(OPTIMAL GROUP LOGO) 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 1934For the quarterly period ended September 30, 2008  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. Employerof incorporation
 or organization)
Identification
 No.)3500 de Maisonneuve Blvd. West, Suite 800,
(514)
 738-8885Montreal,
 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, a non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the Exchange Act (Check one): Large
 Accelerated filer o
Accelerated
 filer x
Non-accelerated
 filer o
Smaller
 reporting company o(Do not check if
 a smaller reporting company)  Indicate
 by check mark whether the registrant is a shell company (as defined in Rule
 12b-2 of the Securities Exchange Act of 1934).

Yes o No x At October
31, 2008 the registrant had 25,829,090 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.Periods ended September
 30, 2008 and 2007(expressed in U.S.
 dollars)2

OPTIMAL
 GROUP INC.Consolidated Financial
 Statements(Unaudited)Periods ended September 30, 2008 and 2007
(expressed in U.S. dollars)

Financial
 StatementsConsolidated
 Balance Sheets

1Consolidated
 Statements of Operations and Comprehensive Loss

2Consolidated
 Statements of Shareholders Equity

3Consolidated
 Statements of Cash Flows

4Notes to
 Consolidated Financial Statements

5OPTIMAL GROUP INC.Consolidated Balance
 Sheets(Unaudited)September 30, 2008 and December 31, 2007(expressed in thousands of U.S. dollars)September 30,
 2008

December 31,
 2007AssetsCurrent assets:Cash and cash
equivalents

$
45,106

$
47,193Cash held as reserves


5,525


6,869Short-term investments


1,216


12,477Short-term investments held as
reserves


1,795


1,710Settlement assets


2,368


4,715Accounts and other
receivables


44,525


18,513Inventories


21,394


3,103Income taxes receivable and
refundable investment
 tax credits


750


4,169Prepaid expenses and
deposits


1,809


1,958Future income taxes





714124,488


101,421Restricted cash


19,183


19,183Property and equipment


7,753


4,670Goodwill


42,220


66,210Intangible assets


75,001


86,858Future income taxes





6,200Other asset





5,739$
268,645

$
290,281Liabilities
 and Shareholders EquityCurrent liabilities:Bank indebtedness

$
12,620

$
Accounts payable and accrued
liabilities


66,475


47,083Customer reserves and security
deposits


20,193


21,324Income taxes payable


7,887


7,251Future income taxes


1,028


1,270108,203


76,928Future income taxes


11,031


11,648Shareholders
 equity:Share capital


210,741


211,998Warrants


2,696


2,696Additional paid-in
capital


33,257


29,561Deficit


(95,799
)

(41,066
)Accumulated other comprehensive
loss


(1,484
)

(1,484
)149,411


201,705Contingencies (note 7)Subsequent events (note
17)$
268,645

$
290,281See accompanying notes to unaudited consolidated financial statements.

1

OPTIMAL GROUP INC.Consolidated Statements
 of Operations and Comprehensive Loss(Unaudited)Periods ended September
 30, 2008 and 2007(expressed in thousands
 of U.S. dollars, except per share amounts)Three months ended
 September 30,

Nine months ended
 September 30,2008

2007

2008

2007Revenues

$
79,562

$
27,622

$
152,391

$
85,730Expenses:Transaction processing and cost
of sales


54,062


17,404


100,125


54,173Selling, general and
administrative


14,175


7,614


40,608


21,088Amortization of intangibles
pertaining to
 transaction processing and cost of sales


4,852


3,066


14,448


9,402Amortization of equipment
pertaining to cost of
 sales


859





2,520


Amortization of equipment
pertaining to selling,
 general and administrative


371


174


1,013


824Stock-based compensation
pertaining to selling,
 general and administrative


459


30


2,910


6,057Research and
development


1,468


584


4,218


1,848Operating leases


561


292


1,521


806Impairment loss (note
4)








29,097


Earnings (loss) before
undernoted item


2,755


(1,542
)

(44,069
)

(8,468
)Investment income


260


1,522


1,097


4,999Earnings (loss) before income
tax provision and
 non-controlling interest


3,015


(20
)

(42,972
)

(3,469
)Income tax provision


1,308


393


11,761


1,280Earnings (loss) before
non-controlling interest


1,707


(413
)

(54,733
)

(4,749
)Non-controlling
interest











159Net earnings (loss) and
comprehensive income (loss)

$
1,707

$
(413
)
$
(54,733
)
$
(4,908
)Weighted average number of
shares:Basic


25,829,090


23,866,604


25,882,946


23,855,987Plus impact of stock options
and warrants











411,423Diluted


25,829,090


23,866,604


25,882,946


24,267,410Earnings (loss) per
share:Net:Basic

$
0.07

$
(0.02
)
$
(2.11
)
$
(0.21
)Diluted


0.07


(0.02
)

(2.11
)

(0.21
)See accompanying notes to unaudited consolidated financial statements.

2

OPTIMAL GROUP INC.Consolidated
 Statements of Shareholders Equity(Unaudited)Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars)Accu-
 mulated
 other
 compre-
 hensive
 lossAddi-
 tional
 paid-in
 capitalClass
 A sharesNumber

Dollars

Warrants


Deficit


TotalBalance, December 31,
2007

25,983,148

$
211,998

$
2,696

$
29,561

$
(41,066
)
$
(1,484
)
$
201,705Cancellation of shares pursuant
to stock buyback program (note 5)

(154,058
)

(1,257
)




786








(471
)Stock-based compensation (note
8)










2,910








2,910Net loss













(54,733
)




(54,733
)Balance, September 30,
2008

25,829,090

$
210,741

$
2,696

$
33,257

$
(95,799
)
$
(1,484
)
$
149,411Balance, December 31,
2006

23,849,090

$
202,252

$


$
23,169

$
(4,555
)
$
(1,484
)
$
219,382Exercise of stock
options:Cash
proceeds

18,261


87














87Ascribed
value




95





(95
)







Stock-based compensation (note
8)










6,057








6,057Net loss













(4,908
)




(4,908
)Balance, September 30,
2007

23,867,351

$
202,434

$


$
29,131

$
(9,463
)
$
(1,484
)
$
220,618See accompanying notes to
unaudited consolidated financial statements.

3

OPTIMAL GROUP INC.Consolidated
 Statements of Cash Flows(Unaudited)Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars)Three
 months ended
 September 30,

Nine
 months ended
 September 30,2008

2007

2008

2007Cash flows from (used in)
operating activities:Net earnings
(loss)

$
1,707

$
(413
)
$
(54,733
)
$
(4,908
)Adjustments for
items not affecting cash:Non-controlling interest











159Amortization


6,082


3,240


17,981


10,226Gain on
settlement of litigation











(1,612
)Impairment
loss








29,097


Future income
taxes


546


1,165


11,183


168Stock-based
compensation


459


30


2,910


6,057Foreign
exchange


(161
)

(206
)

(182
)

(344
)Net change in
operating assets and liabilities (note 11 (a))


(12,959
)

2,749


(15,858
)

(42,835
)(4,326
)

6,565


(9,602
)

(33,089
)Cash flows from (used in)
financing activities:Repurchase of
Class A shares








(471
)

Proceeds from
exercise of RSUs in OPIL











58Proceeds from
issuance of Class A shares





35





87Increase in
bank indebtedness


4,802





7,283


(8,581
)4,802


35


6,812


(8,436
)Cash flows from (used in)
investing activities:Business
acquisitions, net of cash (note 3 (a))


(6,534
)




(6,534
)

Purchase of
equipment and intangible assets


(793
)

(603
)

(4,173
)

(2,661
)Proceeds from
maturity of short-term investments


1,167





11,261


71,621Decrease in
long-term receivables





39


368


401Repurchase of
OPIL ordinary shares











(16,463
)Transaction
costs


(112
)




(112
)

(1,748
)(6,272
)

(564
)

810


51,150Effect of exchange rate changes
on cash and cash equivalents during
 the period


(98
)

206


(107
)

361(Decrease) increase in cash and
cash equivalents


(5,894
)

6,242


(2,087
)

9,986Cash and cash equivalents,
beginning of period


51,000


107,666


47,193


103,922Cash and cash equivalents, end
of period

$
45,106

$
113,908

$
45,106

$
113,908Supplemental cash flow information
(note 11)

See accompanying notes to
unaudited consolidated financial statements.

4

OPTIMAL GROUP INC.Notes to
 Consolidated Financial Statements(Unaudited)Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars, except share and per share amounts)1.
Nature of
 operations: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 September 30, 2008, the unaudited consolidated statements
 of operations and comprehensive income (loss) and cash flows for the periods
 ended September 30, 2008 and 2007 and the unaudited consolidated statements
 of shareholders equity for the periods ended September 30, 2008 and 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 4 to the annual audited
 consolidated financial statements for the year ended December 31, 2007,
 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, 2007.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 otherwise specifically identified.2.
Changes
 in accounting policies:(a)
New accounting policies:Effective January 1, 2008,
 the Company adopted the Canadian Institute of Chartered Accountants (CICA)
 Handbook Section 1535, Capital Disclosures,
 CICA Handbook Section 3862, Financial
 Instruments - Disclosure, and CICA Handbook Section 3863, Financial Instruments - Presentation.The
 sections relate to disclosure
 and presentation only and did not have an impact on the Companys financial
 results (refer to notes 12, 13 and 14).Effective January 1, 2008,
 the Company also adopted CICA Handbook Section 3031, Inventories, which replaces Section 3030
 and harmonizes the Canadian standards related to inventories with
 International Financial Reporting Standards (IFRS). This section provides
 changes to the measurement and more extensive guidance on the determination
 of cost, including allocation of overhead; narrows the permitted cost
 formulas; and expands the disclosure requirements to increase transparency.
 The adoption of this standard did not have a significant impact on the
 consolidated financial statements.Inventories are measured
 at the lower of cost and net realizable value. At September 30, 2008,
 inventories consist of raw materials of $12,046 and finished goods of $9,348.5

OPTIMAL GROUP INC.Notes to Consolidated
 Financial Statements, Continued(Unaudited)Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars, except share and per share amounts)2.
Changes
 in accounting policies (continued):(b)
Future accounting
 policies:In February 2008, the CICA
 issued Section 3064, Goodwill and
 Intangible Assets, which will replace Section 3062, Goodwill and Other Intangible Assets,and
 Section 3450,Research and Development
 Costs. The standard provides guidance on the recognition of
 intangible assets in accordance with the definition of an asset and the
 criteria for asset recognition, as well as clarifying the application of the
 concept of matching revenues and expenses, whether these assets are
 separately acquired or internally developed. This standard applies to interim
 and annual financial statements relating to fiscal years beginning on or
 after October 1, 2008. The adoption of this standard is not expected to have
 a significant impact on the Companys financial results.In 2005, the Accounting
 Standards Board of Canada announced that accounting standards in Canada are
 to converge with International Financial Reporting Standards (IFRS). In
 February 2008, the CICA confirmed the change over date from current Canadian
 GAAP to IFRS to be January 1, 2011. While IFRS uses a conceptual framework
 similar to Canadian GAAP, there are significant differences in accounting
 policies which must be addressed. The Company has not yet fully assessed the
 future impact of these new standards on the consolidated financial
 statements.3.
Business
 acquisitions:(a)
Acquisitions:(i)
2008 acquisitions:The following acquisitions
 were accounted for using the purchase method, and the results were
 consolidated with those of the Company from the date of acquisition. The
 Company has allocated the purchase prices on a preliminary basis to the
 assets acquired and the liabilities assumed based on managements best
 estimate of their fair values and taking into account all relevant
 information available at that time. Since the Company is still in the process
 of finalizing the valuation of identifiable intangible assets as well as
 other assets acquired and liabilities assumed at the date of acquisition, the
 allocation of the purchase price is subject to change. The Company expects to
 finalize the allocation of the purchase price by the end of the second
 quarter of 2009.On August 29, 2008, the
 Company acquired all the outstanding shares of Sablon Distribution S.A.
 (Sablon), a Belgium-based toy distributor operating in the Benelux countries,
 Austria and Germany. The Company believes the acquisition strengthens and
 broadens the direct distribution structure of the consumer robotics, toy and
 entertainment products business segment and positions this segment closer to
 retailers and end users in Sablons markets.6

OPTIMAL GROUP INC.Notes to Consolidated
 Financial Statements, Continued(Unaudited)Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars, except share and per share amounts)3.
Business
 acquisitions (continued):(a)
Acquisitions (continued):(i)
2008 acquisitions
 (continued):During the quarter, the
 Company also purchased certain assets and liabilities of a toy operation
 based in New York, USA.The total purchase price
 for both acquisitions was $6,669, consisting of cash consideration of $6,557
 and transaction costs of $112. In connection with the Sablon acquisition, an
 additional EUR 1,200 is payable in the first quarter of 2009 depending upon
 the consolidated net equity of Sablon at the end of 2008. Additional
 consideration is also payable in each of 2009 and 2010 based on the
 consolidated net revenues of Sablon in these years. In connection with the
 second acquisition, the agreement provides for an additional payment payable
 by December 31, 2009 upon the achievement of defined financial milestones.
 The agreement also provides for additional contingent consideration based on
 the net profits of the business over a three-year period. Additional
 consideration payable by the Company will be accounted for as additional
 goodwill.The following table
 presents the estimated fair value of the assets purchased and liabilities
 assumed in connection with these acquisitions:Assets acquired:Cash and cash
equivalents

$
23Accounts
receivable


3,908Inventories


7,667Income tax
receivable


268Property and
equipment


2,567Customer
relationships


1,710Non-compete
agreement


352Goodwill


4,67421,169Liabilities assumed:Bank
indebtedness


5,699Accounts
payable and accrued liabilities


4,318Customer
deposits


313Long-term
debt


3,514Future income
taxes


65614,500Net assets acquired

$
6,6697

OPTIMAL GROUP INC.Notes to
 Consolidated Financial Statements, Continued(Unaudited)Periods
 ended September 30, 2008 and 2007(expressed
 in thousands of U.S. dollars, except share and per share amounts)3.
Business acquisitions (continued):(a)
Acquisitions
 (continued):(i)
2008
 acquisitions (continued):The
 following table presents the estimated fair value of the assets purchased and
 liabilities assumed in connection with these acquisitions (continued):Consideration:Cash

$
6,557Transaction
costs


112Total
 purchase price

$
6,669Goodwill
 recorded in connection with these transactions is not expected to be
 deductible for tax purposes.(ii)
2007
 acquisitions:(a)
Optimal
 Acquisition Inc.:On February
 23, 2007, Optimal Acquisition Inc. completed the acquisition of all of the
 outstanding shares held by non-controlling shareholders of Optimal Payments
 (Ireland) Limited for $16,463, which as of that date became a wholly-owned
 subsidiary of the Company. As a result of the acquisition, non-controlling
 interest is no longer recorded in the consolidated financial statements. The
 transaction was accounted for using the purchase method.(b)
Wow Wee
 Limited:On November
 7, 2007, the Company completed its previously announced acquisition of
 substantially all of the assets of Wow Wee Limited, a privately-held Hong
 Kong-based developer, marketer and supplier of technology-based, consumer
 robotic, toy and entertainment products, as well as substantially all of the
 assets of WowWee Marketing, Inc., with offices in California, and
 Wow Wee Group Company, with offices in Canada (collectively, WowWee).
 WowWee Marketing, Inc. and Wow Wee Group Company were service providers to
 Wow Wee Limited in the operation of its business. The Company believes
 that the acquisition will provide the WowWee business with greater financial
 and operational resources to grow both in North America and internationally,
 and that the Company will be able to build upon the existing consumer-focused
 franchise of the business, by capitalizing on its corporate brands through
 the development of a cross-platform entertainment media strategy.8

OPTIMAL GROUP INC.Notes to
 Consolidated Financial Statements, Continued(Unaudited)Periods
 ended September 30, 2008 and 2007(expressed
 in thousands of U.S. dollars, except share and per share amounts)3.
Business acquisitions and disposals (continued):(a)
Acquisitions (continued):(ii)
2007 acquisitions (continued):(b)
Wow Wee
 Limited (continued):The total
 purchase price was $60,421, consisting of a cash consideration of $46,570,
 the issuance of 2,169,197 Class A shares with a fair value of $10,000,
 820,000 warrants to purchase 820,000 Class A shares having an
 estimated fair value of $2,696 and transaction costs of approximately $1,155.
 The warrants have an exercise price of $5.56 per share and are exercisable
 for a period of seven years.The
 acquisition was accounted for using the purchase method, and the results of
 WowWee were consolidated with those of the Company from the date of
 acquisition The following table presents the estimated fair value of the assets
 purchased and liabilities assumed from WowWee on November 7, 2007.Assets
 acquired:Cash and cash
equivalents

$
483Accounts receivable


9,722Inventories


5,194Income tax receivable


2,966Prepaid expenses and
deposits


771Property and equipment


1,991Customer relationships


21,171Intellectual property


5,520Tradename


14,797Goodwill


37,546100,161Liabilities
 assumed:Accounts payable and accrued
liabilities


33,445Future income taxes


6,29539,740Net assets
 acquired

$
60,421Consideration:Cash

$
46,5702,169,197 Class A
shares


10,000Warrants


2,696Transaction costs


1,155Total
 purchase price

$
60,4219

OPTIMAL GROUP INC.Notes to
 Consolidated Financial Statements, Continued(Unaudited)Periods
 ended September 30, 2008 and 2007(expressed
 in thousands of U.S. dollars, except share and per share amounts)3.
Business acquisitions and disposals (continued):(a)
Acquisitions
 (continued):(ii)
2007
 acquisitions (continued):(b)
Wow Wee
 Limited (continued):Goodwill
 recorded in connection with this transaction is not expected to be deductible
 for tax purposes.The fair
 value of the warrants was estimated using the Black-Scholes model using the
 following assumptions: exercise price $5.56, share price $5.48, volatility
 56%, risk-free rate 3.74%, and dividend yield 0%.During the
 nine-month period ended September 30, 2008, the Company increased the
 goodwill on acquisition by $432 to record fair value adjustments as at the
 date of acquisition for accounts receivable ($1,427), inventory $374,
 property and equipment $466 and accounts payable and accrued liabilities
 $1,019.4.
Goodwill and other intangible assets:September 30, 2008Gross
 carrying
 amount

Accumulated
 amortization

Net book
 valueGoodwill

$
42,220

$


$
42,220Customer
 relationships and service agreements


88,192


34,672


53,520ISO/ISA
 relations


7,180


3,077


4,103Intellectual
 property


5,520


1,687


3,833Tradename


14,797


2,713


12,084Other


7,016


5,555


1,461122,705


47,704


75,001$
164,925

$
47,704

$
117,22110

OPTIMAL GROUP INC.Notes to
 Consolidated Financial Statements, Continued(Unaudited)Periods
 ended September 30, 2008 and 2007(expressed
 in thousands of U.S. dollars, except share and per share amounts)4.
Goodwill and other intangible assets (continued):December 31, 2007Gross
 carrying
 amount

Accumulated
 amortization

Net book
 valueGoodwill

$
66,210

$


$
66,210Customer
 relationships and service agreements


86,482


25,502


60,980ISO/ISA
 relations


7,180


2,308


4,872Intellectual
 property


5,520


307


5,213Tradename


14,798


493


14,305Other


6,134


4,646


1,488120,114


33,256


86,858$
186,324

$
33,256

$
153,068At December
 31, 2007, the net book value of goodwill was $66,210, of which $37,113
 related to the consumer robotic, toy and entertainment products segment and
 $29,097 related to the payment processing segment. Goodwill in the payment
 processing segment at December 31, 2007 was net of impairment charges of
 $22,552 provided for in 2007.As discussed
 in note 3 (a) (ii) (b), goodwill in the consumer robotic, toy and
 entertainment products segment was increased by $432 during the nine-month
 period ended September 30, 2008, as a result of fair value adjustments to
 certain assets and liabilities at the date of acquisition. At June 30, 2008,
 the Company tested goodwill for impairment in the payment processing segment
 as the Company determined that there was a more likely than not expectation
 that a significant portion, or this entire segment, would be sold over the
 course of the next 12 months. As a result of this analysis, the goodwill in
 the segment was determined to be impaired since the estimated fair value to
 be realized as proceeds from transactions would be less than the carrying
 value of the segment including goodwill. As a result, the Company recorded a
 non-cash goodwill impairment loss of $29,097 in the second quarter of 2008 in
 the payment processing segment. The balance of goodwill at September 30, 2008
 relates entirely to the Companys consumer robotic, toy and entertainment
 products segment.Due largely
 to a general deterioration of the economic environment, sales, operating
 profits and cash flows in the consumer robotic, toy and entertainment
 products segment were lower than expected during the third quarter of 2008.
 As a result, the Company performed the first step of an interim impairment
 test that indicated that the estimated fair value of this segment was less
 than its carrying value at September 30, 2008. The second step of the
 impairment test estimates the implied fair value of goodwill and whether a
 write-down is required. The Company expects to complete this step before the
 end of 2008 when sales and cash flow budgets become available and, under this
 testing, it is possible that a non-cash, impairment write-down of goodwill
 may be required in the fourth quarter of 2008.11

OPTIMAL GROUP INC.Notes to
 Consolidated Financial Statements, Continued(Unaudited)Periods
 ended September 30, 2008 and 2007(expressed
 in thousands of U.S. dollars, except share and per share amounts)5.
Share capital:On November
 6, 2007, the Board of Directors renewed the stock buyback program authorizing
 the Company to purchase up to 5% of its outstanding Class A shares. The
 Company may purchase the Class A shares on the open market through the
 facilities of the Nasdaq Stock Market over the course of 12 months commencing
 November 21, 2007 and ending November 20, 2008. All shares purchased under
 the stock buyback program will be cancelled. During the nine months ended
 September 30, 2008, 154,058 Class A shares having a book value of $1,257
 have been repurchased for a total consideration of $471. The excess of the
 book value of the shares over the purchase price, in the amount of $786, was
 added to the additional paid-in capital.6.
Stock options and warrants:(a)
Optimal
 Group Inc.:The Company
 has a stock option plan that provides for the granting of options to
 employees and directors for the purchase of the Companys Class A shares to
 be issued from treasury. Options may be granted by the Board of Directors for
 terms of up to ten years. The Board of Directors establishes the exercise
 period, vesting terms and other conditions for each grant at the grant date.
 The maximum number of shares that may be issued under the plan is 9,000,000.
 Options may be granted with exercise prices at the then current market price.Details of
 outstanding stock options are as follows:Number of
 options

Weighted
 average
 exercise
 price
 per shareOptions
 outstanding December 31, 2007


5,538,541

$
6.26Expired/cancelled


(34,000
)

6.34Options outstanding
 September 30, 2008


5,504,541

$
6.26During the
 nine-month period ended September 30, 2008, no options were granted.As at
 September 30, 2008, 5,504,541 stock options could potentially dilute basic
 earnings per share in the future. They were not included in the computation
 of diluted earnings per share because to do so would have been anti-dilutive
 for the periods ended September 30, 2008.12

OPTIMAL GROUP INC.Notes to Consolidated
 Financial Statements, Continued(Unaudited)Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars, except share and per share amounts)6.
Stock
 options and warrants (continued):(a)
Optimal Group Inc.
 (continued):The
 following table summarizes information about the options outstanding and
 exercisable at September 30, 2008:Options
 outstanding

Options
 exercisableExercise
 price/share

Weighted
 average
 remaining
 contractual
 life
 (years)

Number

Weighted
 average
 exercise
 price per
 share

Number

Weighted
 average
 exercise
 price per
 share$7.10


5.58


3,840,041

$
7.10


3,840,041

$
7.10$9.36


3.22


37,500


9.36


12,500


9.36$4.21


6.13


1,627,000


4.21





5,504,541

$
6.26


3,852,541

$
7.11At
 September 30, 2008, there are 820,000 warrants outstanding, exercisable at
 $5.56 per share. These warrants expire in November 2014 and 50% are
 exercisable in November 2008 and the balance is exercisable in November 2009.
 All of these warrants could potentially dilute basic earnings per share in
 the future. The warrants were not included in the computation of diluted
 earnings per share because to do so would have been anti-dilutive for the
 period ended September 30, 2008.(b)
Terra
 Payments Inc.:Details
 of the stock options outstanding under the Terra Payments Inc. plan as at
 September 30, 2008 are as follows:U.S.
 dollar exercise price

Canadian
 dollar exercise priceNumber

Exercise
 price
 per share

Number

Weighted
 average
 exercise price
 per shareBalance, December 31, 2007


134,113

$
7.43


140,709

$
8.26Expired/cancelled








(77,144
)

6.31Balance, September 30,
 2008


134,113

$
7.43


63,565

$
10.63All of these options were
 fully vested.These options expire on
 various dates up to April 2009.13

OPTIMAL GROUP INC.Notes to Consolidated
 Financial Statements, Continued(Unaudited)Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars, except share and per share amounts)6.
Stock
 options and warrants (continued):(b)
Terra Payments Inc.
 (continued):The
 134,113 options outstanding with a U.S. dollar exercise price of $7.43 have a
 remaining contractual life of 0.50 year as at September 30, 2008.As
 at December 31, 2007, there were 21,978 warrants outstanding, which expired
 in March 2008.There
 are 197,678 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
 periods ended September 30, 2008.7.
Contingencies:(a)
As
 previously announced, immediately following the enactment of the Unlawful
 Internet Gambling Enforcement Act of 2006 (the Act) on October 13, 2006,
 the Companys then majority-owned subsidiary, OPIL, ceased to process
 settlement transactions originating from United States consumers. This
 represented a substantial portion of its revenues derived from processing
 transactions from online gambling. The Company is exposed to adverse
 consequences as a result of possible enforcement proceedings, governmental
 investigations or lawsuits initiated against it in jurisdictions where online
 gambling is or becomes restricted or prohibited.Following
 announcements by the U.S. Attorneys Office in the Southern District of New
 York relating to its investigation of the U.S. Internet gambling industry,
 the Company announced on May 8, 2007 that it has initiated discussions with
 the U.S. Attorneys Office in the Southern District of New York and is in the
 process of responding to a voluntary request for information issued by the
 U.S. Attorneys Office. In connection with such ongoing investigation, the
 Company announced on May 11, 2007 that it had received a copy of warrants of
 seizure issued by the U.S. Attorneys Office against funds of certain payment
 processors that were on deposit with two U.S. banks. These funds included
 $19,183 on deposit to the credit of Company affiliates. The total amount
 seized of $19,183 is presented as restricted cash on the consolidated balance
 sheets. No provision has been recorded by the Company for this matter because
 the outcome of these discussions and the amount of loss, if any, are not
 currently determinable.While
 best estimates have been used for reporting financial statement items subject
 to measurement uncertainty, management considers that it is possible that
 changes in future conditions in the near term could require a material change
 in the recognized amounts of certain assets and liabilities. Near term is
 considered to be within one year from the date of the financial statements.(b)
Optimal
 Payments Inc. has received a request for information from the U.S. Attorneys
 office in the Eastern District of New York pertaining to its former
 involvement in processing transactions for Internet pharmacies. Optimal
 Payments Inc. is currently in discussions with that Office relating to those
 processing activities. No provision has been recorded by Optimal Payments
 Inc. for this matter because the outcome of these discussions and the amount
 of loss, if any, are not determinable.14

OPTIMAL GROUP INC.Notes to Consolidated
 Financial Statements, Continued(Unaudited)Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars, except share and per share amounts)7.
Contingencies
 (continued):(c)
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.(d)
In
 the sale or other disposition of assets out of the ordinary course of
 business, in addition to possible indemnification relating to failure to
 perform covenants and breach of representations and warranties, the Company
 might agree to indemnify the buyer against claims from its past conduct of
 its business. Typically, the term and amount of such indemnification will be
 limited by agreement. No provision has been made in these financial
 statements with respect to this item as the Company does not expect to make
 any payments for these items and the standby liability is nominal.8.
Stock-based
 compensation:Stock-based compensation
 expenses in the consolidated statements of operations were comprised of:Three
 months ended
 September 30,

Nine
 months ended
 September 30,2008

2007

2008

2007Expense related to options
granted in 2004 and amended in 2008

$


$


$
1,356

$
(Income) expense related to
options granted in 2006


(59
)

30


14


90Expense related to options
granted in 2007


518





1,540


Expense related to OPIL
restricted share unit plan











5,967$
459

$
30

$
2,910

$
6,057In
 June 2008, the shareholders approved a modification to the expiry date of
 3,840,041 options exercisable at $7.10 per share from April 29, 2009 to April
 29, 2014. Since these options were vested at the date of modification, the
 incremental value of $1,356 of the fair value of the modified option over the
 value of the old option immediately before its terms were modified was
 expensed in the second quarter of 2008.15

OPTIMAL GROUP INC.Notes to Consolidated
 Financial Statements, Continued(Unaudited)Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars, except share and per share amounts)9.
Income
 taxes:The
 income tax provision differs from the amount computed by applying the
 combined Canadian federal and Québec provincial tax rates to earnings before
 income taxes. The reasons for the difference and the related tax effects are
 as follows:Three
 months ended
 September 30,

Nine
 months ended
 September 30,2008

2007

2008

2007Earnings (loss) before income
taxes and non-controlling interest

$
3,015

$
(20
)
$
(42,972
)
$
(3,469
)Combined Canadian federal and
provincial income taxes at 31% (2007 -
 32%)

$
932

$
(6
)
$
(13,278
)
$
(1,111
)Foreign
exchange(1)


384


(1,215
)

159


(2,505
)Change in valuation
allowance


(207
)

1,437


184


2,976Difference in tax rates in
foreign jurisdictions


(476
)

(253
)

544


(563
)Stock-based compensation not
deductible


141


10


899


1,940Impairment loss








8,991


Amortization of other
asset








5,739


236Write-off of previously
recognized future income tax assets


796





8,378


Permanent differences and
other


(262
)

420


145


307Income tax provision

$
1,308

$
393

$
11,761

$
1,280(1)
For
 purposes of calculating the income tax provision of the Company, a tax
 liability (recovery) is recognized in foreign exchange gains or losses which
 arise on the conversion into Canadian dollars of the net monetary assets
 denominated in U.S. dollars; such conversion is required for tax purposes. As
 these financial statements are presented in U.S. dollars, these foreign
 exchange gains or losses do not impact (loss) earnings before income taxes,
 even though the income tax provision would include a tax effect for these
 items. Future fluctuations in the foreign exchange rate between the Canadian
 and U.S. dollar will change the amount of the foreign exchange gains or
 losses and, thus, the provision for income or recovery taxes thereon.16

OPTIMAL GROUP INC.Notes to Consolidated
 Financial Statements, Continued(Unaudited)Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars, except share and per share amounts)9.
Income
 taxes (continued):The provision for income
 taxes is composed of the following:Three
 months ended
 September 30,

Nine
 months ended
 September 30,2008

2007

2008

2007Current income taxes

$
762

$
(772
)
$
578

$
1,112Future income taxes


546


1,165


11,183


168$
1,308

$
393

$
11,761

$
1,280As
 a result of the goodwill impairment loss relating to the payment processing
 segment referred to in note 4, the Company amortized $5,739 of the other
 (tax) asset as a future tax expense representing the remaining portion of
 this asset. In addition, the Company wrote off $8,378 of previously
 recognized future tax assets that no longer met the criteria for recognition.10.
Segmented information:As
 of November 7, 2007, as a result of the acquisition of the assets of WowWee
 as discussed in note 3 (a) (ii) (b), the Company operates in two segments:
 the consumer robotic, toy and entertainment products segment and the payment
 processing segment.Comparative
 figures have been reclassified to conform with this new presentation.17

OPTIMAL GROUP INC.Notes to Consolidated Financial Statements,
Continued
(Unaudited)

Periods ended
September 30, 2008 and 2007
(expressed in thousands of U.S. dollars, except share and per share amounts)

10.
Segmented information (continued):(a)
Information
 on the operating segments is as follows:Consumer
 robotic, toy and
 entertainment
 products

Payment
 processing

Unallocated

ConsolidatedThree-month period ended
September 30, 2008:Revenues

$
52,135

$
27,427

$


$
79,562Transaction processing and cost
of sales


38,307


15,755





54,062Selling, general and
administrative


8,882


4,935


358


14,175Research and
development


861


607





1,468Operating leases


268


293





5613,817


5,837


(358
)

9,296Stock-based
compensation


49


(58
)

468


459Amortization


2,845


3,199


38


6,082923


2,696


(864
)

2,755Investment income


2


134


124


260Earnings before income
taxes


925


2,830


(740
)

3,015Income tax (recovery)
provision


(209
)

1,343


174


1,308Net earnings

$
1,134

$
1,487

$
(914
)
$
1,70718

OPTIMAL GROUP INC.Notes to Consolidated Financial Statements,
Continued
(Unaudited)

Periods ended
September 30, 2008 and 2007
(expressed in thousands of U.S. dollars, except share and per share amounts)

10.
Segmented information (continued):(a)
Information
 on the operating segments is as follows (continued):Consumer
 robotic, toy and
 entertainment
 products

Payment
 processing

Unallocated

ConsolidatedNine-month period ended
September 30, 2008:Revenues

$
72,521

$
79,870

$


$
152,391Transaction processing and cost
of sales


52,767


47,358





100,125Selling, general and
administrative


20,148


19,924


536


40,608Research and
development


2,136


2,082





4,218Operating leases


742


779





1,521(3,272
)

9,727


(536
)

5,919Stock-based
compensation


146


15


2,749


2,910Impairment loss





29,097





29,097Amortization


8,241


9,652


88


17,981(11,659
)

(29,037
)

(3,373
)

(44,069
)Investment income


6


521


570


1,097Loss before income
taxes


(11,653
)

(28,516
)

(2,803
)

(42,972
)Income tax (recovery)
provision


(979
)

12,566


174


11,761Net loss

$
(10,674
)
$
(41,082
)
$
(2,977
)
$
(54,733
)Revenues from
the consumer robotic, toy and entertainment products segment are subject to
seasonal variability with a significant portion of revenues generated in the
third and fourth quarters of each calendar year.

In the periods
ended September 30, 2007, the Company only operated in the payment processing
segment.

19

OPTIMAL GROUP INC.Notes to Consolidated Financial Statements,
Continued
(Unaudited)

Periods ended
September 30, 2008 and 2007
(expressed in thousands of U.S. dollars, except share and per share amounts)

10.
Segmented information (continued):(a)
Information
 on the operating segments is as follows (continued):Consumer
 robotic, toy and
 entertainment
 products

Payment
 processing

Eliminations/
 unallocated

ConsolidatedSeptember 30,
2008:Total assets

$
156,930

$
87,406

$
24,309

$
268,645Total additions
to goodwill for the nine months
 ended September 30, 2008


5,106








5,106Total additions
to property and equipment and other
 intangibles for the nine months ended September 30, 2008-  through business acquisition


4,628








4,628-  other


3,328


232


613


4,173December 31,
2007:Total assets

$
104,560

$
140,050

$
45,671

$
290,281Total additions
to goodwill for the year ended
 December 31, 2007


37,113


2,406





39,519Total additions
to property and equipment and other
 intangibles for the year ended December 31, 2007-  through business acquisition


43,945








43,945-  other


1,597


3,112


35


4,74420

OPTIMAL GROUP INC.Notes to
Consolidated Financial Statements, Continued
(Unaudited)

Periods ended September 30,
2008 and 2007 
(expressed in thousands of U.S. dollars, except share and per share amounts)

10.
Segmented
 information (continued):(b)
Geographic information is
 as follows:Revenues

Property
 and equipment,
 goodwill and intangiblesThree
 months ended
 September 30,

Nine
 months ended
 September 30,

September
 30,
 2008

December
 31,
 20072008

2007

2008

2007United States

$
51,724

$
21,702

$
101,192

$
64,020

$
41,869

$
58,429Central America


2,601


2,624


8,335


10,709





Canada


3,274


1,592


7,016


5,177


2,532


19,695Europe


15,395


1,206


25,036


4,504


7,121


1,649Hong Kong


2





2





73,452


77,965Other


6,566


498


10,810


1,320





$
79,562

$
27,622

$
152,391

$
85,730

$
124,974

$
157,738Revenues are attributed to
countries based on the location of the customers. The Other caption includes
countries in Africa, Australia and Asia (excluding Hong Kong).

11.
Supplemental
 disclosure of cash flow and other information:(a)
Net change in operating
 assets and liabilities:Three
 months ended
 September 30,

Nine
 months ended
 September 30,2008

2007

2008

2007Cash and short-term investments
held as reserves

$
243

$
2,810

$
1,259

$
11,130Restricted cash











(19,182
)Settlement assets


(966
)

1,015


2,347


6,068Accounts receivable


(21,250
)

3,703


(21,014
)

4,160Inventories


1,853





(10,998
)

Income taxes receivable and
refundable investment tax credits
 receivable


94


47


3,687


(385
)Prepaid expenses and
deposits


(406
)

(670
)

(369
)

652Accounts payable and accrued
liabilities


6,897


1,339


10,081


(4,382
)Income taxes payable


(71
)

(1,482
)

593


(962
)Customer reserves and security
deposits


647


(4,013
)

(1,444
)

(39,934
)Net change in operating assets
and liabilities

$
(12,959
)
$
2,749

$
(15,858
)
$
(42,835
)21

OPTIMAL GROUP INC.Notes to
Consolidated Financial Statements, Continued
(Unaudited)

Periods ended September 30,
2008 and 2007 
(expressed in thousands of U.S. dollars, except share and per share amounts)

11.
Supplemental
 disclosure of cash flow and other information (continued):(b)
Cash paid for interest and
 income taxes:Three months ended
 September 30,

Nine months ended
 September 30,2008

2007

2008

2007Interest

$
84

$
34

$
184

$
75Income taxes





1,547


150


2,226(c)
Cash and cash equivalents:September
 30,
 2008

December
 31,
 2007Cash and cash equivalents
consist of:Cash balances with
banks

$
44,636

$
47,193Short-term investments, bearing
interest at 3.20%


470


$
45,106

$
47,193(d)
Non-cash transactions:September
 30,
 2008

December
 31,
 2007Addition of property, equipment
and intangibles included in accounts
 payable and accrued liabilities

$
370

$
Shares and warrants issued in
connection with WowWee





12,696Adjustments to WowWee purchase
price equation to goodwill


432


(e)
Foreign exchange:Included in Selling,
 general and administrative expenses in the consolidated statement of
 operations and comprehensive loss is a foreign exchange gain relating to
 financial assets and liabilities of $1,066 for the three-month period ended
 September 30, 2008 (September 30, 2007 - loss of $601) and $649 for the
 nine-month period ended September 30, 2008 (September 30, 2007 - loss of
 $911).22

OPTIMAL GROUP INC.Notes to
Consolidated Financial Statements, Continued
(Unaudited)

Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars, except share and per share amounts)12.
Capital
 disclosures:The
 Companys objective is to maintain a strong capital base to maintain
 investor, creditor and market confidence and to sustain future development of
 the business.Management
 defines capital as the Companys shareholders equity, excluding accumulated other
 comprehensive income. The Company does not have any long-term debt.In
 order to maximize flexibility in financing the Companys ongoing growth and
 be able to take advantage of additional new capital investment and
 acquisition opportunities, the Company does not currently pay a dividend. To
 maintain or adjust the capital structure, the Company may also repurchase
 existing shares, issue new shares or long-term debt, or sell assets to adjust
 to changes in economic conditions and the risk characteristic of the
 underlying assets. (Refer to note 5 as to the Companys stock buyback
 program.)There
 were no changes to the Companys approach to capital management during the
 period. Neither the Company nor any of its subsidiaries is subject to externally
 imposed capital requirements.13.
Financial
 risk management:This
 note provides disclosures relating to the nature and extent of the Companys
 exposure arising from financial instruments, including interest rate risk,
 foreign currency risk, credit risk and liquidity risk and how the Company
 manages these risks.(a)
Interest
 rate risk:Interest
 rate risk is the risk that the fair value or future cash flows of a financial
 instrument will fluctuate because of changes in market interest rates.Short-term
 investments (including those held in reserve) consist of short-term notes
 invested at fixed interest rates. The risk that the Company will realize a
 loss as a result of a decline in the fair value of these investments is limited
 because although available for sale, these investments are short-term and are
 generally held to maturity.The
 Company is exposed primarily to interest rate fluctuations as a result of
 cash (including cash held in reserve) and bank indebtedness which bears
 interest at variable interest rates. A 0.5% increase in the interest rate
 would have decreased the net loss and comprehensive loss by $171 in the
 nine-month period ended September 30, 2008. An equal but opposite effect
 would result assuming a 0.5% decrease in interest rates.23

OPTIMAL GROUP INC.Notes to
Consolidated Financial Statements, Continued
(Unaudited)

Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars, except share and per share amounts)13.
Financial
 risk management (continued):(b)
Foreign currency risk:A
 significant portion of the Companys cash flows and financial assets and
 liabilities are denominated in U.S. dollars, which is the Companys
 functional and reporting currency. Foreign currency risk is limited to the
 portion of the Companys business transactions denominated in currencies
 other than U.S. dollars, primarily for head office expenses in Canada and
 European operations. For the Companys foreign currency transactions,
 fluctuations in the respective exchange rates relative to the U.S. dollar
 will create volatility in the Companys cash flows and the reported amounts
 for revenues and selling, general and administrative expenses in its
 consolidated statement of operations on a period-to-period basis. Additional
 earnings variability arises from the translation of monetary assets and
 liabilities denominated in currencies other than the U.S. dollar at the rates
 of exchange at each balance sheet date, the impact of which is reported as a
 foreign exchange gain and loss which is included as part of selling, general
 and administrative expenses in the statement of operations and comprehensive
 loss.The
 Companys objective in managing its foreign currency risk is to minimize its
 net exposures to foreign currency cash flows, by transacting with third
 parties in U.S. dollars to the maximum extent possible and practical and
 holding cash and cash equivalents in U.S. dollars. The Company monitors and
 forecasts the values of net foreign currency cash flow and balance sheet
 exposures and with the aid of external consultants manages its cash flow to
 hold on hand sufficient levels of foreign currencies to meet its obligations.The
 following table provides an indication of the Companys significant foreign
 currency exposures expressed in U.S. dollars:September
 30, 2008CAD

GBP

EUROCash and cash equivalents


2,373


75


1,169Bank indebtedness








(7,747
)Accounts payable and
 accrued liabilities


(7,082
)

(692
)

(6,873
)Customer reserves and
 security deposits


(135
)

(327
)

(191
)Balance sheet exposure


(4,844
)

(944
)

(13,642
)As
at September 30, 2008, all the short-term investments held in reserve were
denominated in U.S. dollars.In
addition to the foreign currency exposures noted above, the Company also incurs
a portion of its operating costs in its consumer robotic, toy and entertainment
products segment, in Hong Kong dollars. However, the Company does not view its
exposure to the Hong Kong dollar as a significant foreign exchange risk since
the Hong Kong dollar is pegged to the U.S. dollar and historically has not
fluctuated significantly.24

OPTIMAL GROUP
INC.Notes to Consolidated Financial Statements, Continued
(Unaudited)

Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars, except share and per share amounts)13.
Financial
 risk management (continued):(b)
Foreign currency risk
 (continued):The following are the
 exchange rates applied during the nine-month periods ended September 30,
 2008:Average
 rate
 during Q3

Rate
 as at
 September 30, 2008CAD to USD


0.9822


0.9397GBP to USD


1.9470


1.7779EURO to USD


1.5219


1.4076Based
on the Companys foreign currency exposures noted above, varying the above
exchange rates to reflect a 5% weakening of the U.S. dollar would affect
earnings and comprehensive earnings as follows:CAD

GBP

EURONine
 months ended
 September 30, 2008

Nine
 months ended
 September 30, 2008

Nine
 months ended
 September 30, 2008Increase in net loss

$
242

$
47

$
682An
 assumed 5% strengthening of the U.S. dollar would have an equal but opposite
 effect on the above currencies to the amounts shown above.(c)
Credit
 risk:Credit
 risk is the risk of an unexpected loss if a customer or counterparty to a
 financial instrument fails to meet its contractual obligations. Financial
 instruments that potentially subject the Company to concentrations of credit
 risk consist primarily of cash and cash equivalents, short-term investments
 and accounts receivable:(i)
Cash
 and cash equivalents and short-term investments:The
 credit risk relating to cash and cash equivalents is limited because the
 counterparties are highly-rated American and European financial institutions.
 The credit risk related to short-term investments is limited because they
 consist of discounted notes issued by high-credit, quality corporations. The
 Company has investment policies to provide guidance on investing available
 cash resources. In general, these policies stress the preservation of capital
 with investments allowed in notes issued by corporations with credit rankings
 of not less than R-1mid.25

OPTIMAL GROUP INC.Notes to
Consolidated Financial Statements, Continued
(Unaudited)

Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars, except share and per share amounts)13.
Financial
 risk management (continued):(c)
Credit risk (continued):(ii)
Accounts receivable:Consumer robotic, toy and
 entertainment segment:Credit
 risk for this segment arises primarily from the segments trade receivables.
 Allowances are provided for potential losses. The amounts disclosed in the
 balance sheet are net of these allowances for bad debts. Accounts receivable
 are assessed for impairment on a case-by-case basis when they are past due or
 when objective evidence is received that a customer will default. The Company
 takes into consideration the customers payment history, its creditworthiness
 and the current economic environment in which the customer operates to assess
 impairments. All bad debts are charged to selling, general and administrative
 expenses on the statement of operations and comprehensive loss.The
 credit risk for trade receivables is concentrated as the majority of sales
 are to a relatively small group of wholesale distributors and mass market
 retailers. However, the majority of these wholesale distributors and mass
 market retailers are large companies which have been customers of the
 acquired business for a number of years. Customers do not provide collateral
 in exchange for credit.Payment
 processing segment:Disputes
 between credit card holders and merchants may arise as a result of, among
 other things, consumer dissatisfaction with merchandise quality or services
 provided by merchants. Such disputes may not be resolved in the merchants
 favour which means the transaction amount is refunded to the consumer and in
 certain cases charged to the merchant. If the merchant has insufficient
 funds, the Company bears the credit risk for the full amount of the
 transaction. Management evaluates the risk of such transactions and estimates
 the loss for disputed transactions based primarily on historical experience
 and other relevant factors.26

OPTIMAL GROUP INC.Notes to
Consolidated Financial Statements, Continued
(Unaudited)

Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars, except share and per share amounts)13.
Financial
 risk management (continued):(c)
Credit risk (continued):(ii)
Accounts receivable
 (continued):Payment processing segment
 (continued):The
 Company retains a portion of amounts owed to certain merchants (based on
 processing dollar volume) as reserves to help offset its exposure to
 chargebacks and other losses for merchant transactions that have been
 previously processed and on which revenues have been recorded. Management
 analyzes the adequacy of its reserve for merchant losses in each reporting
 period. The reserve for merchant losses is comprised of specifically
 identifiable reserves for merchant transactions for which losses can be
 estimated and an estimate of loss in the remaining portfolio based on
 experience.The
 net charge for the provision for merchant losses is included in selling,
 general and administrative expenses in the statement of operations and
 comprehensive loss. As at September 30, 2008, the reserve for losses on
 merchant accounts is included in Accounts payable and accrued liabilities
 on the balance sheet.The
 payment processing segments credit risk is also decreased because its
 customers consist of a diverse portfolio of small- and medium-sized merchants
 and because of the strong proprietary risk management expertise it has
 developed to help reduce the inherently higher risk associated with card-not-present
 transactions.The
 maximum credit exposure to the Company is the carrying amount of financial
 assets plus credit risk on chargebacks, as previously explained, which are
 provided for separately.Included
 in accounts and other receivables are trade receivables in the consumer
 robotic, toy and entertainment segment of $34,573. The aging of the trade
 receivables at the reporting date was as follows:September
 30,
 2008Not past due

$
28,649Past due 0-30 days


4,526Past due 31-60 days


196Past due 61-120 days


1,202Trade receivables

$
34,57327

OPTIMAL GROUP INC.Notes to
Consolidated Financial Statements, Continued
(Unaudited)

Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars, except share and per share amounts)13.
Financial
 risk management (continued):(c)
Credit risk (continued):(ii)
Accounts receivable
 (continued):A breakdown of trade
 receivables by type of customer is presented below:September
 30,
 2008Distributors

$
12,582Mass-market retailers


21,991$
34,573(d)
Liquidity risk:Liquidity
 risk is the risk that the Company will not be able to meet its financial
 obligations as they fall due. The Company manages liquidity risk through the
 management of its capital structure and by continuously monitoring actual and
 projected cash flows. In recent years, the Company has financed its
 acquisitions through mainly internally-generated funds.The
 Company has a revolving credit facility in its consumer robotic, toy and
 entertainment products segment, for a maximum of $14,924, subject to annual
 renewal.As
 at September 30, 2008, the Company has $45,106 of cash and cash equivalents
 and has $12,620 outstanding balance on its revolving line of credit.The
 following are the contractual maturities of financial liabilities at
 September 30, 2008:Carrying
 amount

0
 to 12 monthsBank indebtedness

$
12,620

$
12,620Accounts payable and
 accrued liabilities


66,475


66,475Customer reserves and
 security deposits


20,193


20,193Total

$
99,288

$
99,28828

OPTIMAL GROUP INC.Notes to Consolidated
 Financial Statements, Continued(Unaudited)Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars, except share and per share amounts)14.
Financial
 instruments:(a)
Fair values:The
 Company has determined that the fair value of its short-term financial assets
 and liabilities approximates their respective fair values as at the balance
 sheet dates because of the short-term maturity of those instruments.(b)
Financial income and
 expense:The
 following components of income and expense relating to financial instruments
 are included in the statement of operations and comprehensive loss:(i)
Interest income and
 expense:For
 the three months ended

For
 the nine months endedSeptember
 30,
 2008

September
 30,
 2007

September
 30,
 2008

September
 30,
 2007Interest income on
available-for-sale financial assets

$
218

$
1,381

$
946

$
4,793Other


42


141


151


206Total

$
260

$
1,522

$
1,097

$
4,999Interest
 income on available-for-sale financial assets consists of interest earned
 from cash and cash equivalents and short-term investments invested in
 short-term deposits.(ii)
Impairment
 losses recognized on trade receivables in consumer robotic, toy and
 entertainment products segment:The
 Company recorded a bad debt expense of nil for the three-month period ended
 September 30, 2008 (September 30, 2007 - nil) and $15 for the nine-month
 period ended September 30, 2008 (September 30, 2007 - $382) in Selling,
 general and administrative expenses in the statement of operations and
 comprehensive loss.29

OPTIMAL GROUP INC.Notes to Consolidated
 Financial Statements, Continued(Unaudited)Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars, except share and per share amounts)15.
Canadian/U.S.
 reporting differences:The consolidated financial
 statements of the Company are prepared in accordance with Canadian GAAP,
 which conform, in all material respects, with U.S. GAAP, except as described
 below:(a)
Consolidated balance
 sheets:Differences between
 Canadian and U.S. GAAP in the presentation of share capital, additional
 paid-in capital and deficit are as follows:(i)
Share capital:September
 30,
 2008

December
 31,
 2007Share capital in
 accordance with Canadian GAAP

$
210,741

$
211,998Stock-based compensation
 costs on options exercised: (1)Cumulative
effect of prior years


39,868


39,868Change in reporting
 currency (2)


2,588


2,588Share capital in
 accordance with U.S. GAAP

$
253,197

$
254,454(ii)
Additional paid-in
 capital:September
 30,
 2008

December
 31,
 2007Additional paid-in capital
 in accordance with Canadian GAAP

$
33,257

$
29,561Stock-based compensation
 costs: (1)Cumulative
effect of prior years


68,757


68,757Stock-based compensation
 costs on options exercised: (1)Cumulative
effect of prior years


(39,868
)

(39,868
)Change in reporting
 currency (2)


968


968Additional paid-in capital
 in accordance with U.S. GAAP

$
63,114

$
59,41830

OPTIMAL GROUP INC.Notes to
Consolidated Financial Statements, Continued 
(Unaudited)

Periods ended September
 30, 2008 and 2007 
 (expressed in thousands of U.S. dollars, except share and per share amounts)15.
Canadian/U.S.
 reporting differences (continued):(a)
Consolidated balance
 sheets (continued):(iii)
Deficit:September
 30,
 2008

December
 31,
 2007Deficit in accordance with
Canadian GAAP

$
(95,799
)
$
(41,066
)Stock-based compensation costs:
(1)Cumulative effect of prior
years


(68,757
)

(68,757
)Stock-based compensation to
non-employees (1)


(834
)

(834
)Change in reporting
currency(2)


(1,189
)

(1,189
)Deficit in accordance with U.S.
GAAP

$
(166,579
)
$
(111,846
)(1)
Stock-based compensation:For U.S. GAAP purposes,
 the Company adopted Statement of Financial Accounting Standards (SFAS) No.
 123R, Share-based Payments, on
 January 1, 2006, which requires the expensing of all options based on the
 grant date fair value, over the period during which the employee is required
 to provide service. The Company adopted SFAS No. 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 No. 123R.A description of the
 Companys stock option plans is presented in note 6.The aggregate intrinsic
 value for outstanding and exercisable options at September 30, 2008
 represents the pre-tax intrinsic value based on the Companys closing stock
 price at September 30, 2008, which would have been received by option holders
 had they exercised their securities at that date. The aggregate intrinsic
 value of all outstanding and exercisable options was nil. No options were
 exercised during the period ended September 30, 2008.(2)
Change in 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.31

OPTIMAL GROUP INC. Notes to Consolidated Financial
Statements, Continued 
(Unaudited)

Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars, except share and per share amounts)15.
Canadian/U.S.
 reporting differences (continued):(b)
Accumulated other
 comprehensive income (loss):Accumulated other
 comprehensive income (loss) under U.S. GAAP, which resulted solely from the
 translation of the financial statements up to June 30, 2000, the date on
 which the Company adopted the United States dollar as its measurement
 currency, in accordance with the current rate method, is $(3,018) as at
 September 30, 2008 and December 31, 2007.(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)on
 January 1, 2007. 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. For U.S.
 GAAP tax purposes, unrecognized tax benefits would be classified as
 non-current other liabilities. The Company recognizes interest and penalties
 related to unrecognized tax benefits in income tax expense. At September 30,
 2008 and December 31, 2007, the total liability for unrecognized tax benefits
 was approximately $14,500, of which $8,200 would impact the annual effective
 rate if realized.The 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 the United States
 and Hong Kong. In general, the Company is subject to examination by taxing
 authorities for years after 2000. The Canadian tax authorities have commenced
 examinations of tax returns for certain Canadian subsidiaries for the
 taxation years 2003 to 2006.(d)
SFAS No. 157 - Fair value
 measurements:On January 1, 2008, the
 Company adopted 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.32

OPTIMAL GROUP INC. Notes to Consolidated Financial
Statements, Continued 
(Unaudited)

Periods ended September
 30, 2008 and 2007(expressed in thousands of
 U.S. dollars, except share and per share amounts)15.
Canadian/U.S.
 reporting differences (continued):(d)
SFAS No. 157 - Fair value
 measurements (continued):Assets measured at fair
 value on a recurring basis:Fair
 value measurements at reporting date usingSeptember
 30,
 2008

Quoted
 prices in
 active markets
 for identical
 assets (level 1)

Significant
 other
 observable
 inputs (level 2)

Significant
 unobservable
 inputs
 (level 3)Available-for-sale
securities

$
3,011

$
3,011

$


$
The Company has elected to
 defer for one year the application of Statement No. 157 for non-financial
 assets and non-financial liabilities (except for items that are recognized or
 disclosed at fair value in the financial statements on a recurring basis).(e)
Recent accounting
 pronouncements:SFAS No. 141R - Business
 combinations:In December 2007, the FASB
 issued a revised standard on accounting for business combinations. The major
 changes to accounting for business combinations include the following: all
 business acquisitions would be measured at fair value; the existing
 definition of a business would be expanded; pre-acquisition contingencies
 would be measured at fair value; most acquisition-related costs would be
 recognized as expenses as incurred (they would no longer be part of the
 purchase consideration); obligations for contingent consideration would be
 measured and recognized at fair value at the acquisition date (measurement
 would no longer need to wait until the contingency is settled);
 non-controlling interests would be measured at fair value at the date of
 acquisition (i.e., 100% of the assets and liabilities would be measured at
 fair value even when an acquisition is for less than 100%); goodwill, if any,
 arising on a business combination reflects the excess of the fair value of
 the acquiree, as a whole, over the net amount of the recognized identifiable
 assets acquired and liabilities assumed, and would be allocated to the
 acquirer and the non-controlling interest. The statement is effective for
 periods beginning on or after January 1, 2009. The Company will apply the
 standard for acquisitions occurring after this date.33

OPTIMAL GROUP INC.Notes to
Consolidated Financial Statements, Continued 
(Unaudited)

Periods ended September 30,
2008 and 2007 
(expressed in thousands of U.S. dollars, except share and per share amounts)

15.
Canadian/U.S.
 reporting differences (continued):(e)
Recent
 accounting pronouncements (continued):SFAS
 No. 160 - Non-controlling interest in consolidated financial statements:In
 December 2007, the FASB issued a revised standard on accounting for
 non-controlling interests and transactions with non-controlling interest
 holders in consolidated financial statements. This statement specifies that
 non-controlling interests are to be treated as a separate component of
 equity, not as a liability or other item outside of equity. Because
 non-controlling interests are an element of equity, increases and decreases
 in the parents ownership interest that leave control intact are accounted
 for as capital transactions rather than as step acquisitions or generating
 dilution gains or losses. The carrying amount of the non-controlling
 interests is adjusted to reflect the changes in ownership interests, and any
 difference between the amount by which the non-controlling interests are
 adjusted and the fair value of the consideration paid or received is
 recognized directly in equity attributable to the controlling interests.This
 standard requires net income and comprehensive income to be displayed for
 both the controlling and the non-controlling interests. Additional required disclosures
 and reconciliations include a separate schedule that shows the effects of any
 transactions with the non-controlling interests on the equity attributable to
 the controlling interests.The
 statement is effective for periods beginning on or after December 15, 2008.
 SFAS No. 160 will be applied prospectively to all non-controlling interests,
 including any that arose before the effective date. The Company does not
 expect the adoption of SFAS No. 160 to materially affect its consolidated
 financial statements.SFAS
 No. 161 - Disclosures about derivative instruments and hedging activities, an
 amendment to FASB Statement No. 133:In
 March 2008, the FASB issued the above-noted statement, which requires
 qualitative disclosures about objectives and strategies for using
 derivatives, quantitative disclosures about fair value amounts of gains and
 losses on derivative instruments, and disclosures about credit-risk related
 contingent features on derivative agreements. The statement is effective for
 periods beginning on or after November 15, 2008. The Company does not expect
 the adoption of SFAS No. 161 to materially affect its consolidated financial
 statements.SFAS
 No. 162 - The hierarchy of generally accepted accounting principles and SFAS
 163 - Accounting for financial guarantee insurance contracts:In
 May 2008, the FASB issued the above-noted statements. The Company does not
 expect the adoption of these statements to affect its consolidated financial
 statements.34

OPTIMAL GROUP INC.Notes to
Consolidated Financial Statements, Continued 
(Unaudited)

Periods ended September 30,
2008 and 2007 
(expressed in thousands of U.S. dollars, except share and per share amounts)

16.
Comparative figures:Certain
 of the comparative figures have been reclassified in order to conform with
 the current periods presentation.17.
Subsequent events:(a)
Card-not-present
 Payment Processing Business:On
 October 1, 2008, the Company completed the sale of all the assets of its
 business of processing payments for Card-not-present transactions for $7,000,
 plus the assumption of certain liabilities of Optimal Payments. At the
 closing of the transaction, Optimal Payments also paid to the purchaser $850
 in connection with the assumption by the purchaser of certain liabilities of
 Optimal Payments. The purchase price is subject to post-closing working
 capital adjustments. The carrying amounts of the assets and liabilities in
 this business are less than the purchase price received.(b)
Renewal
 of stock buyback program:On
 November 5, 2008, the Board of Directors approved a stock buyback program
 authorizing the Company to purchase up to 5% of its outstanding Class A
 shares. The Company may purchase the Class A shares on the open market
 through the facilities of the Nasdaq Stock Market over the course of the
 twelve months commencing November 21, 2008 and ending November 20, 2009. All
 shares purchased under the stock buyback program will be cancelled.35

Item 2.
MANAGEMENT
 DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe
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, 2007, and the factors set forth below under Cautionary Statements
Regarding Forward-Looking Statements. We prepare our interim consolidated
financial statements in accordance with generally accepted accounting
principles (GAAP) in Canada, with a reconciliation to U.S. GAAP, as disclosed
in note 15 of the notes to our interim consolidated financial statements.

In this Form 10-Q, except where otherwise indicated,
references to dollars or $ are to United States dollars, references to our
common shares are to our Class A shares, references to our interim
consolidated financial statements are to our interim consolidated financial
statements as at and for the period ended September 30, 2008, which are
included in Item 1. Financial Statements, and all dollar amounts, except
those expressed in millions of dollars, are rounded to the nearest thousand.
Any reference in this Form10-Q 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 and Section 21E of the Securities
Exchange Act of 1934. Words such as expects, intends, anticipates, plans,
believes, seeks, estimates, or variations of such words and similar
expressions are intended to identify such forward-looking statements.
Forward-looking statements include, but are not limited to, statements about
our current expectations with respect to our future growth strategies, results,
opportunities and prospects, competitive position and industry environment.
These forward-looking statements are subject to a number of risks,
uncertainties and other factors that could cause our actual results,
performance, prospects or opportunities, or those of the markets we serve, to
differ materially from those expressed in, or implied by, these forward-looking
statements, including:


existing and future governmental regulations and disputes with
 governmental authorities;
general economic, legal and business conditions in the markets
 we serve;
consumer confidence in the security of financial information
 transmitted via the Internet;
levels of consumer and merchant fraud, disputes between
 consumers and merchants and merchant insolvency;
liability for merchant chargebacks;
our
 ability to safeguard against breaches of privacy and security when processing
 electronic transactions and use of our payments systems for illegal purposes;
the
 imposition of and our compliance with rules and practice procedures
 implemented by credit card and check clearing associations;
our
 ability to protect our intellectual property;36


our
 relationships with our suppliers and the banking associations that we rely
 upon to process our electronic transactions;
disruptions in the function of our electronic payments systems
 and technological defects;
our
 ability to complete, integrate and benefit from acquisitions, divestitures,
 joint ventures and strategic alliances;
our
 ability to retain key personnel;
currency exchange rate fluctuations;
our
 ability to successfully implement our strategies for our recently acquired
 WowWee business;
changing consumer preferences for electronics and play products;
the
 seasonality of retail sales;
concentration among our major retail customers for the products
 of our WowWee business;
economic, social and political conditions in China, where
 WowWees products are manufactured;
the
 price and supply of raw materials used to manufacture WowWees products;
product liability claims and product recalls;
increased competition;
litigation; and
the
 factors described under Item 1A Risk Factors in our Annual Report on Form
 10-K for the year ended December 31, 2007.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

We
operate in two business segments. Through WowWee (our business segment
established by our acquisition in November 2007 and comprised of WowWee Group
Limited, WowWee Canada Inc. and WowWee USA, Inc.), we design, develop, market
and distribute technology-based, consumer robotic, toy and entertainment
products. Through Optimal Payments Corp., we process credit card payments for
small and medium-sized retail point-of-sale merchants.

Prior
to October 1, 2008, the Optimal Payments segment processed both card-present
and card-not-present transactions. On October 1, 2008, we completed the
previously announced sale of substantially all of the assets of our payment
processing segment that were used in the business of processing payments for
card-not-present

37

transactions
 see Recent Developments below. We believe that it is more likely than not that
our remaining interest in this segment will be sold over the course of the next
twelve months.

Our Industry Segments

As
at September 30, 2008, we operate in two business segments: WowWee and Optimal
Payments (see note 10 of the notes to our interim consolidated financial
statements).

WOWWEE

Based
in Hong Kong, with offices in La Jolla and Carlsbad, California and Montreal,
Quebec, WowWee designs, develops, markets and distributes technology-based,
consumer robotic, toy and entertainment products. For 2008, WowWees product
offerings encompass five distinct lines: WowWee Robotics, WowWee Flytech,
WowWee Alive, WowWee Technologies and WowWees recently established Think Wow
Toys division that produces and markets plush toys, novelty items, action
figures and promotional toys, including third-party licensed characters and
properties.

WowWees
products are sold in a range of brick and mortar channels including grocery
stores, pharmacies, toy stores, department stores and high-end consumer
technologies stores. A majority of our retailer customers in the United States
also carry the full line of WowWee products on their Internet sales sites.
WowWees products are available for purchase online at WowWees website
(http://www.wowweestore.com) and are also made through Internet-based
e-tailers such as Amazon.com and Buy.com.

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

Within
the United States and Canada, WowWee sells its products directly to its
retailer customers through its direct sales channel and through independent
sales representatives. For retailers across the rest of the world, WowWee
utilizes a network of distributors located in various jurisdictions. Following
our acquisition of Sablon Distribution (see Recent Developments below), we
intend to expand Sablon Distribution into new jurisdictions and take over from
third-party distributors the direct distribution of WowWees products in those
jurisdictions. WowWee products are also available for sale through WowWees
Internet-based store. In 2007, approximately 55% of its products were sold in
North America, with the balance being sold internationally. WowWee does not
have written agreements with its customers. Instead, sales are generally made
based on purchase orders, primarily against letters of credit. Historically,
the majority of bookings and orders are received during the first two quarters
of the year, with shipments occurring throughout the year as new products
become available. The majority of product shipments occur during the third and
fourth quarters of the year. Revenue is recognized when (i) persuasive evidence
of an arrangement exists; (ii) products are shipped to customers who assume
risk of loss, (iii) collection of the respective receivable is probable and
(iv) sales price is fixed or determinable. In practice, this results in revenue
being recognized when the product is shipped from Hong Kong. Accruals for
customer discounts, rebates, incentives and allowances are recorded when the
related revenues are recognized.

WowWees
engineering and design team develops new technologies using internal
capabilities and seeks to identify emerging or underutilized innovations that
are currently being developed or that are available in the marketplace. In
order to leverage the man-hours invested in product development, older
generations of products

38

frequently
form the foundation for the next generation of products as well as new product
lines. New technologies are then integrated to enhance the overall
functionality of the product. In sourcing technologies, WowWee reviews the
latest technology innovations at trade-shows, conferences, colleges and
universities, on the Internet, and through word-of-mouth. WowWee regularly
reviews technologies or product concepts from third party sources that it
believes could have potential synergies with WowWees current product line or
that could be successfully commercialized based upon WowWees development
process. WowWee also licenses third party technologies for development within
unique consumer applications developed by WowWee.

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


expanding sales and distribution through a broadening of the
 sales channels, particularly outside North America in emerging markets;
expanding product design, development and production
 capabilities to produce an increased number of products at varying price
 points;
broadening development initiatives into products that combine
 computer connectivity, utility and entertainment;
embarking on branded entertainment initiatives, licensing,
 publishing and merchandising; and
evaluating potential acquisition opportunities.OPTIMALPAYMENTS

Optimal
Payments provides technology and services that businesses require to accept
credit card, electronic check and direct debit payments. Optimal Payments
processes credit card payments primarily for retail point-of-sale merchants.

Optimal
Payments generates revenues primarily from fees charged to merchants for
processing services. Fees charged to merchants typically include a discount
rate, based upon a percentage of the dollar amounts processed, and a variety of
fixed transaction fees. Merchant fees charged are based upon the merchants
transaction volume and risk profile. Other fees are derived from a variety of
fixed transaction fees, including fees for monthly minimum charge volume
requirements, statement fees, annual fees and fees for other miscellaneous
items, such as handling chargebacks. Revenue is recognized primarily at the
time the transaction is performed. Where Optimal Payments is the primary party
responsible for providing processing services, revenue is recorded on a gross
basis and amounts paid to the acquiring processing supplier are recorded as
part of our transaction processing expenses. Where Optimal Payments is not the
primary party in providing a merchant with processing services, we record
revenue net of amounts paid to the acquiring processing supplier.

Disputes
between a customer and a merchant periodically arise as a result of, among
other things, consumer dissatisfaction with merchandise quality or services
provided by a merchant. Such disputes may not always be resolved in the
merchants favor. If a dispute is not resolved in the merchants favor, the
transaction is charged back to Optimal Payments and the purchase price is
refunded to the merchants customer. If Optimal Payments is unable to collect
the charged back amount from the merchant, it bears the credit risk for the
full amount of the transaction. As a result, Optimal Payments acquiring
processing suppliers require it to maintain certain amounts with them as
reserves. Amounts withheld from Optimal Payments by its acquiring processing
suppliers as reserves are included as current assets on our balance sheet under
the line item held as reserves. Optimal Payments retains a percentage of
amounts owed to certain merchants based on processing dollar volume, typically
for a six-month period, to absorb potential losses arising as a result of,
among other things, disputes between consumers and merchants or credit card or
check clearing association fines related to chargeback activity. The aggregate
amount withheld is included under the line item Customer reserves and security
deposits on the balance sheets contained in our interim consolidated financial
statements.

Recent Developments

On
October 1, 2008, we completed the previously announced sale of substantially
all of the assets of our payments processing segment that were used exclusively
in the business of processing payments for card-not-present transactions. The
aggregate purchase price paid by the purchaser was $7.0 million, plus the
assumption of certain liabilities of this segment. The purchase price is
subject to a post-closing working capital adjustment. At the closing of the
transaction, we paid to the purchaser $850,000 in connection with the
assumption by the purchaser of certain liabilities of this segment.

39

On
August 29, 2008, we acquired Sablon Distribution S.A., a prominent distributor
of WowWee and third party toy products in the Benelux countries, Austria and
Germany, based in Wauthier-Braine, Belgium. The acquisition strengthens and
broadens WowWees direct distribution structure and positions WowWee closer to
retailers and end users in Sablon Distributions markets. The former owners and
senior management team of Sablon Distribution will remain with the company and
they will continue to operate in the same capacities. The acquisition was
completed at an all-cash price of EUR3.8 million paid upon completion of the
acquisition plus up to an additional EUR1.2 million payable in the first
quarter of 2009 depending upon the consolidated net equity of Sablon
Distribution at the end of 2008 and an earnout based on the consolidated net
revenues of Sablon Distribution in each of 2009 and 2010.

Seasonality

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

Critical Accounting Policies and Estimates

Our
interim consolidated financial statements have been prepared in accordance with
Canadian GAAP, which requires us to make numerous estimates and assumptions.
Financial results as determined by actual events could differ from those
estimates and assumptions, and therefore affect our reported results of
operations and financial position. Changes in 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, 2007 and note 2 of the notes to our interim consolidated financial
statements. Our significant accounting policies are more fully described in
note 4 of the notes to our annual audited consolidated financial statements
included in our Form 10-K Annual Report for the year ended December 31, 2007.
The critical accounting policies described here are those that are most
important to the depiction of our financial condition and results of
operations. The preparation of financial statements also involves significant
management judgment in making estimates about the effect of matters that are
inherently uncertain. While best estimates have been used for reporting
financial statement items subject to measurement uncertainty, management
considers that it is possible, based on existing knowledge, that changes in
future conditions in the near term could affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities. Near
term is considered to be within one year from the date of the financial
statements.

Stock-based Compensation

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

Reserve for Losses on Merchant
Accounts

When
a consumer pays a merchant for goods or services online and the consumer
subsequently disputes the online transaction, the amount of the disputed item
gets charged back to the merchant and the credit card or clearing bank
association may levy a fee against it. In addition, if a merchants chargeback
rate becomes excessive, the associations can also require it to pay fines. If
the credit card or clearing bank association is unable to collect from the
merchant the amount charged back and the amount of such fines, Optimal Payments
would be responsible to remit these amounts to the association. In turn,
Optimal Payments attempts to recover such amounts from the merchant. However,
it may not always be successful in doing so, for reasons which could include
merchant insolvency. We evaluate the risk associated with merchants and
consumers and estimate our loss based primarily on historical experience and
other relevant factors. Our loss reserves comprise specifically identifiable
reserves for merchant transactions for which losses can be estimated and an
estimate of loss in the remaining portfolio based on experience.

40

Allowance for Doubtful Accounts

Our
allowance for doubtful accounts is based on managements assessment of the
business environment, customers financial condition, historical collection
experience, accounts receivable aging, customer disputes and the collectability
of specific customer accounts. If there were a deterioration of a major
customers creditworthiness, or actual defaults were higher than our historical
experience, our estimates of the recoverability of amounts due to us could be
overstated, which could have an adverse impact on our operating results. The
allowance for doubtful accounts is also affected by the time at which
uncollectible accounts receivable balances are actually written off.

Major
customers accounts are monitored on an ongoing basis; more in depth reviews
are performed based on changes in customers financial condition and/or the
level of credit being extended. When a significant event occurs, such as a
bankruptcy filing by a specific customer, and on a quarterly basis, the allowance
is reviewed for adequacy and the balance or accrual rate is adjusted to reflect
current risk prospects.

There
has been a general deterioration of the business environment over recent months
that may extend well into 2009. Under these economic conditions, we may
experience greater exposure to credit losses as well as increases in the
variability of its estimates of allowances for doubtful accounts.

Sales Incentives

Sales are recorded
net of sales returns and discounts, which are estimated at the time of
shipment. We routinely enter into arrangements with our customers to provide
sales incentives, support customer promotions, and provide allowances for
returns. Such programs are based primarily on customer purchases, customer performance
of specified promotional activities, and other specified factors such as sales
to consumers. Accruals for these programs are recorded as sales adjustments
that reduce gross revenue in the period that the related revenue is recognized.

Reserve for Inventory Obsolescence

We
value our inventory at the lower of cost or net realizable value. Based upon a
consideration of quantities on hand, actual and projected sales volume,
anticipated product selling prices and product lines planned to be discontinued,
slow-moving and obsolete inventory is written down to its net realizable value.

Failure
to accurately predict and respond to consumer demand could result in our
under-producing popular items or overproducing less popular items. Furthermore,
significant changes in demand for our products would impact managements
estimates in establishing our inventory provision.

Management
estimates are monitored on a quarterly basis and a further adjustment to reduce
inventory to its net realizable value is recorded, as an increase to cost of
sales, when deemed necessary under the lower of cost or market standard.

Goodwill and Other Intangibles

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

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

41

Due
to the subjective nature of assessing impairment, significant changes in the
assumptions used to develop the estimate could materially affect the conclusion
regarding the future cash flows necessary to support the valuation of
long-lived assets and goodwill. The valuation of goodwill involves a high
degree of judgment and consists of a comparison of the fair value of a
reporting unit with its book value. Impairment is determined by estimating the
fair value of a reporting unit and comparing that value to the reporting units
book value. If the implied fair value is more than the book value of the
reporting unit, an impairment loss is not indicated. If impairment exists, the
fair value of the reporting unit is allocated to all of its assets and liabilities
excluding goodwill, with the excess amount representing the fair value of
goodwill. An impairment loss is measured as the amount by which the book value
of the reporting units goodwill exceeds the estimated fair value of that
goodwill.

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 recoverability 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 consider the scheduled
reversal of tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment.

Our
income tax provision and related income tax assets and liabilities are
calculated based on actual income in the various jurisdictions in which we
operate. Significant judgment is required in interpreting tax regulations in
the Canadian and foreign jurisdictions, and in evaluating worldwide uncertain
tax positions. Actual results could differ materiality from those judgments,
and changes in judgments could materially affect our consolidated financial
statements.

Contingent Liabilities

Our
former gaming payment processing services segment derived a substantial portion
of its revenue prior to October 13, 2006 from processing transactions from
U.S.-based gaming. Therefore, we may be exposed to adverse consequences as a
result of enforcement proceedings, governmental investigations or lawsuits
initiated against us in jurisdictions where gaming is or becomes restricted or
prohibited. Following announcements by the U.S. Attorneys Office in the
Southern District of New York relating to its investigation of the U.S.
Internet gambling industry, we announced on May 8, 2007 that we had initiated
discussions with the U.S. Attorneys Office in the Southern District of New
York and are in the process of responding to a voluntary request for
information issued by the U.S. Attorneys Office. In connection with the
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 on deposit to the credit of our 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
because the outcome of these discussions and the amount of loss, if any, are
not determinable.

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

42

Recent Accounting Pronouncements

(a)
New Accounting PoliciesThe
 following accounting standards have recently been issued by the Canadian
 Institute of Chartered Accountants (CICA), and the Financial Accounting
 Standards Board (FASB) that are relevant to our company. References to FASB
 and Statement of Financial Accounting Standards (SFAS) relate to U.S. GAAP
 and therefore may affect the note to our consolidated financial statements
 that discloses Canadian/U.S. GAAP differences.Capital DisclosuresOn
 January 1, 2008, we adopted Section 1535, Capital
 Disclosures, which established guidelines for disclosure of both
 qualitative and quantitative information that enables users of financial
 statements to evaluate the entitys objectives, policies and processes for
 managing capital. This new standard relates to disclosure only and did not
 impact our financial results.Financial InstrumentsOn
 January 1, 2008, we adopted Section 3862, Financial
 Instruments - Disclosure, which describes the required disclosure
 for the assessment of the significance of financial instruments for an
 entitys financial position and performance and of the nature and extent of
 risk arising from financial instruments to which the entity is exposed and
 how the entity manages those risks. In addition, we adopted Section 3863, Financial Instruments  Presentation,
 which establishes standards for presentation of financial instruments and
 non-financial derivatives. It carries forward the presentation related
 requirements of Section 3861, Financial
 Instruments - Disclosure and Presentation. These new standards
 relate to disclosure only and did not impact our financial results.InventoriesOn
 January 1, 2008, we adopted Section 3031, Inventories,
 which replaces Section 3030 and harmonizes the Canadian standards related to
 inventories with the International Financial Reporting Standards (IFRS).
 This Section provides changes to the measurement and more extensive guidance on
 the determination of cost, including allocation of overhead; narrows the
 permitted cost formulas; requires impairment testing; and expands the
 disclosure requirements to increase transparency. The adoption of this
 standard did not have a significant impact on our interim consolidated
 financial statements.SFAS No. 157 - Fair Value MeasurementsOn
 January 1, 2008 we adopted 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. The standard did not have a significant
 impact on our interim consolidated financial statements.(b)
Future Accounting PronouncementsThe
 following accounting pronouncements have recently been issued by the CICA and
 the FASB and may be relevant to our company. References to FASB and SFAS
 relate to U.S. GAAP and therefore may affect the note to our consolidated
 financial statements that discloses Canadian/U.S. GAAP differences.Goodwill and intangible assetsIn
 February 2008, the CICA issued Section 3064, Goodwill
 and Intangible Assets, which will replace Section 3062, Goodwill and Other Intangible Assetsand
 Section 3450, Research and Development
 Costs. The standard provides guidance on the recognition of
 intangible assets in accordance with the definition of an asset and the
 criteria for asset recognition, as well as clarifying the application of the43

concept
 of matching revenues and expenses, whether these assets are separately
 acquired or internally developed. This standard applies to interim and annual
 financial statements relating to fiscal years beginning on or after October
 1, 2008. We expect that the adoption of this standard will not have a
 significant impact on our financial results.International Financial Reporting StandardsIn
 2005, the Accounting Standards Board of Canada announced that accounting
 standards in Canada are to converge with IFRS. In February 2008, the CICA
 confirmed the change-over date from current Canadian GAAP to IFRS to be
 January 1, 2011. While IFRS uses a conceptual framework similar to Canadian
 GAAP, there are significant differences in accounting policies which must be
 addressed. We have not yet fully assessed the future impact of these new
 standards on our consolidated financial statements.SFAS No. 141R, Business CombinationsIn
 December 2007, the FASB issued a revised standard on accounting for business
 combinations. The major changes to accounting for business combinations
 include the following: all business acquisitions will be measured at fair
 value; the existing definition of a business would be expanded; certain
 pre-acquisition contingencies would be measured at fair value; most acquisition-related
 costs would be recognized as expenses are incurred (they would no longer be
 part of the purchase consideration); obligations for contingent consideration
 would be measured and recognized at fair value at the date of acquisition
 (measurement and recognition would no longer be dependent on settlement of
 the contingency); non-controlling interests would be measured at fair value
 at the date of acquisition (i.e., 100% of the assets and liabilities would be
 measured at fair value even when an acquisition is less than 100%); goodwill,
 if any, arising on a business combination reflects the excess of the fair
 value of the acquiree, as a whole, over the net amount of the recognized
 identifiable assets acquired and liabilities assumed, and would be allocated
 to the acquirer and the non-controlling interest. The statement is effective
 for periods beginning on or after January 1, 2009. We will apply the standard
 for acquisitions occurring after this date.SFAS No. 160 - Non-controlling interest in consolidated
 financial statementsIn
 December 2007, the FASB issued a revised standard on accounting for
 non-controlling interests and transactions with non-controlling interest
 holders in consolidated financial statements. This revised standard specifies
 that non-controlling interests are to be treated as a separate component of
 equity, not as a liability or other items outside of equity. Because
 non-controlling interests are an element of equity, increases and decreases
 in the parents ownership interest that leave control intact are accounted
 for as capital transactions rather than as a step acquisition or dilution
 gains or losses. The carrying amount of the non-controlling interests is
 adjusted to reflect the changes in ownership interests, and any difference
 between the amount by which the non-controlling interests are adjusted and
 the fair value of the consideration paid or received is recognized directly
 in equity attributable to the controlling interests.This
 standard requires net income and comprehensive income to be displayed for
 both the controlling and the non-controlling interests. Additional required
 disclosures and reconciliations include a separate schedule that shows the
 effects of any transactions with the non-controlling interests on the equity
 attributable to the controlling interests.The
 statement is effective for periods beginning on or after December 15, 2008.
 SFAS 160 will be applied prospectively to all non-controlling interests,
 including any that arose before the effective date. We do not expect the
 adoption of SFAS 160 to materially impact our consolidated financial
 statements.SFAS No. 161 - Disclosures about derivative instruments
 and hedging activities, an amendment to FASB Statement No. 133In
 March 2008, the FASB issued the above-noted statement, which requires
 qualitative disclosures about objectives and strategies for using
 derivatives, quantitative disclosures about fair value amounts of and gains
 and losses on derivative instruments, and disclosures about credit-risk
 related contingent features on derivative agreements. The statement is
 effective for periods beginning on or after November 15, 2008. We do not
 expect the adoption of SFAS No. 161 to materially affect our consolidated
 financial statements.44

SFAS No. 162  The Hierarchy of Generally Accepted
 Accounting Principles and SFAS 163 - Accounting for Financial Guarantee
 Insurance ContractsIn
 May 2008, the FASB issued the above-noted statements. We do not expect the
 adoption of these statements to affect our consolidated financial statements.Financial Condition

As
at September 30, 2008, cash and cash equivalents, cash held as reserves,
short-term investments, short-term investments held as reserves and settlement
assets totaled $56.0 million (including $7.3 million held as reserves) compared
to $73.0 million (including $8.6 million held as reserves) as at December 31,
2007.

The
decrease in cash and cash equivalents, and short-term investments is primarily
due to the use of cash for the acquisitions described above (see Recent
Developments) of approximately $6.7 million paid in cash and the increase in
bank indebtedness of $12.6 million, as well as cash used by WowWee for the
seasonal build-up of accounts receivables and inventories, and the purchase of
equipment. As described above, a significant portion of cash and cash
equivalents, and short-term investments have a corresponding liability as these
cash amounts are derived from reserves and security deposits which are due to
customers (see Our Industry Segments  Optimal Payments). As at September 30,
2008 and December 31, 2007, our cash and cash equivalents, short-term
investments and settlement assets positions, net of bank indebtedness and
customer reserves and security deposits, were as follows:

(U.S. dollars, in
 thousands)

September 30,
 2008

December 31,
 2007Cash and cash equivalents

$
45,106

$
47,193Cash held as reserves


5,525


6,869Short-term investments


1,216


12,477Short-term investments
 held as reserves


1,795


1,710Settlement assets


2,368


4,71556,010


72,964Less:Bank indebtedness


(12,620
)

Customer reserves and
 security deposits


(20,193
)

(21,324
)(32,813
)

(21,324
)Net cash position

$
23,197

$
51,640Our
portfolio of liquid and investment grade short-term investments consists of
U.S. denominated discounted and undiscounted notes and bonds.

Working
capital, excluding cash and short-term investments held as reserves, as at
September 30, 2008 was $9.0 million, as compared to $15.9 million at December
31, 2007. This decrease resulted primarily from the use of cash by WowWee in
the nine-months ended September 30, 2008 due to the seasonality of its
revenues.We expect WowWee to use
cash in the first half of the year for manufacturing costs required to fulfill
sales orders, and to generate cash later in the year as orders are shipped and
subsequently collected.

Accounts
and other receivables, as at September 30, 2008 were $44.5 million, as compared
to $18.5 million at December 31, 2007. The increase is due primarily to the
seasonal increase in revenues generated by WowWee (including accounts
receivable assumed on the acquisition of Sablon Distribution) in the nine-month
period ended September 30, 2008.

Intangible
assets decreased by $11.9 million, from $86.9 million as at December 31, 2007
to $75.0 million as at September 30, 2008, due to amortization recorded in the
nine-month period ended September 30, 2008 of $14.4 million partially off-set
by the recognition of intangibles from the acquisitions during the same period.

45

Customer
reserves and security deposits as at September 30, 2008 were $20.2 million, as
compared to $21.3 million as at December 31, 2007. The decrease of $1.1 million
is primarily due to decreased processing volume in Optimal Payments.

Shareholders
equity as at September 30, 2008 was $149.4 million as compared to $201.7
million as at December 31, 2007. The decrease is attributable primarily to the
results of operations net of stock-based compensation and the cancellation of
shares pursuant to our stock buyback program.

Results of Operations

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

Nine-month period ended September 30, 2008
compared to the nine-month period ended September 30, 2007

Revenues
increased by $66.7 million, from $85.7 million for the nine-month period ended
September 30, 2007 to $152.4 million for the nine-month period ended September
30, 2008. The increase consists of additional revenues of $72.5 million
resulting from the acquisition of WowWee in 2007 and the acquisition of Sablon
Distribution in August 2008, offset by a decrease in revenues in Optimal
Payments as a result of lower merchant volumes from normal attrition and
discontinuing business with unprofitable merchant accounts.

Transaction
processing expenses and cost of sales increased by $45.9 million, from $54.2
million for the nine-month period ended September 30, 2007 to $100.1 million
for the nine-month period ended September 30, 2008. The increase consists of
additional cost of sales of $52.8 million in WowWee (included cost of sales of
Sablon Distribution for the month of September 2008), offset by a decrease in
transaction processing due to lower volumes in Optimal Payments.

Selling,
general and administrative expenses increased by $19.5 million, from $21.1
million for the nine-month period ended September 30, 2007 to $40.6 million for
the nine-month period ended September 30, 2008. The increase in selling,
general and administrative expenses is due primarily to our acquisition of
WowWee. The level of selling, general and administrative expenses is not
subject to significant seasonal variability.

Amortization
of intangibles pertaining to transaction processing and cost of sales increased
by $5.0 million, from $9.4 million for the nine-month period ended September
30, 2007 to $14.4 million for the nine-month period ended September 30, 2008.
The increase in amortization is due primarily to the intangible assets acquired
in connection with our acquisition of WowWee.

Amortization
of equipment pertaining to cost of sales was $2.5 million for the nine-month
period ended September 30, 2008. This expense arises from our acquisition of
WowWee and is related to the amortization of moulds used in the production of
our products.

Amortization
of equipment pertaining to selling, general and administrative expense for the
nine-month periods ended September 30, 2008 and 2007 remained constant at
approximately $1.0 million.

Stock-based
compensation pertaining to selling, general and administrative expense
decreased by $3.2 million, from $6.1 million for the nine-month period ended
September 30, 2007 to $2.9 million for the nine-month period ended September
30, 2008. 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.
In June 2008, the expiry dates of outstanding options issued in 2004 were
extended by five years. Since these options were vested at the date of
modification, the incremental value of $1.4 million of the fair value of the
modified options over the value of the options immediately prior to their
modification was recognized as an expense in the quarter ended September 30,
2008.

Research
and development expenses increased by $2.4 million, from $1.8 million for the
nine-month period ended September 30, 2007 to $4.2 million for the nine-month
period ended September 30, 2008. The increase in research and development
expenses is due primarily to our acquisition of WowWee.

46

At
December
31, 2007 the net book value of goodwill was $66.2 million, of which $37.1
million related to WowWee and $29.1 million related to Optimal Payments.
Goodwill in Optimal Payments at December 31, 2007, was net of impairment
charges of $22.6 million provided for in 2007.

As
discussed in note 3 of the notes to the interim consolidated financial
statements, goodwill in WowWee was increased by $0.4 million during the
nine-month period ended September 30, 2008, as a result of fair value
adjustments to certain assets and liabilities as at the date of acquisition.

At
June 30,
2008, we also tested goodwill for impairment in Optimal Payments as we
determined that there was a more likely than not expectation that a significant
portion, or the entirety of this segment, would be sold over the course of the
next twelve months. As a result of this analysis, the goodwill in the segment
was determined to be impaired since the estimated fair value to be realized as
proceeds from transactions which are expected to be finalized within the next
twelve months would be less than the carrying value of the segment including
goodwill. As a result, we recorded a non-cash, pre-tax goodwill impairment loss
of $29.1 million in the second quarter of 2008 in Optimal Payments.

Due
largely
to a general deterioration of the economic environment, sales, operating
profits and cash flows in the consumer robotic, toy and entertainment products
segment were lower than expected during the third quarter of 2008. As a result,
we performed the first step of an interim impairment test that indicated that
the estimated fair value of this segment was less than its carrying value at
September 30, 2008. The second step of the impairment test estimates the
implied fair value of goodwill and whether a write-down is required. We expect
to complete this step before the end of 2008 when sales and cash flow budgets
become available and, under this testing, it is possible that a non-cash,
impairment write-down of goodwill may be required in the fourth quarter of
2008.

Investment
income decreased by $3.9 million, from $5.0 million during the nine-month
period ended September 30, 2007 to $1.1 million for the nine-month period ended
September 30, 2008. The decrease is due primarily to the lower cash position
during the nine-month period ended September 30, 2008, as a result of funds
used to acquire WowWee in November 2007.

The
provision for income taxes was $11.8 million for the nine-month period ended
September 30, 2008, as compared to $1.3 million for the nine-month period ended
September 30, 2007. The consolidated tax provision for the nine-month period
ended September 30, 2008 included the effect of non-deductible goodwill
impairment in the amount of $9.0 million related to the payment processing
segment. As a result of the goodwill impairment loss, we amortized $5.7 million
of the other tax asset as a future tax expense, which represented the remaining
portion of this asset. In addition, we wrote off $8.4 million of previously
recognized future tax assets that no longer met the criteria for recognition.

Other
items
in the 2008 tax provision include tax differences in tax rates in foreign
jurisdictions and non-deductible stock-based compensation. In 2008, a greater
portion of our operations was taxable in Hong Kong at a lower effective tax
rate than in Canada, which affected the provision by $0.5 million compared to a
recovery of $0.6 million for the nine-month period ended September 30, 2007. In
addition, the 2008 tax provision includes the tax effect of non-deductible
stock-based compensation expense in the amount of $0.9 million compared to $1.9
million for the nine-month period ended September 30, 2007, which was a result
of the acceleration of vesting and exercise of restricted share units in
connection with the privatization of FireOne Group plc.

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 the nine-month
period ended September 30, 2008, our tax provision includes a future tax charge
of $0.2 million related to foreign exchange, as compared to a recovery of $2.5
million for the nine-month period ended September 30, 2007.

Our net
loss for the nine-month period ended September 30, 2008 was $54.7 million (or
$2.11 per share  basic and diluted), as compared to a net loss of $4.9 million
(or $0.21 per share  basic and diluted) for the nine-month period ended
September 30, 2007. The increase is due primarily to a non-cash impairment loss
from Optimal Payments of $29.1 million for goodwill, as well as related charges
of $5.7 million for the other asset and $8.4 million of future tax assets that
no longer meet the criteria for recognition at September 30, 2008 in this
segment.

47

EBITDA
was
$5.9 million (or $0.23 per share) for the nine-month period ended September 30,
2008, as compared to $7.8 million (or $0.32 per diluted share) for the nine-month
period ended September 30, 2007.

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

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

Reconciliation of Non-GAAP
Financial Information 
(expressed in thousands of U.S. dollars, except per share amounts)Nine months ended
 September 30,2008Unaudited

2007UnauditedNet loss

$
(54,733
)
$
(4,908
)Add (deduct):Amortization of intangibles
 pertaining to transactionprocessing and cost of sales


14,448


9,402Amortization of equipment
 pertaining to selling,general and administrative


1,013


824Amortization of equipment
 pertaining to cost of sales


2,520


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


2,910


6,057Non-controlling interest





159Investment income


(1,097
)

(4,999
)Income tax provision


11,761


1,280Impairment loss


29,097


EBITDA

$
5,919

$
7,815Diluted shares


25,882,946


24,267,410EBITDA per diluted share

$
0.23

$
0.3248

Three-month period ended September 30, 2008
compared to the three-month period ended September 30, 2007

Revenues
increased by $52.0 million, from $27.6 million for the three-month period ended
September 30, 2007 to $79.6 million for the three-month period ended September
30, 2008. The increase is due primarily to additional revenues of $52.1 million
resulting from our acquisition of WowWee (including revenues of Sablon
Distribution for the month of September 2008).

Transaction
processing expenses and cost of sales increased by $36.7 million, from $17.4
million during the three-month period ended September 30, 2007 to $54.1 million
for the three-month period ended September 30, 2008. The increase consists of additional
cost of sales of $38.3 million in WowWee (including cost of sales of Sablon
Distribution for the month of September 2008), offset by a decrease in
transaction processing due to lower volumes in Optimal Payments.

Selling,
general and administrative expenses increased by $6.6 million, from $7.6
million for the three-month period ended September 30, 2007 to $14.2 million
for the three-month period ended September 30, 2008. The increase in selling,
general and administrative expenses is due primarily to our acquisition of
WowWee. The level of selling, general and administrative expenses is not
subject to significant seasonable variability.

Amortization
of intangibles pertaining to transaction processing and cost of sales increased
by $1.8 million, from $3.1 million during the three-month period ended
September 30, 2007 to $4.9 million for the three-month period ended September
30, 2008. The increase in amortization is due primarily to the intangible
assets acquired in connection with our acquisition of WowWee.

Amortization
of equipment pertaining to cost of sales was $0.9 million for the three-month
period ended September 30, 2008. This expense arises from our acquisition of
WowWee and is related to the amortization of moulds used in the production of
our products.

Stock
based
compensation pertaining to selling, general and administrative expense
increased, from a nominal amount during the three-month period ended September
30, 2007 to $0.5 million during the three-month period ended September 30,
2008. This increase is due to additional compensation expense resulting from
the issuance of options in November 2007.

Research
and development expenses increased by $0.9 million, from $0.6 million for the
three-month period ended September 30, 2007 to $1.5 million for the three-month
period ended September 30, 2008. The increase in research and development
expenses is due primarily to our acquisition of WowWee.

At
December
31, 2007, the net book value of goodwill was $66.2 million, of which $37.1
million related to WowWee and $29.1 million related to Optimal Payments.
Goodwill in Optimal Payments as at December 31, 2007, was net of impairment
charges of $22.6 million provided for in 2007.

Due
largely
to a general deterioration of the economic environment, sales, operating
profits and cash flows in the consumer robotic, toy and entertainment products
segment were lower than expected during the third quarter of 2008. As a result,
we performed the first step of an interim impairment test that indicated that
the estimated fair value of this segment was less than its carrying value at
September 30, 2008. The second step of the impairment test estimates the
implied fair value of goodwill and whether a write-down is required. We expect
to complete this step before the end of 2008 when sales and cash flow budgets
become available and, under this testing, it is possible that a non-cash,
impairment write-down of goodwill may be required in the fourth quarter of
2008.

Investment
income decreased by $1.2 million, from $1.5 million during the three-month
period ended September 30, 2007 to $0.3 million for the three-month period
ended September 30, 2008. The decrease is due primarily to the lower cash position
during the three-month period ended September 30, 2008, as a result of funds
used to acquire WowWee in November 2007.

The
provision for income taxes was $1.3 million for the three-month period ended
September 30, 2008 as compared to $0.4 million for the three-month period ended
September 30, 2007. The consolidated tax provision for the three-month period
ended September 30, 2008 included the effect of writing off previously
recognized future tax assets of $0.8 million that no longer met the criteria
for recognition.

49

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 interim consolidated
financial statements are presented in U.S. dollars, these foreign exchange gains
and losses do not affect earnings before income taxes. In the three-month
period ended September 30, 2008, our tax provision includes a future tax charge
of $0.4 million related to foreign exchange compared to a recovery of $1.2
million for the three-month period ended September 30, 2007.

Our net
earnings for the three-month period ended September 30, 2008 was $1.7 million
(or $0.07 per share - basic and diluted), compared to a net loss of $0.4
million (or $(0.02) per share  basic and diluted) for the three-month period
ended September 30, 2007. The increase is due primarily due to the acquisition
of WowWee.

EBITDA
was
$9.3 million (or $0.36 per diluted share) for the three-month period ended
September 30, 2008, as compared to $1.7 million (or $0.07 per diluted share)
for the three-month period ended September 30, 2007.

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

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



Reconciliation of Non-GAAP
Financial Information 
(expressed in thousands of U.S. dollars, except per share amounts)Three months ended
 September 30,2008
 Unaudited

2007
 UnauditedNet earnings (loss)

$
1,707

$
(413
)Add (deduct):Amortization of intangibles
 pertaining to transactionprocessing and cost of sales


4,852


3,066Amortization of equipment
 pertaining to selling,general and administrative


371


174Amortization of equipment
 pertaining to cost of sales


859


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


459


30Investment income


(260
)

(1,522
)Income tax provision


1,308


393EBITDA

$
9,296

$
1,728Diluted shares


25,829,090


23,866,604EBITDA per diluted share

$
0.36

$
0.0750

Liquidity and Capital Resources

As at
September 30, 2008, cash and cash equivalents, cash held as reserves,
short-term investments, short-term investments held as reserves and settlement
assets totaled $56.0 million (including $7.3 million held as reserves) compared
to $73.0 million (including $8.6 million held as reserves) as at December 31,
2007.

The
decrease in cash and cash equivalents, and short-term investments is primarily
due to the use of cash for the acquisitions described above (under Recent
Developments ) of approximately $6.7 million paid in cash and the assumption of
$7.7 million in bank indebtedness, as well as cash used by WowWee for the
seasonal build-up of inventories to meet orders shipped in the third quarter
but for which the receivables have yet to be collected, and the purchase of
equipment. As described above, a significant portion of cash and cash
equivalents, and short-term investments have a corresponding liability as these
cash amounts are derived from reserves and security deposits which are due to
customers (see Our Industry Segments  Optimal Payments ). Settlement assets
result from timing differences in the settlement process of Optimal Payments.
Settlement assets are typically funded to us within days from the transaction
processing date.

Operating
activities used $4.3 million of cash and cash equivalents in the three-month
period ended September 30, 2008, as compared to $6.6 million of cash generated
for the three-month period ended September 30, 2007. This change is due mainly
to the increase in WowWee receivables which will not be collected until the
fourth quarter offset by the increase in WowWee payables for goods produced in
the three-month period ended September 30, 2008.

Investing
activities used$6.3 million of
cash and cash equivalents for the three-month period ended September 30, 2008,
as compared to using $0.6 million of cash and cash equivalents for the
three-month period ended September 30, 2007. During the three-month period ended
September 30, 2008, approximately $6.5 million was used for acquisitions.

Given
the
economic events of the third and fourth quarters, including significant
negative media regarding the credit crisis and various government initiatives
to support various financial institutions, particularly in the United States
but also throughout the world, we are closely monitoring spending activity. Our
cash resources are invested in term deposits of major Canadian banks.

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

We
have no
long-term financial obligations of significance, including any off-balance
sheet arrangements, other than long-term lease commitments for our premises in
the United States, Canada and Hong Kong.

Item 3.
Quantitative and Qualitative Disclosures About Market RiskThere
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, 2007.

Item 4.
Controls and ProceduresAs of
September 30, 2008 (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

51

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 ProceedingsThere
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, 2007, except as
discussed in our Quarterly Report on Form 10-Q for the three-months ended March
31, 2008 and as follows.

Optimal
Payments has received a request for information from U.S. Attorneys Office in
the Eastern District of New York pertaining to its former involvement in
processing payment transactions for Internet pharmacies. Optimal Payments is
currently in discussions with that office relating to those processing
activities.

Item 1A.
Risk
 FactorsThere
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, 2007.

Item 2.
Unregistered Sales of Equity Securities and
 Use of Proceeds(1)
There were
 no sales of unregistered equity securities and there were no repurchases
 under our stock purchase program during the three-month period ended September
 30, 2008.Item 3.
Defaults Upon Senior SecuritiesThe
registrant has nothing to report under this item.

Item 4.
Submission of Matters to a Vote of Security
 HoldersThe
registrant has nothing to report under this item.

Item 5.
Other InformationThe
registrant has nothing to report under this item.

Item 6.
ExhibitsExhibits

Exhibit 
 Number

Exhibit10.1

Asset Purchase Agreement among Optimal Payments Inc., Optimal
 Payments Limited, Optimal Payments (Ireland) Limited, Optimal Payments Corp.
 and 7012985 Canada Inc. on its behalf and/or that of a designee, with the
 interventions of Card One Plus Ltd. And the Registrant (incorporated by
 reference to Exhibit 2.1 to the Registrants Current Report on Form 8-K dated
 August 11, 2008), as amended as of September 30, 2008 (incorporated by
 reference to Exhibit 2.2 to the Registrants Current Report on Form 8-K dated
 October 7, 2008).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 2002.52

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.

November 5,
 2008
Optimal Group Inc.By:
/s/
 NEIL S. WECHSLERNeil
 S. Wechsler, Co-Chairmanand
 Chief Executive Officer(Principal
 Executive Officer)By:
/s/
 GARY S. WECHSLERGary
 S. Wechsler, Chief Financial Officer(Principal
 Accounting Officer)53