UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

**FORM 10-Q**

 

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

|   | **For the quarterly period ended June 30,                            2007** |
|--------|-----------------------------------------------------------------------------|

**or**

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

|   | For the transition period from ______ to                            _______ |
|--------|-----------------------------------------------------------------------------|

 

**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:) |

 

 

| 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.

  | Yes                            [**X**] No                            o                                                                                                                                                                                                                     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Indicate by                            check mark whether the registrant is a large accelerated filer, an                            accelerated filer, or a non-accelerated filer. See definition of                            “accelerated filer and large accelerated filer” in Rule                            12b-2 of the Exchange Act. (Check one):

                                                                                                                          | Large                            Accelerated filer o                                     Accelerated Filer                             x                               Non-accelerated filer                            o |
| Indicate by check mark whether the                            registrant is a shell company (as defined in Rule 12b-2 of the                            Act).                                                                                                                                                                                                                                                                                                                                           | Yes                            o Nox                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                       |
| At August 3, 2007, the registrant had 23,867,351                            common shares designated as Class “A” shares (without                            nominal or par value) outstanding.

                                                                                                                                                                                                                                                                                      |

 

 

----

 

**OPTIMAL GROUP INC.**

 

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

             

             

             

Consolidated Financial Statements of

(Unaudited)

             

**OPTIMAL GROUP INC.**

             

Six-month periods ended June 30, 2007 and 2006

(expressed in U.S. dollars)

             

             

 

2

----

 

**OPTIMAL GROUP INC.**

Consolidated Financial Statements

(Unaudited)

             

Six-month periods ended June 30, 2007 and 2006

(expressed in U.S. dollars)

             

             

**Financial Statements**

 

Consolidated Balance Sheets

4

Consolidated Statements of Operations and Comprehensive                            Income (Loss)

5

Consolidated Statements of Shareholders’                            Equity

6

Consolidated Statements of Cash Flows

7

Notes to Consolidated Financial Statements

8

 

 

3

 

**OPTIMAL GROUP INC.**

 

 

 

 

Consolidated Balance Sheets

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

June 30, 2007 and December 31, 2006

 

 

 

 

(expressed in thousands of U.S. dollars)

 

 

 

 

 

 

 

 

 

 

June                                30, 

December 31, 

 

 

2007 

 

2006 

Assets

 

                                 

 

                                 

Current assets:

 

                                 

 

                                 

Cash and cash equivalents

$

107,666 

$

103,922 

Restricted cash (note 8 (f))

 

19,182 

 

–   

Cash held as reserves

 

11,340 

 

18,960 

Short-term investments

 

–   

 

71,621 

Short-term investments held as reserves

 

2,410 

 

3,110 

Settlement assets

 

2,008 

 

7,061 

Accounts receivable

 

8,343 

 

5,600 

Income taxes receivable and refundable investment                                tax credits

 

1,457 

 

1,025 

Prepaid expenses

 

1,303 

 

2,625 

Future income taxes

 

2,096 

 

2,199 

 

 

 

155,805 

 

216,123 

Long-term receivables

 

1,394 

                                 

3,144 

Property and equipment

 

1,758 

                                 

2,121 

Goodwill and other intangible assets

 

102,877 

                                 

106,041 

Future income taxes

 

4,914 

                                 

4,183 

Other asset

 

10,186 

                                 

10,423 

 

 

                                 

                                 

 

 

$

276,934 

$

342,035 

Liabilities and                                Shareholders' Equity

 

                                 

 

                                 

Current                                liabilities:

                                 

                                 

 

                                 

Bank indebtedness

$

–   

$

8,581 

Customer reserves and security deposits

 

25,976 

 

61,897 

Accounts payable and accrued liabilities

 

17,641 

 

23,362 

Income taxes payable

 

5,989 

 

5,573 

Future income taxes

 

381 

 

382 

 

 

 

49,987 

 

99,795 

Non-controlling interest

                                 

–   

                                 

16,392 

Future income taxes

 

5,981 

 

6,466 

Shareholders' equity:

 

                                 

 

                                 

Share capital (note 6)

 

202,359 

 

202,252 

Additional paid-in capital

 

29,141 

 

23,169 

Deficit

 

(9,050)

 

(4,555)

Accumulated other comprehensive loss

 

(1,484)

 

(1,484)

 

 

 

220,966 

 

219,382 

 

 

                                 

 

                                 

Contingencies and other (note 8)

 

                                 

 

 

 

 

                                 

 

                                 

 

$

276,934 

$

342,035 

 

 

See accompanying                                notes to unaudited consolidated financial statements.

 

                                 

                                 

                                 

 

 

 

 

4

 

**OPTIMAL GROUP INC.**

Consolidated Statements of Operations and                                Comprehensive Income (Loss)

(Unaudited)

                                 

Periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars, except per                                share amounts)

                                 

                                 

Three months ended June 30,

Six months ended June 30,

                                 

2007 

2006 

2007 

2006 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Revenues

$

28,042 

$

52,242 

$

58,108 

$

104,664 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Expenses:

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Transaction processing

                                 

18,096 

                                 

24,545 

                                 

36,769 

                                 

50,053 

Selling, general and administrative

                                 

5,803 

                                 

14,550 

                                 

13,474 

                                 

26,519 

Amortization of intangibles pertaining to                                transaction processing

                                 

3,227 

                                 

3,050 

                                 

6,336 

                                 

6,065 

Amortization of property and equipment

                                 

316 

                                 

377 

                                 

650 

                                 

766 

Stock-based compensation pertaining to selling,                                general and administrative

                                 

30 

                                 

335 

                                 

6,027 

                                 

335 

Research and development

                                 

601 

                                 

825 

                                 

1,264 

                                 

1,630 

Operating leases

                                 

282 

                                 

384 

                                 

514 

                                 

752 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

(Loss) earnings from continuing operations before                                undernoted item

                                 

(313)

                                 

8,176 

                                 

(6,926)

                                 

18,544 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Investment income

                                 

1,576 

                                 

2,235 

                                 

3,477 

                                 

3,517 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Earnings (loss) from continuing operations before                                income tax provision and non-controlling interest

                                 

1,263 

                                 

10,411 

                                 

(3,449)

                                 

22,061 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Income tax provision (note 10)

                                 

106 

                                 

1,852 

                                 

887 

                                 

4,323 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Earnings (loss) from continuing operations before                                non-controlling interest

                                 

1,157 

                                 

8,559 

                                 

(4,336)

                                 

17,738 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Non-controlling interest

                                 

-   

                                 

(2,037)

                                 

(159)

                                 

(4,157)

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Earnings (loss) from continuing                                operations

                                 

1,157 

                                 

6,522 

                                 

(4,495)

                                 

13,581 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Loss from discontinued operations

                                 

-   

                                 

(2,831)

                                 

-   

                                 

(5,501)

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Net earnings (loss) and comprehensive income                                (loss)

$

1,157 

$

3,691 

$

(4,495)

$

8,080 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Weighted average number of shares:

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Basic

                                 

23,854,507 

                                 

23,707,648 

                                 

23,853,710 

                                 

23,517,593 

Plus impact of stock options and warrants

                                 

542,407 

                                 

2,074,570 

                                 

617,135 

                                 

2,366,788 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Diluted

                                 

24,396,914 

                                 

25,782,218 

                                 

24,470,845 

                                 

25,884,381 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Earnings (loss) per share:

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Continuing operations:

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Basic

$

0.05 

$

0.28 

$

(0.19)

$

0.58 

Diluted

                                 

0.05 

                                 

0.25 

                                 

(0.19)

                                 

0.52 

Discontinued operations:

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Basic

                                 

-   

                                 

(0.12)

                                 

-   

                                 

(0.24)

Diluted

                                 

-   

                                 

(0.11)

                                 

-   

                                 

(0.21)

Net:

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Basic

                                 

0.05 

                                 

0.16 

                                 

(0.19)

                                 

0.34 

Diluted

                                 

0.05 

                                 

0.14 

                                 

(0.19)

                                 

0.31 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

See accompanying notes to unaudited consolidated                                financial statements.

 

 

 

5

 

**OPTIMAL GROUP INC.**

Consolidated Statements of Shareholders’                                Equity

(Unaudited)

                                 

Periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars)

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Accu- 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

mulated 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Addi- 

                                 

                                 

                                 

other

                                 

                                 

                                 

                                 

                                 

                                 

                                 

tional 

                                 

                                 

                                 

compre- 

                                 

                                 

                                 

Share capital

                                 

paid-in 

                                 

                                 

                                 

hensive 

                                 

                                 

                                 

Number 

                                 

Dollars 

                                 

capital 

                                 

Deficit 

                                 

loss 

                                 

Total 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Balance, December 31, 2006

23,849,090 

$

202,252 

$

23,169 

$

(4,555)

$

(1,484)

$

219,382 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Exercise of stock options:

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Cash proceeds

10,708 

                                 

52 

                                 

–   

                                 

–   

                                 

–   

                                 

52 

Ascribed value

–   

                                 

55 

                                 

(55)

                                 

–   

                                 

–   

                                 

–   

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Stock-based compensation (note 9)

–   

                                 

–   

                                 

6,027 

                                 

–   

                                 

–   

                                 

6,027 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Net loss

–   

                                 

–   

                                 

–   

                                 

(4,495)

                                 

–   

                                 

(4,495)

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Balance, June 30, 2007

23,859,798 

$

202,359 

$

29,141 

$

(9,050)

$

(1,484)

$

220,966 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

See accompanying notes to unaudited consolidated                                financial statements.

 

 

 

 

6

 

                 

**OPTIMAL GROUP INC.**

Consolidated Statements of Cash Flows

(Unaudited)

                                 

Periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars)

                                 

                                 

Three months endedJune                                30,

Six months endedJune                                30,

                                 

2007 

2006 

2007 

2006

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Cash flows from (used in) operating                                activities:

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Net earnings (loss)

$

1,157 

$

3,691 

$

(4,495)

$

8,080 

 

Add: loss from discontinued operations

                                 

-   

                                 

2,831 

                                 

-   

                                 

5,501 

Net earnings (loss) from continuing                                operations

                                 

1,157 

                                 

6,522 

                                 

(4,495)

                                 

13,581 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Adjustments for items not affecting cash:

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Non-controlling interest

                                 

-   

                                 

2,037 

                                 

159 

                                 

4,157 

Amortization

                                 

3,543 

                                 

3,427 

                                 

6,986 

                                 

6,831 

Gain on settlement of litigation

                                 

(1,612)

                                 

-   

                                 

(1,612)

                                 

-   

Future income taxes

                                 

(421)

                                 

(1,988)

                                 

(997)

                                 

(2,541)

Stock-based compensation

                                 

30 

                                 

335 

                                 

6,027 

                                 

335 

Foreign exchange

                                 

(108)

                                 

(822)

                                 

(138)

                                 

(868)

Net change in operating assets and liabilities (note                                12 (a))

                                 

(22,295)

                                 

(1,918)

                                 

(45,584)

                                 

(11,473)

 

                                 

                                 

(19,706)

                                 

7,593 

                                 

(39,654)

                                 

10,022 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Cash flows from (used in) financing                                activities:

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Proceeds from exercise of RSUs in FireOne

                                 

-   

                                 

15 

                                 

58 

                                 

21 

Proceeds from issuance of Class “A”                                shares

                                 

34 

                                 

217 

                                 

52 

                                 

4,047 

FireOne dividend paid

                                 

-   

                                 

(2,107)

                                 

-   

                                 

(2,107)

Increase (decrease) in bank indebtedness

                                 

-   

                                 

1,469 

                                 

(8,581)

                                 

938 

Repurchase of Class “A”                                shares

                                 

-   

                                 

(1,291)

                                 

-   

                                 

(2,264)

 

                                 

                                 

34 

                                 

(1,697)

                                 

(8,471)

                                 

635 

 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Cash flows from (used in) investing                                activities:

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Repurchase of FireOne ordinary shares

                                 

-   

                                 

-   

                                 

(16,463)

                                 

-   

Transaction costs

                                 

(6)

                                 

-   

                                 

(1,748)

                                 

-   

Purchase of property, equipment and intangible                                assets

                                 

(976)

                                 

(625)

                                 

(2,058)

                                 

(1,698)

Proceeds from maturity of short-term                                investments

                                 

5,138 

                                 

14,425 

                                 

71,621 

                                 

34,248 

Decrease (increase) in long-term                                receivables

                                 

27 

                                 

(241)

                                 

362 

                                 

589 

 

                                 

                                 

4,183 

                                 

13,559 

                                 

51,714 

                                 

33,139 

 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Effect of exchange rate changes on cash and cash                                equivalents during the period

                                 

108

                                 

344 

                                 

155 

                                 

402  

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Cash flows of discontinued operations:

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Operating cash flows

                                 

–   

                                 

(2,548)

                                 

–   

                                 

(3,261)

Investing cash flows

                                 

–   

                                 

(11)

                                 

–   

                                 

(82)

                                 

                                 

–   

                                 

(2,559)

                                 

–   

                                 

(3,343)

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

(Decrease) increase in cash and cash                                equivalents

                                 

(15,381)

                                 

17,240 

                                 

3,744 

                                 

40,855 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Cash and cash equivalents, beginning of                                period

                                 

123,047 

                                 

121,851 

                                 

103,922 

                                 

98,236 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

                                 

Cash and cash equivalents, end of period

$

107,666 

$

139,091 

$

107,666 

$

139,091 

                                 

 

Supplemental cash flow information (note                                12).

 

                                 

 

See accompanying notes to unaudited consolidated                                financial statements.

 

 

 

 

 

7

 

 

**OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements

(Unaudited)

             

Six-month periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars, except share and per share            amounts)

             

                                 

 

 

 

             

**1.**

**Interim                            financial information:**

These consolidated financial statements have been prepared by management            in accordance with Canadian generally accepted accounting principles            (“GAAP”). The unaudited consolidated balance sheet as at June 30,            2007, the unaudited consolidated statements of operations and cash flows for the            periods ended June 30, 2007 and 2006 and the unaudited consolidated statement of            shareholders' equity for the period ended June 30, 2007 reflect all adjustments which,            in the opinion of management, are necessary to present a fair statement of the results            of the interim periods. These interim consolidated financial statements follow the same            accounting policies and methods of their application as described in note 3 to the            annual audited consolidated financial statements for the year ended December 31, 2006,            except as described in note 2 below. The interim consolidated financial statements do            not include all disclosures required for annual financial statements and should be read            in conjunction with the most recent annual audited consolidated financial statements of            Optimal Group Inc. (the “Company”) as at and for the year ended December            31, 2006.

The Company's revenues and expenses are subject to seasonal variations.            The results of operations and cash flows for any quarter are not necessarily indicative            of the results or cash flows for an entire year.

All amounts in the attached notes are unaudited unless specifically            identified.

             

**2.**

**Changes in                            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*. These new Handbook Sections 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 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 GAAP.

 

8

 

 

**OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements, Continued

(Unaudited)

             

Six-month periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars, except share and per share            amounts)

                                 

 

 

 

             

**2.**

**Changes in                            accounting policies (continued):**

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, investments held to            maturity 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.

As a result of the adoption of these standards, the Company has            classified its cash and cash equivalents, short-term investments and cash and            short-term investments held as reserves as available for sale. The Company has            classified accounts receivable, settlement assets, and long-term receivables 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.

             

**3.**

**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 4 (b), the            results of this discontinued operation are presented separately under discontinued            operations in the consolidated statements of operations for 2006.

             

9

 

 

**OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements, Continued

(Unaudited)

             

Six-month periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars, except share and per share            amounts)

                                 

 

 

 

             

**4.**

**Business                            acquisition and disposal:**

                             

(a)

Acquisition:

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 FireOne Group plc ("FireOne") 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 FireOne, 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            of the Company. Transaction costs in connection with this transaction were $1,748. The            transaction was accounted for using the purchase method. The Company recorded goodwill            of $1,603 in connection with this transaction.

                             

(b)

Sale of hardware maintenance and repair services                            segment:

Effective September 30, 2006, the Company sold its Canadian hardware            maintenance and repair services segment. The divestiture is 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 2006 results of operations for this business segment are included in            discontinued operations on the consolidated statement of operations. The results of            operations include management assumptions and adjustments related to cost allocations            which are inherently subjective.

 

10

 

 

**OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements, Continued

(Unaudited)

             

Six-month periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars, except share and per share            amounts)

                                 

 

 

 

**4.**

**Business                            acquisition and disposal (continued):**

                             

(b)

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

The results of operations of this business for the three-month and            six-month periods ended June 30, 2006 were as follows:

             

 

 

                             

 

                             

 

Three months ended June 30,

 

Six months                            ended June 30,

 

 

                             

 

                             

 

2006

 

2006

 

 

                             

 

                             

 

                             

 

 

Revenue

 

                             

 

                             

$

8,514 

$

18,204 

 

 

                             

 

                             

 

                             

 

                             

Expenses:

 

                             

 

                             

 

                             

 

                             

Service costs

 

                             

 

                             

 

7,295 

 

15,276 

Selling, general and administrative

 

                             

 

                             

 

2,203 

 

3,747 

Restructuring

 

                             

 

                             

 

811 

 

2,383 

Amortization of property, equipment and                            intangibles

 

                             

 

                             

 

–   

 

259 

Operating leases

 

                             

 

                             

 

587 

 

1,322 

Foreign exchange

 

                             

 

                             

 

449 

 

368 

 

 

                             

 

                             

 

                             

 

                             

Loss before income taxes

 

                             

 

                             

 

(2,831)

 

(5,151)

 

 

                             

 

                             

 

                             

 

                             

Income tax provision

 

                             

 

                             

 

–   

 

350 

 

 

                             

 

                             

 

                             

 

                             

Net                            loss from discontinued operations

 

                             

 

                             

$

(2,831)

$

(5,501)

             

 

11

 

 

**OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements, Continued

(Unaudited)

             

Six-month periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars, except share and per share            amounts)

                                 

 

 

 

             

**5.**

**Goodwill and                            other intangible assets:**

             

 

 

 

 

 

June                            30, 

 

 

 

 

 

 

2007 

 

 

 

 

 

 

 

 

 

Gross 

 

 

 

 

 

 

carrying 

 

Accumulated 

 

Net                            book 

 

 

amount 

 

amortization 

 

value 

 

 

 

 

 

 

 

Goodwill

$

50,846 

$

–   

$

50,846 

Customer relationships and service agreements

 

64,333 

 

20,176 

 

44,157 

Acquired                            technology

 

4,520 

 

2,938 

 

1,582 

ISO/ISA                            relations

 

7,180 

 

1,795 

 

5,385 

Supplier                            contract

 

1,376 

 

905 

 

471 

Licensing                            agreement

 

538 

 

102 

 

436 

 

 

 

 

 

 

 

 

$

128,793 

$

25,916 

$

102,877 

             

Goodwill in the amount of $1,603 was recognized as a result of the            acquisition of all the issued shares of FireOne Group Plc not already owned by the            Company. Other various merchant payment processing agreements and software licensing            agreements were acquired during the six-month period ended June 30, 2007,            entitling the Company to future revenues.

             

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 

Acquired technology

                             

4,520 

                             

2,486 

                             

2,034 

ISO/ISA relations

                             

7,180 

                             

1,282 

                             

5,898 

Supplier contract

                             

1,376 

                             

732 

                             

644 

Licensing agreement

                             

240 

                             

11 

                             

229 

                             

                             

                             

                             

                             

                             

                             

                             

$

125,883 

$

19,842 

$

106,041 

             

             

12

 

 

**OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements, Continued

(Unaudited)

             

Six-month periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars, except share and per share            amounts)

                                 

 

 

 

             

**6.**

**Share                            capital:**

On November 6, 2006, the Board of Directors approved a stock buyback            program which authorizes the Company to purchase up to 1,100,000 of its issued and            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, 2006 and ending November 21, 2007. All shares            purchased under the stock buyback program will be cancelled. During the six months            ended June 30, 2007, no Class "A" shares were purchased.

             

**7.**

**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. Options may be            granted with exercise prices at the then current market price. Options currently            outstanding under the plan expire five years after the date of grant.

Details of the outstanding stock options are as follows:

             

 

 

 

Weighted average 

 

Number 

 

exercise price 

 

of                            options 

 

per                            share 

 

 

 

 

Options outstanding, December 31, 2006

3,933,171 

$

7.14 

Expired/cancelled

(630)

 

7.10 

 

 

 

 

Options outstanding, June 30, 2007

3,932,541 

$

7.14 

             

There are 67,500 (June 30, 2006 - nil) stock options that could            potentially dilute basic earnings per share in the future that were not included in the            computation of diluted earnings per share because to do so would have been            anti-dilutive for the three and six-month periods ended June 30, 2007.

             

13

 

 

**OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements, Continued

(Unaudited)

             

Six-month periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars, except share and per share            amounts)

                                 

 

 

 

             

**7.**

**Stock                            options and warrants (continued):**

                             

(a)

Optimal Group Inc. (continued):

The following table summarizes information about the options outstanding            and exercisable at June 30, 2007:

             

 

Options                            outstanding

Options                            exercisable

 

                             

                             

Weighted 

                             

                             

                             

                             

                             

                             

                             

                             

                             

                             

average 

                             

                             

                             

Weighted 

                             

                             

                             

Weighted 

                             

                             

remaining 

                             

                             

                             

average 

                             

                             

                             

average 

                             

                             

contractual 

                             

                             

                             

exercise 

                             

                             

                             

exercise 

Exercise

                             

life 

                             

                             

                             

price/ 

                             

                             

                             

price/ 

price/share

                             

(years) 

                             

Number 

                             

share 

                             

Number 

                             

share 

                             

                             

                             

                             

                             

                             

                             

                             

                             

                             

                             

$7.10

                             

1.83 

                             

3,865,041 

$

7.10 

                             

3,865,041 

$

7.10 

$9.36  

                             

4.47 

                             

67,500 

                             

9.36 

                             

–   

                             

–   

                             

                             

                             

                             

                             

                             

                             

                             

                             

                             

                             

                             

                             

1.88 

                             

3,932,541 

$

7.14 

                             

3,865,041 

$

7.10 

             

                             

(b)

Terra Payments Inc.:

Under the terms of the Combination Agreement with Terra, the Company            assumed Terra's stock option plan and, as such, stock options governed by this plan            will 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.

Details of the outstanding stock options under the Terra plan are as            follows:

             

 

Options                            with a

Options                            with a

 

U.S. dollar                            exercise price

Canadian                            dollar exercise price

 

 

 

 

 

Weighted                            average 

 

Exercise                            price 

exercise                            price 

 

Number 

 

per                            share 

Number 

 

per                            share 

 

 

 

 

 

 

 

Options                            outstanding, December 31, 2006

134,113 

$

7.43 

181,758 

$

8.19 

Expired/cancelled

–   

 

–   

(19,414)

 

10.62 

Exercised

–   

 

–   

(10,708)

 

5.31 

 

 

 

 

 

 

 

Options outstanding, June 30, 2007

134,113 

$

7.43 

151,636 

$

8.08 

             

 

14

 

 

**OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements, Continued

(Unaudited)

             

Six-month periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars, except share and per share            amounts)

                                 

 

 

 

             

**7.**

**Stock                            options and warrants (continued):**

                             

(b)

Terra Payments Inc. (continued):

All of these options were fully vested at December 31, 2005. These            options expire on various dates up to April 2009.

The weighted average remaining contractual life of the options at June            30, 2007 is approximately 1.5 years.

As at December 31, 2006 and June 30, 2007, there were 22,003 and 21,991            warrants outstanding, respectively, with a weighted average exercise price of CA$0.01            and CA$0.01, respectively, and expiring on dates up to March 2008.

There are 55,062 (June 30, 2006 - nil) Terra options that could            potentially dilute basic earnings per share in the future that were not included in the            computation of diluted earnings per share because to do so would have been            anti-dilutive for the three and six-month periods ended June 30, 2007.

                             

(c)

FireOne Group plc:

FireOne established a restricted share unit plan whereby eligible            individuals were awarded rights to receive ordinary shares in FireOne to be issued from            treasury for a nominal consideration. The plan was administered by FireOne’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            terminate 7 years from date of award.

 

15

 

 

**OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements, Continued

(Unaudited)

             

Six-month periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars, except share and per share            amounts)

                                 

 

 

 

             

**7.**

**Stock                            options and warrants (continued):**

                             

(c)

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, 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,

June 30, 2007

–   

                             

–   

–   

                             

–   

             

As a result of the Company's acquisition of all of the issued ordinary            shares of FireOne 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.

             

**8.**

**Contingencies and other:**

                             

(a)

The Company received a legal letter from a claimant                            in 1999, and again in February 2001, alleging infringement of a                            patent related to the*U-Scan®*self-checkout business, which the Company sold to                            Fujitsu on April 8, 2004. In March 2003, this claimant also sent a                            third demand letter alleging infringement of additional patents. The                            Company believes these claims to be without merit and intends to                            vigorously defend its position should this claimant initiate a civil                            action. No amounts have been specified in these claims. It is not                            possible at this time to make an estimate of the amount of damages, if                            any, that may result and, accordingly, no provision has been made in                            these financial statements with respect to such claims.

             

16

 

 

**OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements, Continued

(Unaudited)

             

Six-month periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars, except share and per share            amounts)

                                 

 

 

 

             

**8.**

**Contingencies and other (continued):**

                             

(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 claims. 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 and is included in accounts receivable in the consolidated                            balance sheets at June 30, 2007. The Company recorded a gain of                            approximately $1,600 as a result of the settlement, 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.

                             

(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. The nature of these indemnification agreements prevents                            the Company from estimating the maximum potential liability to                            indemnified parties. Accordingly, no provision has been made in these                            financial statements with respect to this item.

 

17

 

 

**OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements, Continued

(Unaudited)

             

Six-month periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars, except share and per share            amounts)

                                 

 

 

 

             

**8.**

**Contingencies and other (continued):**

                             

(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, FireOne, ceased to                            process settlement transactions originating from United States                            consumers. This represented a substantial portion of 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 monies that were on            deposit to the credit of Company affiliates of $19,182. The total amount seized of            $19,182 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.

             

18

 

 

**OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements, Continued

(Unaudited)

             

Six-month periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars, except share and per share            amounts)

                                 

 

 

 

             

**9.**

**Stock-based                            compensation:**

Stock-based compensation expense in the consolidated statements of            operations was comprised of:

 

 

Three months ended

Six months                            ended

 

June 30,

June                            30,

 

 

2007

 

2006

 

2007

 

2006

Expense related to options granted in 2006

$

30 

$

–   

$

60 

$

–   

Expense related to FireOne restricted share unit                            plan

 

–   

 

335 

 

5,967 

 

335 

 

 

                             

 

                             

 

                             

 

                             

 

$

30 

$

335 

$

6,027 

$

335 

             

**10.**

**Income                            taxes:**

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

             

                             

Three                            months ended

Six months                            ended

                             

June                            30,

June                            30,

                             

 

2007

 

2006

 

2007

 

2006

                             

 

 

 

 

 

 

 

 

Earnings (loss) from continuing operations before income                            tax provision and non-controlling interest

$

1,263 

$

10,411 

$

(3,449)

$

22,061 

 

 

 

 

 

 

 

 

 

Combined Canadian federal and provincial income taxes at                            32 %

$

404 

$

3,334 

$

(1,105)

$

7,064 

Foreign exchange(1)

 

(1,152)

 

(1,248)

 

(1,290)

 

(1,145)

Change in valuation allowance

 

1,285 

 

585 

 

1,539 

 

515 

Stock-based compensation not deductible for                            tax

 

10 

 

76 

 

1,930 

 

76 

Permanent differences and other

 

(161)

 

750 

 

(112)

 

953

Differences in tax rates

 

(280)

 

(1,645)

 

(311)

 

(3,140)

Amortization of other asset

 

–   

 

–   

 

236 

 

–   

 

 

 

 

 

 

 

 

 

Income tax provision for continuing                            operations

$

106 

$

1,852 

$

887 

$

4,323 

             

             

19

 

 

**OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements, Continued

(Unaudited)

             

Six-month periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars, except share and per share            amounts)

                                 

 

 

 

             

**10.**

**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 earnings (loss) 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 for continuing operations is composed of            the following:

             

 

Three months ended June 30,

Six months ended June 30,

 

 

2007 

 

2006 

 

2007 

 

2006 

                             

 

 

 

 

 

 

 

 

Current income taxes

$

527 

$

3,840 

$

1,884 

$

6,864 

Future income taxes

 

(421)

 

(1,988)

 

(997)

 

(2,541)

 

 

 

 

 

 

 

 

 

 

$

106 

$

1,852 

$

887 

$

4,323 

             

**11.**

**Segmented                            information:**

In 2006, the Company operated in two processing segments, namely gaming            payment services and payment services. On October 13, 2006, the Company’s then            majority-owned subsidiary, FireOne, 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 FireOne shares as discussed in            note 4 (a) and reorganized its activities into one payment processing            services segment beginning January 1, 2007.

 

20

 

 

**OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements, Continued

(Unaudited)

             

Six-month periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars, except share and per share            amounts)

                                 

 

 

 

             

**11.**

**Segmented                            information (continued):**

Geographic information is as follows:

             

                             

                             

                             

                             

Property and equipment,

                             

Revenues

goodwill and intangibles

                             

                             

Three months ended June 30,

                             

Six months

ended June 30,

                             

June 30, 

                             

December 31, 

                             

                             

2007 

                             

2006 

                             

2007 

                             

2006 

                             

2007 

                             

2006 

                             

                             

                             

                             

                             

                             

                             

                             

                             

                             

                             

                             

                             

United States

$

21,318 

$

28,327 

$

42,318 

$

56,232 

$

60,425 

$

64,445 

Central America

                             

3,026 

                             

17,145 

                             

8,086 

                             

35,620 

                             

–   

                             

–   

Canada

                             

1,807 

                             

2,408 

                             

3,585 

                             

4,502 

                             

42,516 

                             

43,611 

Europe

                             

1,610 

                             

2,858 

                             

3,298 

                             

5,177 

                             

1,694 

                             

106 

Other

                             

281 

                             

1,504 

                             

821 

                             

3,133 

                             

–   

                             

–   

                             

                             

                             

                             

                             

                             

                             

                             

                             

                             

                             

                             

                             

                             

$

28,042 

$

52,242 

$

58,108 

$

104,664 

$

104,635 

$

108,162 

             

Revenues are attributed to countries based on the location of the            customers.

             

**12.**

**Supplemental                            disclosure of cash flow information:**

                             

(a)

Net change in operating assets and                            liabilities:

             

 

 

Three                            monthsended June 30,

 

Six months                            endedJune 30,

 

 

2007 

 

2006 

 

2007 

 

2006 

 

 

 

 

 

 

 

 

 

Cash and short-term investments held as                            reserves

$

7,441 

$

(1,133)

$

8,320 

$

(934)

Restricted cash

 

(19,182)

 

–   

 

(19,182)

 

–   

Settlement assets

 

213 

 

2,921 

 

5,053 

 

7,894 

Accounts receivable

 

(916)

 

(2,117)

 

457

 

(3,005)

Income taxes receivable and refundable investment tax                            credits receivable

 

(363)

 

(286)

 

(432)

 

(398)

Prepaid expenses

 

(122)

 

(428)

 

1,322

 

(426)

Accounts payable and accrued liabilities

 

971 

 

5,949 

 

(5,720)

 

(73)

Income taxes payable

 

(696)

 

1,235 

 

519 

 

(1,090)

Customer reserves and security deposits

 

(9,641)

 

(8,059)

 

(35,921)

 

(13,441)

 

 

 

 

 

 

 

 

 

Net                            change in operating assets and liabilities

$

(22,295)

$

(1,918)

$

(45,584)

$

(11,473)

                             

                             

                             

                             

                             

                             

                             

                             

                             

 

 

21

 

 

**OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements, Continued

(Unaudited)

             

Six-month periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars, except share and per share            amounts)

                                 

 

 

 

             

**12.**

**Supplemental                            disclosure of cash flow information (continued):**

                             

(b)

Cash paid for interest and income taxes:

             

 

 

Three                            monthsended June 30,

 

Six months                            endedJune 30,

 

 

2007 

 

2006

 

2007 

 

2006 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

$

–   

$

6 

$

41 

$

9 

Income taxes

 

461 

 

1,189 

 

679 

 

3,690 

 

 

 

 

 

 

 

 

 

             

                             

(c)

Cash and cash equivalents:

             

 

 

 

 

June 30, 

 

December                            31, 

 

 

 

 

2007 

 

2006 

 

 

 

 

 

 

 

Cash and cash equivalents consist of:

 

 

 

 

 

 

Cash balances with                            banks

 

                             

$

86,528 

$

59,069 

Short-term investments, bearing interest at 5.18% to                            5.19% (2006 - 5.29% to 5.32%)

 

 

 

21,138 

 

44,853 

 

 

 

 

 

 

 

 

 

 

$

107,666 

$

103,922 

 

**13.**

**Canada/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:

             

                             

                             

June 30, 

                             

December 31, 

                             

                             

2007 

                             

2006 

                             

                             

                             

                             

                             

Share capital in accordance with                            Canadian  GAAP

$

202,359 

$

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

$

244,815 

$

244,708 

             

 

22

 

 

**OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements, Continued

(Unaudited)

             

Six-month periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars, except share and per-share            amounts)

                                 

 

 

 

             

**13.**

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

                             

(a)

Consolidated Balance Sheets (continued):

                             

(ii)

Additional paid-in capital:

             

                             

                             

June 30, 

                             

December 31, 

                             

                             

2007 

                             

2006 

                             

                             

                             

                             

                             

Additional paid-in capital in accordance with

     Canadian GAAP

$

29,141 

$

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

$

58,998 

$

53,026 

 

             

                             

(iii)

Deficit:

             

                             

                             

June 30, 

                             

December 31, 

                             

                             

2007 

                             

2006 

                             

                             

                             

                             

                             

Deficit in accordance with Canadian GAAP

$

(9,050)

$

(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 US GAAP

$

(79,830)

$

(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 issued, modified or settled 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.

 

23

 

 

**OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements, Continued

(Unaudited)

             

Six-month periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars, except share and per-share            amounts)

                                 

 

 

 

             

**13.**

**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 FireOne's            restricted share unit plan is presented in note 7.

Additional disclosures required under SFAS 123R are as            follows:

             

 

 

 

 

Terra 

 

FireOne 

 

 

Stock 

 

options 

 

restricted 

 

 

option 

 

and 

 

share 

 

 

plan 

 

warrants 

 

units 

 

 

 

 

 

 

 

Aggregate intrinsic value:

 

 

 

 

 

 

Options exercised during                            the period

$

–   

$

62 

$

2,625 

Options outstanding and exercisable

 

1,739 

 

177 

 

–   

 

 

 

 

 

 

 

 

The aggregate intrinsic value for outstanding and exercisable options at            June 30, 2007 represented the pre-tax intrinsic value based on the Company’s            closing stock price at June 30, 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):

Under U.S. GAAP, SFAS No. 130,*Reporting            Comprehensive Income*establishes standards for reporting and            presentation of comprehensive income and its components in a full set of financial            statements. Comprehensive income consists of net earnings (loss) and all other changes            in shareholders' equity that do not result from transactions with shareholders. These            changes include cumulative foreign currency translation adjustments. The statement            requires only additional disclosures in the consolidated financial statements; it does            not affect the Company's financial position or results of operations.

 

24

 

 

**OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements, Continued

(Unaudited)

             

Six-month periods ended June 30, 2007 and 2006

(expressed in thousands of U.S. dollars, except share and per-share            amounts)

                                 

 

 

 

             

**13.**

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

                             

(b)

Accumulated other comprehensive income (loss)                            (continued):

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 June 30, 2007            and December 31, 2006.

                             

(c)

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 $11.5 million, of which $5.8 million 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. There have not            been any material changes in the liability for unrecognized tax benefits, including            interest and penalties, during the six months ended June 30, 2007.

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 and the United States. 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 and 2004.

             

**14.**

**Comparative                            figures:**

Certain of the comparative figures have been reclassified in order to            conform with the current year's presentation.

             

             

             

25

 

 

**Item 2.**

**MANAGEMENT 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, seasonality and trends within our            business environment, the critical accounting policies of our Company that will help            you understand our interim consolidated financial statements, and the principal factors            affecting our results of operations, liquidity and capital resources. This discussion            should be read in conjunction with our consolidated financial statements and management            discussion and analysis for the year ended December 31, 2006, and the factors set forth            below under “Cautionary Statements Regarding Forward-Looking Statements”.            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 interim consolidated financial statements in            accordance with generally accepted accounting principles (“GAAP”) in            Canada, with reconciliation to U.S. GAAP, as disclosed in note 13 of the notes to our            interim consolidated financial statements. Any reference in this report to uniform            resource locator (URL) website locations are inactive textual references only and the            contents of such websites do not form a part of this Form 10-Q.

             

**Cautionary Statements Regarding Forward-Looking            Statements**

 

This Form 10-Q contains certain forward-looking statements within the            meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of            the Securities Exchange Act of 1934, as amended.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,            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;

             

 

**•**

general economic 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;

             

 

**•**

our ability to safeguard against breaches of privacy                            and security when processing electronic transactions;

             

 

**•**

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;

 

 

**•**

the factors described under Item 1A “Risk                            Factors” in our Annual Report on Form 10-K for the year ended                            December 31, 2006; and

 

 

**•**

our ability to complete, integrate and benefit from                            acquisitions, divestitures, joint ventures and strategic                            alliances.

 

26

 

 

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

             

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 quarterly 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 quarterly report.

 

**Overview****and Recent            Developments**

 

Through our wholly owned subsidiary, Optimal Payments Inc, we operate a            payments company with operations primarily in North America and the United Kingdom. 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, as well as through            our stored-value, electronic wallet.

             

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 Company affiliates. The total amount seized of $19.2 million is presented            as restricted cash on the consolidated balance sheets. We have not recorded any            provision for this matter in our financial statements because the outcome of these            discussions and the amount of loss, if any, is not determinable.

             

In 2006, we operated in two processing segments, namely gaming payment            services through our then majority-owned subsidiary, FireOne Group plc and payment            services through Optimal Payments Inc. On October 13, 2006, the United States Unlawful            Internet Gambling Enforcement Act of 2006 (the “Act”), was enacted. Upon            the passage of the Act, FireOne Group plc 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 the revenues of the gaming            payment services segment for the year ended December 31, 2006. On December 15, 2006, in            order to repatriate and realign certain assets, we announced that Optimal Acquisition            Inc., a wholly-owned subsidiary, would make an offer to acquire all of the issued and            to be issued outstanding ordinary shares of FireOne Group plc it did not already own at            a price of £0.60 per share, representing a cash consideration of $18.2 million            inclusive of transaction costs. As a result, effective January 1, 2007, we reorganized            our activities and we now operate and report our payment processing business as a            combined segment.

On February 23, 2007, Optimal Acquisition Inc. completed the acquisition            of all of the issued and outstanding ordinary shares of FireOne Group plc, which as of            that date became our wholly-owned subsidiary. Non-controlling interest is no longer            recorded in our consolidated financial statements after this date.

Effective September 30, 2006, we sold our Canadian hardware maintenance            and repair services segment. The divestiture was in accordance with our 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 on the consolidated statement of operations for            the comparative period.

             

**Payment Processing**

 

We provide technology and services that businesses require to accept            credit card, electronic check and direct debit payments. We process credit card            payments for card-not-present and card-present transactions, including 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, as            well as our stored-value, electronic wallet.

             

27

 

 

We generate revenues primarily from fees charged to merchants for            processing services, as well as from fees charged to consumers who utilize our            electronic wallet. 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            increased risk of fraud associated with these transactions. Other fees are derived from            a variety of fixed transaction fees, including set-up fees, fees for monthly minimum            charge volume requirements, statement fees, annual fees and fees for other            miscellaneous items, such as handling chargebacks. Fees charged to consumers who            utilize our electronic wallet are based on a fixed amount per transaction. Revenue is            recognized primarily at the time the transaction is performed. Where we are 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 we are not the primary party in providing a            merchant with processing services, we record revenue net of amounts paid to the            acquiring processing supplier.

             

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 us and the purchase price is refunded to the merchant’s customer.            If we are unable to collect the disputed amount from the merchant, we bear the credit            risk for the full amount of the transaction. As a result, our acquiring processing            suppliers require us to maintain certain amounts with them as reserves. Amounts            withheld from us by our acquiring processing suppliers as reserves are included as            current assets on our balance sheet under “held as reserves”. We retain 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 disputes. The aggregate amount withheld from our            merchants is recorded under the line item “Customer reserves and security            deposits” on the balance sheet contained in our interim consolidated financial            statements.

 

**Seasonality**

             

Our business is seasonal in nature, generating a high proportion of our            revenues and operating cash flows during the fourth quarter, which includes the holiday            season.

 

**Critical Accounting Policies and Estimates**

 

The accompanying interim consolidated financial statements have been            prepared in accordance with Canadian GAAP. In the preparation of our financial            statements we are required 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 3 of the            notes to our annual audited consolidated financial statements included in our Form 10-K            Annual Report for the year ended December 31, 2006. 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 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 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 from 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.

 

 

28

 

 

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 us and the credit card or clearing bank association may levy a fee            against us. In addition, if our chargeback rate becomes excessive, the associations can            also require us to pay fines. In turn, we attempt to recover from the merchant the            amount charged back and the amount of such fines. However, we 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.

             

Goodwill and Other Intangibles

 

Goodwill is not amortized but rather evaluated under an impairment            approach on an annual basis using December 31st as the measurement date.            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            of goodwill, we are required to determine the fair value of the businesses acquired, on            an annual basis, 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. No write-down of goodwill or other intangibles was recorded in the            six-month period ended June 30, 2007.

 

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 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.

 

**Recent Accounting Pronouncements**

 

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.

 

 

29

 

 

Financial Instruments:

 

Effective January 1, 2007, we adopted CICA Handbook section 1530,*Comprehensive income*, CICA Handbook section            3251,*Equity*, CICA Handbook section            3855,*Financial Instruments – Recognition and            Measurement,*CICA Handbook section 3862,*Financial Instruments – Disclosures*and CICA Handbook 3865,*Hedges*. See note 2 of the notes to our            interim consolidated financial statements.

As a result of the adoption of these standards, we have classified our            cash and cash equivalents, short-term investments and cash and short-term investments            held as reserves as available for sale. We have also classified our accounts            receivable, settlement assets, and long-term receivables as loans and receivables, and            our 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 $1.5 million 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.

 

Accounting changes:

 

CICA Handbook section 1506,*Accounting            changes*, modifies certain aspects of the standard it            replaces. A reporting entity may not change its accounting method unless required by            GAAP or to provide a more reliable and relevant presentation of the financial            statements. In addition, change in accounting methods must be applied retroactively and            additional information must be disclosed. Effective January 1, 2007 we adopted this            section. We are not currently contemplating any voluntary changes in accounting            policies.

 

Accounting for uncertainty in income taxes:

 

In June 2006, theFASB issued*FASB Interpretation            No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB            Statement No. 109 (FIN 48),*which clarifies the accounting            for uncertainty in income taxes recognized in an entity’s financial statements.            The interpretation prescribes a recognition threshold and measurement attribute for the            financial statement recognition and measurement of a tax position taken or expected to            be taken on a tax return. This FASB interpretation was adopted effective January 1,            2007 for U.S. GAAP purposes. See note 13 of the notes to our interim consolidated            financial statements for the impact of adoption of this standard on our U.S. GAAP            disclosures.

 

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.

 

Fair            value option for financial assets and liabilities:

 

In February 2007, the FASB issued*Statement of            Financial Accounting Standards (SFAS) No. 159*,*Fair Value Option for Financial Assets and Financial Liabilities-            Including an amendment of FASB Statement No. 115*.*SFAS No. 159*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 (not a portion of an instrument). Items eligible for the fair            value option are measured at fair value at specified election dates. This statement is            effective for financial instruments issued for fiscal years after November 15, 2007. We            do not expect the adoption of*SFAS No. 159*to materially impact our financial statements.

 

 

30

 

 

**Financial Condition**

 

As at June 30, 2007, cash and cash equivalents, short-term investments            and settlement assets totaled $142.6 million (including $32.9 million held as reserves            and restricted cash), compared to $204.7 million as at December 31, 2006 (including            $22.1 million held as reserves). The decrease in cash and cash equivalents, restricted            cash, short-term investments and settlement assets is primarily due to the acquisition            of all the issued and outstanding ordinary shares of FireOne Group plc held by            non-controlling shareholders, the repayment of bank indebtedness, and the reduction of            customer reserves and security deposits. 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            merchants (see "Payment Processing"). Settlement assets result from timing differences            in the settlement process of our payment processing business segment. Settlement assets            are typically funded to us within days from the transaction processing date. As at June            30, 2007, our cash, short-term investments and settlement assets positions, net of bank            indebtedness and customer reserves and security deposits, were as follows:

 

                             

**June 30,**

**December 31,**

 

(U.S. dollars, in thousands)

**2007**

**2006**

 

                             

                             

                             

                             

                             

Cash and cash equivalents

$

107,666 

$

103,922 

Restricted cash

                             

19,182 

                             

-   

Cash held as reserves

                             

11,340 

                             

18,960 

Short-term investments

                             

-   

                             

71,621 

Short-term investments held as reserves

                             

2,410 

                             

3,110 

Settlement assets

                             

2,008 

                             

7,061 

                             

                             

142,606 

                             

204,674 

                             

                             

                             

                             

                             

Less:

                             

                             

                             

                             

Bank indebtedness

                             

-   

                             

(8,581)

Customer reserves and security deposits

                             

(25,976)

                             

(61,897)

Net

$

116,630 

$

134,196 

 

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

             

Working capital, excluding cash and short-term investments held as            reserves and restricted cash, as at June 30, 2007 was $72.9 million, as compared to            $94.3 million at December 31, 2006. The decrease in working capital is primarily due to            cash used for the acquisition of all the issued and outstanding ordinary shares of            FireOne Group plc held by non-controlling shareholders.

             

We were pursuing the recovery of funds withdrawn from our bank account            by one of our 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. Our claim, which was being pursued through legal recourse, was settled            and received in July 2007 for $3.0 million and is included in accounts receivable in            the consolidated balance sheets at June 30, 2007. As a result of the settlement, we            recorded a gain of $1.6 million representing the difference between the settlement            amount and the carrying amount of the receivable. The gain has been recorded as part of            selling, general and administrative expenses in the consolidated statements of            operations.

             

Accounts receivable as at June 30, 2007 were $8.3 million compared to            $5.6 million at December 31, 2006. The increase of $2.7 million resulted primarily from            the settlement of a claim with one of our credit card suppliers for various service            charges.

 

31

 

 

Goodwill and other intangible assets decreased by $3.1 million, from            $106.0 million as at December 31, 2006 to $102.9 million as at June 30, 2007. This            decrease resulted primarily from goodwill of $1.6 million recorded on the acquisition            of all the issued and outstanding ordinary shares of FireOne Group plc held by            non-controlling shareholders and the acquisition of $1.3 million of intangible assets            being offset by amortization for the period of $6.3 million.

 

Customer reserves and security deposits as at June 30, 2007 were $26.0            million compared to $61.9 million as at December 31, 2006. The decrease of $35.9            million was primarily due to a reduction in transaction processing volume in the gaming            payment processing services segment, resulting from the enactment of the            Act.

             

Shareholders’ equity as at June 30, 2007 was $221.0 million as            compared to $219.4 million as at December 31, 2006. The increase is attributable            primarily to the results of operations net of stock-based compensation.

             

**Results of Operations**

 

Upon the passage of the Act on October 13, 2006, FireOne Group plc            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.

 

*Six-month period ended June 30, 2007 compared to the six-month period            ended June 30, 2006*

 

Revenues decreased by $46.6 million from $104.7 million for the            six-month period ended June 30, 2006 to $58.1 million for the six-month period ended            June 30, 2007. The decrease in revenues is due primarily to the cessation, in October            2006, of the U.S. based gaming portion of FireOne Group plc’s processing            business.

 

Transaction processing expenses decreased by $13.3 million, from $50.1            million for the six-month period ended June 30, 2006 to $36.8 million for the six-month            period ended June 30, 2007. The decrease in transaction processing expenses is due            primarily to the cessation, in October 2006, of the U.S. based gaming portion of            FireOne Group plc’s processing business.

             

Selling, general and administrative expenses decreased by $13.0 million,            from $26.5 million for the six-month period ended June 30, 2006 to $13.5 million for            the six-month period ended June 30, 2007. The net decrease is primarily caused by the            cessation, in October 2006, of the U.S. based gaming portion of FireOne Group            plc’s processing business and a gain of approximately $1.6 million resulting from            the settlement of a claim with one of our former credit card processing            suppliers.

             

Amortization of intangibles pertaining to transaction processing            increased by $0.2 million, from $6.1 million for the six-month period ended June 30,            2006 to $6.3 million for the six-month period ended June 30, 2007.

             

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. As a result of our acquisition of all of            the issued and outstanding ordinary shares of FireOne Group plc 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. Stock-based compensation expense for the six-month period ended June 30,            2006 was $0.3 million.

             

Research and development expenses decreased by $0.3 million, from $1.6            million for the six-month period ended June 30, 2006 to $1.3 million for the six-month            period ended June 30, 2007.

             

Amortization of property and equipment remained constant at            approximately $0.7 million for the six-month periods ended June 30, 2006 and            2007.

 

32

 

 

The provision for income taxes was $0.9 million for the six-month period            ended June 30, 2007 compared to $4.3 million for the six-month period ended June 30,            2006. The variance was primarily due to decreased earnings in 2007 compared to 2006.            Excluding the effect of non-deductible stock-based compensation expense, the effective            tax rate in 2007 was higher than the comparable 2006 period. In 2006, a greater portion            of our income was taxable in Ireland at a lower effective tax rate than in Canada. As a            result, differences in jurisdictional tax rates lowered our tax provision by $0.3            million, compared to $3.1 million in 2006. In addition, the 2007 tax provision includes            the tax effect of non-deductible stock-based compensation expense in the amount of $1.9            million as a result of the acceleration of vesting and exercise of restricted stock            units in connection with the privatization of FireOne Group plc, as well as an increase            to the valuation allowance of $1.5 million for certain losses not likely to be            realized.

 

Our tax provision also 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 and losses do not affect            earnings before income taxes. In 2007, our tax provision includes a future tax recovery            of $1.3 million related to foreign exchange compared to $1.1 million for            2006.

 

We recorded non-controlling interest of $0.2 million for the six-month            period ended June 30, 2007 compared to $4.2 million for the six-month period ended June            30, 2006. The decrease results primarily from our acquisition in February 2007 of all            of the issued and outstanding ordinary shares of FireOne Group plc held by            non-controlling shareholders. After this date, non-controlling interest is no longer            recorded.

             

Our net loss for the six-month period ended June 30, 2007 was $4.5            million (or $0.19 per share – basic and diluted), compared to net earnings of            $8.1 million (or $0.34 per share – basic and $0.31 per share – diluted) for            the six-month period ended June 30, 2006. The decrease is due primarily to the            cessation in October 2006 of the U.S. based gaming portion of FireOne Group plc’s            payment processing business.

             

Adjusted earnings were $7.7 million (or $0.32 per share – basic            and $0.31 per share - diluted) for the six-month period ended June 30, 2007 compared to            adjusted earnings of $19.7 million (or $0.84 per share – basic and $0.76 per            share – diluted) for the six-month period ended June 30, 2006.

             

A reconciliation of this non-GAAP financial information is presented in            the table below. We supplement our reporting of net (loss) earnings determined in            accordance with Canadian and U.S. GAAP by reporting "adjusted earnings" as a measure of            earnings. In establishing this supplemental measure of (loss) earnings, we exclude from            net (loss) earnings, foreign exchange gains and losses, discontinued operations,            impairment losses, restructuring costs, stock-based compensation and amortization of            intangibles pertaining to transaction processing, as management believes that foreign            exchange gains and losses are largely uncontrollable by management and discontinued            operations, impairment losses, restructuring costs, stock-based compensation and            amortization of intangibles pertaining to transaction processing, are not reflective of            our core operations. We did not record any impairment losses, restructuring costs or            results from discontinued operations for the six-month period ended June 30, 2007.            Foreign exchange losses were not significant in the six-month periods ended June 30,            2007 and 2006. Adjusted earnings for 2006 have been modified to exclude amortization of            intangibles pertaining to transaction processing to be comparable with            management’s current definition.

             

Management believes that adjusted earnings is useful to investors as a            measure of our earnings because, for management, it is a primary measure of our            performance, and provides a more meaningful reflection of our earnings.

             

Adjusted earnings does not have a standardized meaning under Canadian or            U.S. GAAP and therefore should be considered in addition to, and not as a substitute            for, (loss) earnings or any other amount determined in accordance with Canadian and            U.S. GAAP. Our measure of adjusted earnings reflects management's judgment in regard to            the impact upon our core operations of foreign exchange gains and losses, discontinued            operations, impairment losses, restructuring costs, stock-based compensation and            amortization of intangibles pertaining to transaction processing, and may not be            comparable to similarly titled measures reported by other companies.

             

 

33

 

 

 

Reconciliation of Non-GAAP Financial                                Information

(expressed                                in thousands of U.S. dollars)

 

 

 

**Six                                months ended**

 

**June                                30,**

                                 

 

**2007**

 

**2006**

 

 

 

 

 

Net (loss)                                earnings

$

(4,495)

$

8,080

Add:

                                 

 

                                 

                                 

 

 

 

 

                                 

Amortization of intangibles pertaining to                                transaction processing, net of income tax recoveries of $176 (2006                                - $296)

 

6,160 

 

5,769

Stock-based compensation pertaining to selling,                                general and administrative expenses

 

6,027 

 

335

Loss from discontinued operations

 

-   

 

5,501

Adjusted earnings

$

7,692 

$

19,685

 

 

 

 

*Three-month period ended June 30, 2007 compared to the three-month            period ended June 30, 2006*

 

Revenues decreased by $24.2 million from $52.2 million for the            three-month period ended June 30, 2006 to $28.0 million for the three-month period            ended June 30, 2007. The decrease in revenues is due primarily to the cessation, in            October 2006, of the U.S. based gaming portion of FireOne Group plc’s processing            business.

 

Transaction processing expenses decreased by $6.4 million, from $24.5            million for the three-month period ended June 30, 2006 to $18.1 million for the            three-month period ended June 30, 2007. The decrease in transaction processing expenses            is due primarily to the cessation, in October 2006, of the U.S. based gaming portion of            FireOne Group plc’s processing business.

             

Selling, general and administrative expenses decreased by $8.8 million,            from $14.6 million for the three-month period ended June 30, 2006 to $5.8 million for            the three-month period ended June 30, 2007. The net decrease is primarily caused by the            cessation, in October 2006, of the U.S. based gaming portion of FireOne Group            plc’s processing business, which resulted in restructuring activities in the            third and fourth quarters of 2006 and a gain of approximately $1.6 million resulting            from the settlement of a claim with one of our former credit card processing            suppliers.

             

Amortization of intangibles pertaining to transaction processing            increased by $0.1 million, from $3.1 million for the three-month period ended June 30,            2006 to $3.2 million for the three-month period ended June 30, 2007.

             

Research and development expenses decreased by $0.2 million, from $0.8            million for the three-month period ended June 30, 2006 to $0.6 million for the            three-month period ended June 30, 2007.

             

Amortization of property and equipment remained constant at            approximately $0.3 million for the three-month periods ended June 30, 2006 and            2007.

             

The provision for income taxes was $0.1 million for the three-month            period ended June 30, 2007 compared to $1.9 million for the three-month period ended            June 30, 2006. The variance was primarily due to decreased earnings in 2007 compared to            2006. The effective tax rate in 2007 was lower than the comparable 2006 period due to            permanent differences and differences in tax rates of foreign jurisdictions.

 

Our tax provision also 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 and losses do not affect            earnings before income taxes. In 2007, our tax provision includes a future tax recovery            of $1.2 million related to foreign exchange compared to a charge of $1.3 million for            2006.

 

We did not record non-controlling interest for the three-month period            ended June 30, 2007 as compared to $2.0 million for the three-month period ended June            30, 2006, a result of our acquisition of all of the issued and outstanding ordinary            shares of FireOne Group plc held by non-controlling shareholders in February            2007.

 

34

 

 

Our net earnings for the three-month period ended June 30, 2007 were            $1.2 million (or $0.05 per share – basic and diluted), compared to net earnings            of $3.7 million (or $0.16 per share – basic and $0.14 per share – diluted)            for the three-month period ended June 30, 2006. The decrease is due primarily to the            cessation in October 2006 of the U.S. based gaming portion of FireOne Group plc’s            payment processing business.

             

Adjusted earnings were $4.3 million (or $0.18 per share – basic            and diluted) for the three-month period ended June 30, 2007 compared to adjusted            earnings of $9.8 million (or $0.41 per share – basic and $0.38 per share –            diluted) for the three-month period ended June 30, 2006.

             

A reconciliation of this non-GAAP financial information is presented in            the table below. We supplement our reporting of net earnings determined in accordance            with Canadian and U.S. GAAP by reporting "adjusted earnings" as a measure of earnings.            In establishing this supplemental measure of earnings, we exclude from net earnings,            foreign exchange gains and losses, discontinued operations, impairment losses,            restructuring costs, stock-based compensation and amortization of intangibles            pertaining to transaction processing, as management believes that foreign exchange            gains and losses are largely uncontrollable by management and discontinued operations,            impairment losses, restructuring costs and stock-based compensation, amortization of            intangibles pertaining to transaction processing, are not reflective of our core            operations. We did not record any impairment losses, restructuring costs or results            from discontinued operations for the three-month period ended June 30, 2007. Foreign            exchange losses were not significant in the three-month periods ended June 30, 2007 and            2006. Adjusted earnings for 2006 have been modified to exclude amortization of            intangibles pertaining to transaction processing to be comparable with            management’s current definition.

             

Management believes that adjusted earnings is useful to investors as a            measure of our earnings because, for management, it is a primary measure of our            performance and provides a more meaningful reflection of our earnings.

             

Adjusted earnings does not have a standardized meaning under Canadian or            U.S. GAAP and therefore should be considered in addition to, and not as a substitute            for, (loss) earnings or any other amount determined in accordance with Canadian and            U.S. GAAP. Our measure of adjusted earnings reflects management's judgment in regard to            the impact upon our core operations of foreign exchange gains and losses, discontinued            operations, impairment losses, restructuring costs, stock-based compensation and            amortization of intangibles pertaining to transaction processing, and may not be            comparable to similarly titled measures reported by other companies.

                 

Reconciliation of Non-GAAP Financial                                Information

(expressed                                in thousands of U.S. dollars)

 

 

 

**Three months ended**

 

**June                                30,**

                                 

 

**2007**

 

**2006**

 

 

 

 

 

Net                                earnings

$

1,157

$

3,691

Add:

                                 

 

                                 

                                 

 

 

 

 

                                 

Amortization of intangibles pertaining to                                transaction processing, net of income tax recoveries of $88 (2006 -                                $146)

 

3,139

 

2,904

Stock-based compensation pertaining to selling,                                general and administrative expenses

 

30

 

335

Loss from discontinued operations

 

-   

 

2,831

Adjusted earnings

$

4,326

$

9,761

 

 

 

 

**Liquidity and Capital Resources**

 

As at June 30, 2007, cash and cash equivalents, short-term            investments and settlement assets totaled $142.6 million (including $32.9 million held            as reserves and restricted cash), compared to $204.7 million as at December 31, 2006            (including $22.1 million held as reserves). Working capital, excluding cash and            short-term investments held as reserves and restricted cash, as at June 30, 2007 was            $72.9 million (December 31, 2006 — $94.3 million). As described, a significant            portion of cash and cash equivalents, and short-term investments have a            corresponding liability as these amounts are derived from reserves and security            deposits which are due to merchants (see "Payment Processing").

 

35

 

 

Settlement assets result from timing differences in the settlement            process of our payment processing business. Settlement assets are typically funded to            us within days from the transaction processing date.

As at June 30, 2007, our cash, restricted cash, short-term investments,            reserves and settlement assets positions, net of bank indebtedness and customer            reserves and security deposits, were $116.6 million (see            "*Financial Condition*"            above).

Operating activities used $19.7 million of cash and cash equivalents in            the three-month period ended June 30, 2007, as compared to $7.6 million of cash            generated for the three-month period ended June 30, 2006. The decrease in cash            generated in the current period is primarily as a result of decreased earnings from            continuing operations as well as a reduction of customer reserves, security deposits            and restricted cash.

             

Financing activities generated a nominal amount of cash for the            three-month period ended June 30, 2007 compared to using $1.7 million for the            three-month period ended June 30, 2006 which included the payment of a dividend by            FireOne Group plc and the repurchase of common shares offset by the increase in bank            indebtedness.

             

Investing activities generated $4.2 million of cash for the three-month            period ended June 30, 2007 compared to $13.6 million of cash generated for the            three-month period ended June 30, 2006. The decreased amount represents primarily            proceeds from the maturity of short-term investments in the amount of $5.1 million for            the three-month period ended June 30, 2007 as compared to $14.4 million for the            three-month period ended June 30, 2006.

             

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, United Kingdom and Canada.

             

**Item 3.**

**Quantitative and Qualitative Disclosures About                            Market Risk**

             

There have been no material changes to the disclosures about market risk            contained in our Annual Report on Form 10-K for the year ended December 31,            2006.

 

**Item 4.**

**Controls and Procedures**

 

As of June 30, 2007 (the “Evaluation Date”), under the            supervision and with the participation of our management, including our Chief Executive            Officer and our Chief Financial Officer, we evaluated the effectiveness of the design            and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e)            or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange            Act”). Based upon this evaluation, our Chief Executive Officer and our Chief            Financial Officer concluded that, as of the Evaluation Date, our disclosure controls            and procedures were effective to ensure that information required to be disclosed by us            in the reports filed or submitted by us under the Exchange Act is recorded, processed,            summarized and reported within the time periods specified in the SEC’s rules and            forms.

 

Additionally, under the supervision and with the participation of our            management, including our Chief Executive Officer and our Chief Financial Officer, we            concluded that there have been no changes in our internal control over financial            reporting during our most recent fiscal quarter that have materially affected, or are            reasonably likely to materially affect, our internal control over financial            reporting.

 

**PART II. OTHER INFORMATION**

 

**Item 1.**

**Legal Proceedings**

             

There were no material changes to the disclosure of legal proceedings            contained in our Annual Report on Form 10-K for the year ended December 31, 2006 other            than those disclosed in this Form 10-Q.

             

 

36

 

 

**Item 1A.**

**Risk Factors**

             

There were no material changes to the disclosure of risk factors            contained in our Annual Report on Form 10-K for the year ended December 31,            2006.

             

**Item                            2.**

**Unregistered                            Sales of Equity Securities and Use of Proceeds**

 

The registrant has nothing to report under this item.

             

**Item                            3.**

**Defaults                            Upon Senior Securities**

 

The registrant has nothing to report under this item.

 

**Item                            4.**

**Submission                            of Matters to a Vote of Security Holders**

             

We held our annual and special meeting of shareholders on June 26, 2007.            The following resolutions were adopted:

 

**Resolution**

**Votes For**

**Votes Against**

**Withheld**

**Spoiled**

**Non-Voted**

Election of Henry M. Karp as                            Director(1)

16,598,942

0

135,685

477

0

Election of                            Jonathan J. Ginns as Director(1)

16,598,942

0

135,685

477

0

Election of                            Sydney Sweibel as Director(1)

16,260,068

0

474,559

477

0

Appointment of                            KPMG LLP as Auditors

16,724,540

0

10,419

0

145

(1)

Henry M. Karp, Jonathan J. Ginns and Sydney Sweibel                            were elected to hold office until the close of the 2010 annual meeting                            of shareholders. The following directors did not stand for election and                            continue in office for the following respective periods:

Neil S. Wechsler, James S. Gertler and Thomas D. Murphy each to hold            office until the close of the 2009 annual meeting of shareholders, and Holden L.            Ostrin, Tommy Boman and Stephen J. Shaper each to hold office until the close of the            2008 annual meeting of shareholders.

.

**Item                            5.**

**Other                            Information**

             

The registrant has nothing to report under this item.

             

**Item 6.**

**Exhibits**

 

Exhibits

 

**Exhibit Number**

**Exhibit**

 

                             

 

                             

31.1

Certification pursuant to Section 302 of the                            Sarbanes-Oxley Act of 2002.

31.2

Certification pursuant to 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.

 

 

37

 

 

**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.

 

August 8, 2007

**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)

             

 

38