the fair value using the Black-Scholes option                            pricing model with the following assumptions: Expected volatility -                            56.31%, Expected life in years - 7, Risk-free interest rate - 3.74% and                            Expected dividend rate - 0%. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | As of December 31, 2007, our                            directors held the following number of outstanding stock options:                            Mr. Boman 83,399; Mr. Gertler 131,250; Mr. Ginns                            115,000; Mr. Karp 990,000; Mr. Murphy 98,959;                            Mr. Sweibel 115,000 and Mr. Shaper 230,811.                                  |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | Mr. Shaper is an employee of our                            company and earned no separate director fees in 2007. His salary for                            the year was $12,101 and a company that he controls also provides                            consulting services to the Company amounting to $260,248 for the                            year. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

116

 

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**Options to Purchase Securities**

 

On February 7, 1997, our Board of Directors adopted a share option plan            known as the 1997 Stock Option Plan (as amended, the “1997            Plan”).

             

Pursuant to the provisions of the 1997 Plan, we may grant options to            purchase common shares to our full-time employees or directors. Options may be granted            for a term of up to 10 years and the term during which such options may be exercised            will be determined by our Board of Directors at the time of each grant of options. The            conditions of vesting and exercise of the options and the option price will be            established by our Board of Directors when such options are granted and the option            price shall not involve a discount greater than that permitted by law and by the            regulations, rules and policies of the securities regulatory authorities to which we            may then be subject.

             

Options granted under the 1997 Plan cannot be assigned or transferred,            except by will or by the laws of descent and distribution of the domicile of the            deceased optionee. Upon an optionee’s employment with our company being            terminated for cause or upon an optionee being removed from office as a director or            becoming disqualified from being a director by law, any option or the unexercised            portion thereof shall terminate forthwith. If an optionee’s employment with our            company is terminated otherwise than by reason of death or termination for cause, or if            any optionee ceases to be a director other than by reason of death, removal or            disqualification by law, any option or the unexercised portion thereof may be exercised            by the optionee for that number of shares only which he was entitled to acquire under            the option at the time of such termination or cessation, provided that such option            shall only be exercisable within 90 days after such termination or cessation or prior            to the expiration of the term of the option, whichever occurs earlier. If an optionee            dies while employed by our company or while serving as a director, any option or the            unexercised portion thereof may be exercised by the person to whom the option is            transferred by will or the laws of descent and distribution for that number of shares            only which the optionee was entitled to acquire under the option at the time of death,            provided that such option shall only be exercisable within 180 days following the date            of death or prior to the expiration of the term of the option, whichever occurs            earlier.

             

Upon its establishment, 3,000,000 common shares were authorized for            issuance pursuant to options granted under the 1997 Plan. In each of 2000 and 2001,            shareholders approved an additional 3,000,000 shares for issuance under the 1997 Plan.            As at February 29, 2008, 3,246,028 common shares had been issued under the 1997 Plan            and 5,538,541 options were outstanding under the 1997 Plan, leaving 215,431 common            shares available for issuance pursuant to future option grants under the 1997            Plan.

             

In accordance with the terms of our January 20, 2004 combination            agreement with Terra Payments, pursuant to which we acquired Terra Payments on April 6,            2004, we assumed all of the options outstanding under the Terra Payments share option            plan, which now represent options to purchase common shares. As at February 29, 2008,            399,067 common shares had been issued upon the exercise of Terra Payments options and            an additional 274,822 common shares underlie the outstanding balance of the Terra            Payments options.

 

**Equity Compensation Plan Information**

 

The following table sets forth the number of common shares to be issued            upon exercise of outstanding options, rights and warrants issued pursuant to our equity            compensation plans, the weighted average exercise price of such options, rights and            warrants and the number of common shares remaining available for future issuance under            our equity compensation plans, all as at December 31, 2007.

 

117

 

----

 

| **Plan                            Category**                                                 | **Number                            of securities to be issued upon exercise of outstanding options,                            warrants and rights** | **Weighted-average exercise price of outstanding                            options, warrants and rights**

**($/Share)** | **Number                            of securities remaining available for future issuance under equity                            compensation plans (excluding securities reflected in first column)                            (1)** |
|----------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Equity compensation plans approved by security                            holders**(1)**     | 5,538,541                                                                                                                                             | 6.26                                                                                                                      | 215,431                                                                                                                                                                                                                                |
| Equity compensation plans not approved by security                            holders**(2)** | 134,113                                                                                                                                               | 7.43                                                                                                                      | Nil                                                                                                                                                                                                                                    |
| Equity compensation plans not approved by security                            holders**(2)** | 140,709                                                                                                                                               | Cdn$                            8.26                                                                                      | Nil                                                                                                                                                                                                                                    |
|  

Total                                                                                | 5,813,363                                                                                                                                             | 6.34(3)                                                                                                                   | 215,431                                                                                                                                                                                                                                |

 

|   | (1) | The 1997 Plan (referred to under “Executive                            Compensation – Options to Purchase Securities,” above), is                            our only equity compensation plan that has been approved by                            shareholders. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Our only equity compensation plan not approved by our                            shareholders is the share option plan of Terra Payments, which we                            assumed in accordance with the terms of our acquisition of Terra                            Payments on April 6, 2004. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | The figure includes the weighted average exercise                            price of 140,709 share purchase options having a Canadian dollar                            exercise price which was converted at the closing rate on December 31,                            2007 of US$1.00=Cdn$0.9913. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

| **ITEM 12.** | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS                            AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |
|--------------|-------------------------------------------------------------------------------------------------------------------------------|

The following table sets forth, as of February 29, 2008, certain            information regarding the beneficial ownership of our common shares by (i) each person            known to us to be a beneficial owner of more than 5% of the common shares of our            company, (ii) each director and Named Executive Officer of our company and (iii) all            directors and executive officers of our company as a group.

             

| **Name and Address of Beneficial Owner**                                 | **Amount and Nature of Beneficial Ownership in Optimal                            Group** | **Percent of Ownership in Optimal Group** |
|--------------------------------------------------------------------------|-------------------------------------------------------------------------------------------|-------------------------------------------|
| William Blair &                            Company, L.L.C            |                                                                                      |                                      |
| 222 W Adams                                                              |                                                                                      |                                      |
| Chicago, IL,                            60606                            | 2,519,381(1)                                                                              | 9.70%                                     |
| Sell Point Holdings                            Limited                   |                                                                                      |                                      |
| Unit 301 A-C, Energy                            Plaza, 92 Granville Road |                                                                                      |                                      |
| Tsimshatsui East, Kowloon,                            Hong Kong          | 2,169,197(2)                                                                              | 8.35%                                     |
| Jay Goldman Asset                            Management, L.L.C.          |                                                                                      |                                      |
| C/O J. Goldman & Co.                            LP                   |                                                                                      |                                      |
| 152 West 57th                            Street                          |                                                                                      |                                      |
| New York, NY                            10019                            | 2,040,034(3)                                                                              | 7.85%                                     |
| Renaissance Technologies                            LLC                  |                                                                                      |                                      |
| 800 Third                            Avenue                              |                                                                                      |                                      |
| New York, New York,                            10022                     | 1,572,623(4)                                                                              | 6.06%                                     |
| Neil S.                            Wechsler                              |                                                                                      |                                      |
| 3500 de Maisonneuve Blvd                            West, 17th Floor,    |                                                                                      |                                      |
| Westmount, PQ, H3Z                            3C1                        | 1,015,607(5)                                                                              | 3.78%                                     |
| Holden L.                            Ostrin                              |                                                                                      |                                      |
| 3500 de Maisonneuve Blvd                            West, 17th Floor,    |                                                                                      |                                      |
| Westmount, PQ, H3Z                            3C1                        | 1,012,857(5)                                                                              | 3.77%                                     |

 

 

118

 

----

 

 

| Henry M. Karp                                                                            |          |   |
|------------------------------------------------------------------------------------------|---------------|--------|
| 3500 de Maisonneuve Blvd                            West, 17th Floor,                    |          |   |
| Westmount, PQ, H3Z                            3C1                                        | 1,012,857(6)  | 3.77%  |
| Gary S.                            Wechsler                                              |          |   |
| 3500 de Maisonneuve Blvd                            West, 17th Floor,                    |          |   |
| Westmount, PQ, H3Z                            3C1                                        | 602,857(7)    | 2.28%  |
| Stephen J.                            Shaper                                             |          |   |
| 325 Ripple                            Creek                                              |          |   |
| Houston, TX,                            77024                                            | 205,826(8)    | **     |
| Douglas P.                            Lewin                                              |          |   |
| 3500 de Maisonneuve Blvd                            West, 7th Floor                      |          |   |
| Westmount, PQ, H3Z                            3C1                                        | 160,867(9)    | **     |
| Leon P.                            Garfinkle                                             |          |   |
| 3500 de Maisonneuve Blvd                            West, 17th Floor,                    |          |   |
| Westmount, PQ, H3Z                            3C1                                        | 128,000(10)   | **     |
| James S.                            Gertler                                              |          |   |
| 62 West 62nd                            Street                                           |          |   |
| New York, NY,                            10023                                           | 86,550(11)    | **     |
| Jonathan J.                            Ginns                                             |          |   |
| 1133 Connecticut Avenue,                            NW Suite 700,                        |          |   |
| Washington, DC,                            200036                                        | 70,000 (12)   | **     |
| Sydney Sweibel                                                                           |          |   |
| 3449 du Musee                            Avenue,                                         |          |   |
| Montreal, PQ, H3G                            2C8                                         | 70,453 (12)   | **     |
| Thomas D.                            Murphy                                              |          |   |
| 1208 Highcrest                            Lane,                                          |          |   |
| Colorado Springs, CO,                            80921                                   | 58,959(13)    | **     |
| Tommy Boman                                                                              |          |   |
| 30 Oyster Landing                            Road,                                       |          |   |
| Hilton Head, SC,                            29928                                        | 38,172(14)    | **     |
| All directors and                            executive officers as a group

(14 persons) | 4,652,265(15) | 15.53% |

             

             

|   | ** | Does not exceed one percent (1%) |
|--------|----|----------------------------------|

             

|   | (1) | The address of this beneficial owner                            is 222 West Adam Street, Chicago, IL 60606. According to the Schedule                            13G/A, dated January 9, 2008, filed with the United States Securities                            and Exchange Commission by this beneficial owner, William Blair &                            Company, L.L.C. is a broker dealer and investment advisor holding sole                            voting and sole dispositive power over all 2,519,381 shares. The                            information in this table is based exclusively on the most recent                            Schedule 13G filed by this beneficial owner with the United States                            Securities and Exchange Commission. We make no representation as to the                            accuracy or completeness of the information reported. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | The address of this beneficial owner                            is Unit 301 A-C, Energy Plaza, 92 Granville Road, Tsimshatsui East,                            Kowloon, Hong Kong. According to the Schedule 13G, dated December 12,                            2007, filed with the United States Securities and Exchange Commission                            by this beneficial owner, Sell Point Holdings Limited is a corporation                            holding sole voting and sole dispositive power over all 2,169,197                            shares. Except for the name of this beneficial owner, which is                            erroneously stated in the Schedule 13G to be Sell Points Holding Inc.,                            the information in this table is based exclusively on the most recent                            Schedule 13G filed by this beneficial owner with the United States                            Securities and Exchange Commission. We make no representation as to the                            accuracy or completeness of the information reported. Sell Point                            Holdings Limited was formerly known as Wow Wee Limited. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | The address of this beneficial owner                            is C/O J. Goldman & Co. LP, 152 West 57th Street, New York, NY                            10019. According to the Schedule 13G/A, dated February 14, 2008, filed                            with the United States Securities and Exchange Commission by Jay                            Goldman Asset Management, L.L.C., J. Goldman Capital GP LLC, Jay G.                            Goldman, Newberg Family Trust u/d/t 12/18/90 and Bruce L. Newberg, Jay                            Goldman Asset Management, L.L.C. has shared voting power and shared                            dispositive power over 543,781 shares; J. Goldman Capital GP LLC has                            shared voting power and shared dispositive power over 489,238 shares;                            Jay G. Goldman has shared voting power and shared dispositive power                            over 1,033,019 shares; Newberg Family Trust u/d/t 12/18/90 has shared                            voting power and shared dispositive power over 1,007,015 shares and                            Bruce l. Newberg has shared voting power and shared dispositive power                            over 1,007,015 shares. The information in this table is based                            exclusively on the most recent Schedule 13G filed by these beneficial                            owners with the United States Securities and Exchange Commission. We                            make no representation as to the accuracy or completeness of the                            information reported. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | The address of this beneficial owner                            is 800 Third Avenue, New York, NY, 10022. According to the Schedule                            13G, dated February 12, 2008, filed with the United States Securities                            and Exchange Commission by Renaissance Technologies LLC and James H.                            Simons, Renaissance Technologies LLC is an investment advisor and James                            H. Simons is a control person of Renaissance Technologies LLC. Each of                            Renaissance Technologies LLC and James H. Simons has sole voting power                            over 1,544,835 shares and sole dispositive power over 1,572,623 shares.                            The information in this table is based exclusively on the most recent                            Schedule 13G filed by these beneficial owners with the United States                            Securities and Exchange Commission. We make no representation as to the                            accuracy or completeness of the information reported. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (5) | Includes 870,000 common shares underlying vested                            options. Excludes 375,000 common shares underlying unvested                            options. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (6) | Includes 870,000 common shares underlying vested                            options. Excludes 120,000 common shares underlying unvested                            options. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

119

 

----

 

|   | (7) | Includes 420,000 common shares underlying vested                            options. Excludes 175,000 common shares underlying unvested                            options. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (8) | Includes 185,811 common shares underlying vested                            options. Excludes 45,000 common shares underlying unvested                            options. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (9) | Includes 160,867 common shares underlying vested                            options. |
|--------|-----|--------------------------------------------------------------------------------------|

(10)  Includes 125,000 common shares underlying vested            options. Excludes 125,000 common shares underlying unvested options.

|   | (11) | Includes 86,250 common shares underlying vested                            options. Excludes 45,000 common shares underlying unvested                            options. |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (12) | Includes 70,000 common shares underlying vested                            options. Excludes 45,000 common shares underlying unvested                            options. |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (13) | Includes 53,959 common shares underlying vested                            options. Excludes 45,000 common shares underlying unvested                            options. |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (14) | Includes 35,000 common shares underlying vested                            options. Excludes 45,000 common shares underlying unvested                            options. |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (15) | Includes 3,986,119 common shares underlying vested                            options. Excludes 1,455,000 common shares underlying unvested                            options. |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **ITEM 13.** | **CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,                            AND DIRECTOR INDEPENDENCE** |
|--------------|----------------------------------------------------------------------------------------------------------|

 

Mr. Stephen Shaper provides us with consulting services and, as a            result, in 2007 we incurred approximately $260,000 (2006 - $497,000) to Middlemarch            Capital Corporation, a company under his control.

 

Our Board of Directors has not adopted a formal policy pertaining to the            review, approval and ratification of related party transactions.

 

| **ITEM 14.** | **PRINCIPAL ACCOUNTING FEES AND                            SERVICES** |
|--------------|-----------------------------------------------------------------------|

             

Upon the recommendation of our Audit Committee, our shareholders            appointed KPMG as our independent auditors for the fiscal year ended December 31,            2007.

 

**Fees Incurred by our Company for KPMG**

 

The following table shows the fees paid or accrued by our company for            the audit and other services provided by KPMG for fiscal 2007 and            2006(1).

             

|                                         | **2007** | **2006**  |   |
|----------------------------------------------|----------|-----------|--------|
|                                         |     |      |   |
| Audit Fees(2)                                | $        | 984,884   | $      | 1,237,788 |
| Audit-Related Fees(3)                        |     | 48,788    |   | 81,989 |
| Tax Fees(4)                                  |     | 56,651    |   | 127,603 |
| All Other                            Fees(5) |     | 134,219   |   | 141,056 |
|                                         |     |      |   |   |
| Total                                        | $        | 1,224,542 | $      | 1,588,436 |
|                                         |     |      |   |   |
|                                              |          |           |        |  |  |

             

|   | (1) | We pay fees to KPMG in Canadian dollars. The                            respective average exchange rates for 2007 and 2006 used to convert                            these fees into dollars were: US$1.00=Cdn$1.0750 (2007) and                            US$1.00=Cdn$1.1343 (2006). |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Audit fees represent fees for professional services                            provided in connection with the audit of our consolidated financial                            statements, the review of our quarterly financial statements and the                            statutory audit of various foreign subsidiaries. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | Audit-related fees represent primarily fees for                            sundry accounting consultations. |
|--------|-----|-------------------------------------------------------------------------------------------------------------|

|   | (4) | Tax fees related to assistance in preparing corporate                            tax returns, claiming research and development tax credits and sundry                            tax consultations. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (5) | All other fees relates primarily to financial due                            diligence in connection with acquisitions. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------|

 

120

 

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The Audit Committee has delegated to the Chairman of the Audit Committee            the authority to pre-approve audit-related and non-audit services not prohibited by law            to be performed by our independent auditors and associated fees up to a maximum for any            one non-audit service of $50,000, provided that the Chairman shall report any decisions            to pre-approve such audit-related or non-audit services and fees to the full Audit            Committee at its next regular meeting. The Audit Committee has also delegated to our            Chief Financial Officer the authority to pre-approve the following non-audit services            to be performed by our independent auditors, provided that the Chief Financial Officer            shall report any decisions to pre-approve such non-audit services and fees to the full            Audit Committee at its next regular meeting: tax advisory services of up to Cdn$60,000            during each fiscal year, provided that no individual mandate is estimated by our            independent auditors to cost in excess of Cdn$20,000; acquisition-related financial due            diligence services of up to Cdn$150,000 during each fiscal year, provided that no            individual mandate is estimated by our independent auditors to cost in excess of            Cdn$25,000; and, other, general services of up to Cdn$60,000 during each fiscal year,            provided that no individual mandate is estimated by our independent auditors to cost in            excess of Cdn$10,000. Approximately 49% of the audit-related and non-audit services            performed by our independent auditors in 2007 were approved by the Chairman of the            Audit Committee or our Chief Financial Officer through the pre-approval            policies.

 

**PART IV**

             

| **ITEM 15.** | **EXHIBITS, FINANCIAL STATEMENT                            SCHEDULES.** |
|--------------|-------------------------------------------------------------------------|

 

| **Exhibit**

**Number** |  

**Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|-------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 3.1                     | Certificate and                            Articles of Continuance (incorporated by reference to Exhibit 3.1 to                            the Company’s Registration Statement on Form F-1, file 333-4950,                            filed with the Commission on October 24, 1996)                                                                                                                                                                                 |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 3.2                     | By-laws (incorporated by reference to Exhibit 3.2 to                            the Company’s Annual Report on Form 10-K, File No. 0-28572, filed                            with the Commission on March 8, 1999)                                                                                                                                                                                                                                                    |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 3.3

              | Certificate and Articles of Amendment (incorporated                            by reference to Exhibit 3.3 to the Company’s Annual Report on                            Form 10-K for the year ended December 31, 2000, filed with the                            Commission on March 1, 2001)                                                                                                                                                                        |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4                       | Specimen certificate of the common shares                            (incorporated by reference to Exhibit 1.1 to the Company’s                            Registration Statement on Form 8, File No. 0-28572, filed with the                            Commission on July 17, 1996)                                                                                                                                                                                 |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.1                    | Employment Agreement with Leon P. Garfinkle                            (incorporated by reference to Exhibit 10.13 to the Company’s                            Annual Report on Form 10-K for the year ended December 31, 2002, filed                            with the Commission on March 31, 2003)                                                                                                                                                               |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.2                    | Employment Agreement with Neil S. Wechsler                            (incorporated by reference to Exhibit 10.14 to the Company’s                            Annual Report on Form 10-K for the year ended December 31, 2003, filed                            with the Commission on March 10, 2004)                                                                                                                                                                |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.3                    | Employment Agreement with Henry M. Karp (incorporated                            by reference to Exhibit 10.15 to the Company’s Annual Report on                            Form 10-K for the year ended December 31, 2003, filed with the                            Commission on March 10, 2004)                                                                                                                                                                   |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.4                    | Employment Agreement with Holden L. Ostrin                            (incorporated by reference to Exhibit 10.16 to the Company’s                            Annual Report on Form 10-K for the year ended December 31, 2003, filed                            with the Commission on March 10, 2004)                                                                                                                                                                |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.5                    | Employment Agreement with Gary S. Wechsler (incorporated                            by reference to Exhibit 10.17 to the Company’s Quarterly Report                            on Form 10-Q for the quarterly period ended March 31, 2004, filed with                            the Commission on April 30, 2004)                                                                                                                                                    |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.6                    | Combination Agreement between Optimal Robotics Corp. and                            Terra Payments Inc. (incorporated by reference to Exhibit 10.18 to the                            Company’s Quarterly Report on Form 10-Q for the quarterly period                            ended March 31, 2004, filed with the Commission on April 30,                            2004)                                                                                       |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.7                    | Asset Purchase Agreement among NCR Corporation, and                            certain of its affiliates, and Optimal Robotics Corp. and certain of                            its affiliates (incorporated by reference to Exhibit 10.19 to the                            Company’s Quarterly Report on Form 10-Q for the quarterly period                            ended March 31, 2004, filed with the Commission on April 30,                            2004) |

 

 

121

 

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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8   | Asset Purchase Agreement among Fujitsu Transaction                            Solutions Inc., Optimal Robotics Corp. and Optimal Robotics Inc.                            (incorporated by reference to Exhibit 10.20 to the Company’s                            Quarterly Report on Form 10-Q for the quarterly period ended June 30,                            2004, filed with the Commission on August 9, 2004)                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.9   | Amendment to Asset Purchase Agreement among Fujitsu                            Transaction Solutions Inc., Optimal Robotics Corp. and Optimal Robotics                            Inc. (incorporated by reference to Exhibit 10.21 to the Company’s                            Quarterly Report on Form 10-Q for the quarterly period ended June 30,                            2004, filed with the Commission on August 9, 2004)                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.10  | Asset Purchase Agreement among Optimal Payments Corp.                            and NPS Holdings LLC, NPS Manager, Inc. and The Members of NPS Holdings                            LLC (incorporated by reference to Exhibit 10.22 to the Company’s                            Quarterly Report on Form 10-Q for the quarterly period ended September                            30, 2004, filed with the Commission on November 4, 2004)                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.11  | Purchase Agreement dated May 6, 2005 among United Bank                            Card, Inc. and Optimal Payments Corp. (incorporated by reference to                            Exhibit 2.1 to the Company’s Form 8-K, filed with the Commission                            on May 11, 2005)                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.12  | Placing Agreement relating to placing of ordinary shares                            of FireOne Group plc dated May 27, 2005 (incorporated by reference to                            Exhibit 99.1 to the Company’s Form 8-K, filed with the Commission                            on June 2, 2005)                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.13  | Tax Deed relating to placing of ordinary shares of                            FireOne Group plc dated May 27, 2005 (incorporated by reference to                            Exhibit 99.2 to the Company’s Form 8-K, filed with the Commission                            on June 2, 2005)                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.14  | Purchase Agreement dated October 5, 2005 among Moneris                            Solutions, Inc. and Optimal Payments Corp. (incorporated by reference                            to Exhibit 2.1 to the Company’s Form 8-K, filed with the                            Commission on October 11, 2005)                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.15  | Recommended cash offer by Optimal Acquisition Inc. for                            FireOne Group plc (incorporated by reference to Exhibit 99 to the                            Company’s Form 8-K, filed with the Commission on December 18,                            2006)                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.16  | Employment Agreement with Douglas P. Lewin                            (incorporated by reference to Exhibit 10.16 to the Company’s                            Annual Report on Form 10-K for the year ended December 31, 2006, filed                            with the Commission on March 15, 2007)                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.17  | Amendment to Employment Agreement with Douglas P.                            Lewin (incorporated by reference to Exhibit 10.17 to the                            Company’s Annual Report on Form 10-K for the year ended December                            31, 2006, filed with the Commission on March 15, 2007)                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.18  | Employment Agreement with Benjamin A. Dalfen                            (incorporated by reference to Exhibit 10.18 to the Company’s                            Annual Report on Form 10-K for the year ended December 31, 2006, filed                            with the Commission on March 15, 2007)                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.19  | Asset Purchase Agreement dated September 26, 2007                            among Optimal Group Inc., Wow Wee Limited, Wow Wee Group Company,                            WowWee Marketing, Inc., Power Assets Pacific Ltd., Richard Yarnofsky,                            Peter Yanofsky, David Goldhar, and Eric Lau Tung Ching (incorporated by                            reference to Exhibit 2.1 to the Company’s Form 8-K, filed with                            the Commission on October 2, 2007)                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.20  | Amendment dated as of November 7, 2007 toAsset Purchase Agreement dated September 26, 2007 among                            Optimal Group Inc., Wow Wee Limited, Wow Wee Group Company, WowWee                            Marketing, Inc., Power Assets Pacific Ltd., Richard Yarnofsky, Peter                            Yanofsky, David Goldhar, and Eric Lau Tung Ching (incorporated by                            reference to Exhibit 2.1 to the Company’s Form 8-K, filed with                            the Commission on November 13, 2007) |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 21     | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 23.1   | Consent of KPMG LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.1   | Certification required under Section 302 of the                            Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.2   | Certification required under Section 302 of the                            Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.1   | Certification pursuant to Section 1350, Chapter 63 of                            Title 18, United States Code, as adopted pursuant to Section 906 of the                            Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.2   | Certification pursuant to Section 1350, Chapter 63 of                            Title 18, United States Code, as adopted pursuant to Section 906 of the                            Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

 

122

 

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| 99.1 | Audit Committee Charter (incorporated by reference to                            Exhibit 99.1 to the Company’s Annual Report on Form 10-K for the                            year ended December 31, 2003, filed with the Commission on March 10,                            2004) |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act,            the registrant has duly caused this report to be signed on its behalf by the            undersigned, thereunto duly authorized.

 

| March 13, 2008 | **Optimal Group Inc.** |
|----------------|------------------------|
|           |                   |   |
|           |                   |   |
|           | By:                    | /s/ NEIL S. WECHSLER |
|           |                   | Neil S. Wechsler, Co-Chairman |
|           |                   | and Chief Executive Officer |
|           |                   | (Principal Executive Officer) |

 

|   |   |                                      |
|--------|--------|-------------------------------------------|
|   | By:    | /s/ GARY S. WECHSLER                      |
|   |   | Gary S. Wechsler, Chief Financial Officer |
|   |   | (Principal Accounting Officer)            |

 

Pursuant to the Exchange Act, this report has been signed below by the            following persons on behalf of the registrant and in the capacities and on the dates            indicated.

 

|           |   |                       |
|----------------|--------|----------------------------|
| March 13, 2008 | By:    | /s/ NEIL S. WECHSLER       |
|           |   | Neil S. Wechsler, Director |

 

|           |   |                       |
|----------------|--------|----------------------------|
| March 13, 2008 | By:    | /s/ HOLDEN L. OSTRIN       |
|           |   | Holden L. Ostrin, Director |

 

|           |   |                  |
|----------------|--------|-----------------------|
| March 13, 2008 | By:    | /s/ TOMMY BOMAN       |
|           |   | Tommy Boman, Director |

 

|           |   |                       |
|----------------|--------|----------------------------|
| March 13, 2008 | By:    | /s/ JAMES S. GERTLER       |
|           |   | James S. Gertler, Director |

 

|           |   |                        |
|----------------|--------|-----------------------------|
| March 13, 2008 | By:    | /s/ JONATHAN J. GINNS       |
|           |   | Jonathan J. Ginns, Director |

 

|           |   |                    |
|----------------|--------|-------------------------|
| March 13, 2008 | By:    | /s/ HENRY M. KARP       |
|           |   | Henry M. Karp, Director |

 

|           |   |                       |
|----------------|--------|----------------------------|
| March 13, 2008 | By:    | /s/ THOMAS D. MURPHY       |
|           |   | Thomas D. Murphy, Director |

 

|           |   |                       |
|----------------|--------|----------------------------|
| March 13, 2008 | By:    | /s/ STEPHEN J. SHAPER      |
|           |   | Stephen J Shaper, Director |

 

|           |   |                     |
|----------------|--------|--------------------------|
| March 13, 2008 | By:    | /s/ SYDNEY SWEIBEL       |
|           |   | Sydney Sweibel, Director |

 

 

123