UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

**FORM 10-Q**

 

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

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

**or**

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

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

 

**Commission file number 0-28572**.

___________________

**OPTIMAL GROUP INC.**

(Exact name of registrant as specified in its charter)

 

| **Canada**                                                   |   | **98-0160833**                              |
|--------------------------------------------------------------|--------|---------------------------------------------|
| (State or                            other jurisdiction      |   | (I.R.S.                            Employer |
| of                            incorporation or organization) |   | Identification No.)                         |

___________________

 

| **3500 de                            Maisonneuve Blvd. West, Suite 1700,**          | **(514)                            738-8885**                                  |
|-------------------------------------------------------------------------------------|--------------------------------------------------------------------------------|
| **Montreal, Quebec, Canada, H3Z 3C1**                                               |                                                                           |
| (Address of                            principal executive offices and postal code) | (Registrant                            telephone number, including area code:) |

 

| Indicate by check mark whether the registrant (1)                                has filed all reports required to be filed by Section 13 or 15(d)                                of the Securities Exchange Act of 1934 during the preceding 12                                months (or for such shorter period that the registrant was required                                to file such reports), and (2) has been subject to such filing                                requirements for the past 90 days.

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

                                                                                                                              | Large                                Accelerated filer o                                         Accelerated                                Filer  x                                 Non-accelerated filer                                o |
| Indicate by check mark whether                                the registrant is a shell company (as defined in Rule 12b-2 of the                                Act).                                                                                                                                                                                                                                                                                                                                                       | Yes                                o Nox                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| At November 8, 2007, the                                registrant had 26,036,548 common shares designated as Class                                “A” shares (without nominal or par value)                                outstanding.

                                                                                                                                                                                                                                                                 |

 

 

 

 

 

**-            1 - **

----

**OPTIMAL GROUP INC.**

 

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

             

             

             

             

             

Consolidated Financial Statements of

(Unaudited)

             

**OPTIMAL GROUP INC.**

             

Nine-month periods ended September 30, 2007 and 2006

(expressed in U.S. dollars)

             

             

 

**-            2 - **

----

**OPTIMAL GROUP INC.**

Consolidated Financial Statements

(Unaudited)

             

Nine-month periods ended September 30, 2007 and 2006

(expressed in U.S. dollars)

             

             

**Financial Statements**

| Consolidated Balance Sheets                                                                      | 4 |
|--------------------------------------------------------------------------------------------------|---|
| Consolidated Statements of Operations and Comprehensive                            Income (Loss) | 5 |
| Consolidated Statements of Shareholders’                            Equity                 | 6 |
| Consolidated Statements of Cash Flows                                                            | 7 |
| Notes to Consolidated Financial Statements                                                       | 8 |

 

 

**-            3 - **

----

| **OPTIMAL GROUP INC.**                                                                                            |                                           |                      |          |                      |
|-------------------------------------------------------------------------------------------------------------------|------------------------------------------------|---------------------------|---------------|---------------------------|
| Consolidated Balance Sheets                                                                                       |                                           |                      |          |                      |
| (Unaudited)                                                                                                       |                                           |                      |          |                      |
|                                                                                                              |                                           |                      |          |                      |
| September 30, 2007 and December 31, 2006                                                                          |                                           |                      |          |                      |
| (expressed in thousands of U.S. dollars)                                                                          |                                           |                      |          |                      |
|                                                                                                              |                                           |                      |          |                      |
|                                                                                                              | September                            30,  | December 31,         |
|                                                                                                              |                                           | 2007                 |          | 2006                 |
| Assets                                                                                                            |                                           |                      |          |                      |
| Current assets:                                                                                                   |                                           |                      |          |                      |
| Cash                            and cash equivalents                                                              | $                                              | 113,908              | $             | 103,922              |
| Restricted cash (note 8 (f))                                                                                      |                                           | 19,182               |          | –    |
| Cash                            held as reserves                                                                  |                                           | 9,230                |          | 18,960               |
| Short-term investments                                                                                            |                                           | –    |          | 71,621               |
| Short-term investments held as reserves                                                                           |                                           | 1,710                |          | 3,110                |
| Settlement assets                                                                                                 |                                           | 993                  |          | 7,061                |
| Accounts receivable                                                                                               |                                           | 5,185                |          | 5,600                |
| Income taxes receivable and refundable investment tax                            credits                          |                                           | 1,410                |          | 1,025                |
| Prepaid expenses                                                                                                  |                                           | 1,973                |          | 2,625                |
| Future income taxes                                                                                               |                                           | 590                  |          | 2,199                |
|                                                                                                              |                                           |                      | 154,181  |                      | 216,123  |
| Long-term receivables                                                                                             |                                           | 810                  |          | 3,144                |
| Property and equipment                                                                                            |                                           | 1,639                |          | 2,121                |
| Goodwill and other intangible assets                                                                              |                                           | 100,359              |          | 106,041              |
| Future income taxes                                                                                               |                                           | 6,185                |          | 4,183                |
| Other asset                                                                                                       |                                           | 10,186               |          | 10,423               |
|                                                                                                              |                                           |                      |          |                      |
|                                                                                                              | $                                              | 273,360              | $             | 342,035              |
| Liabilities and Shareholders'                            Equity                                                   |                                           |                      |          |                      |
| Current                            liabilities:                                                                   |                                           |                      |          |                      |
| Bank indebtedness                                                                                                 | $                                              | –    | $             | 8,581                |
| Customer reserves and security deposits                                                                           |                                           | 21,963               |          | 61,897               |
| Accounts payable and accrued liabilities                                                                          |                                           | 18,980               |          | 23,362               |
| Income taxes payable                                                                                              |                                           | 5,051                |          | 5,573                |
|                                                                                                              |                                           |                      | 45,994   |                      | 99,413  |
| Non-controlling interest                                                                                          |                                           | –    |          | 16,392               |
| Future income taxes                                                                                               |                                           | 6,748                |          | 6,848                |
| Shareholders' equity:                                                                                             |                                           |                      |          |                      |
| Share capital                                                                                                     |                                           | 202,434              |          | 202,252              |
| Additional paid-in capital                                                                                        |                                           | 29,131               |          | 23,169               |
| Deficit                                                                                                           |                                           | (9,463)                   |          | (4,555)                   |
| Accumulated other comprehensive loss                                                                              |                                           | (1,484)                   |          | (1,484)                   |
|                                                                                                              |                                           |                      | 220,618  |                      | 219,382  |
|                                                                                                              |                                           |                      |          |                      |
| Contingencies and other (note 8)                                                                                  |                                           |                      |          |                      |
| Subsequent events (note 15)                                                                                       |                                           |                      |          |                      |
|                                                                                                              |                                           |                      |          |                      |
|                                                                                                              | $                                              | 273,360              | $             | 342,035              |
|  

 

See accompanying notes                            to unaudited consolidated financial statements. |                                           |                      |          |                      |
|                                                                                                              |
|                                                                                                                   |                                                |                           |               |                           |  |  |

 

 

**-            4 - **

----

| **OPTIMAL GROUP INC.**                                                                                                         |
|--------------------------------------------------------------------------------------------------------------------------------|
| Consolidated Statements of Operations and Comprehensive                            Income (Loss)                               |
| (Unaudited)                                                                                                                    |
|                                                                                                                           |
| Periods ended September 30, 2007 and 2006                                                                                      |
| (expressed in thousands of U.S. dollars, except share                            and per share amounts)                        |
|                                                                                                                           |
|                                                                                                                           | Three months ended  | Nine months ended  |
|                                                                                                                           | September 30,  | September 30,  |
|                                                                                                                           | 2007  | 2006  | 2007  | 2006  |
|                                                                                                                           |   |   |   |   |   |   |   |   |
| Revenues                                                                                                                       | $ | 27,622  | $ | 53,297  | $ | 85,730  | $ | 157,961  |
|                                                                                                                           |   |   |   |   |   |   |   |   |
| Expenses:                                                                                                                      |   |   |   |   |   |   |   |   |
| Transaction processing                                                                                                         |   | 17,404  |   | 26,353  |   | 54,173  |   | 76,406  |
| Selling, general and administrative                                                                                            |   | 7,614  |   | 15,014  |   | 21,088  |   | 41,533  |
| Amortization of intangibles pertaining to transaction                            processing                                    |   | 3,066  |   | 3,090  |   | 9,402  |   | 9,155  |
| Amortization of property and equipment                                                                                         |   | 174  |   | 389  |   | 824  |   | 1,155  |
| Stock-based compensation pertaining to selling, general                            and administrative                          |   | 30  |   | 671  |   | 6,057  |   | 1,006  |
| Research and development                                                                                                       |   | 584  |   | 849  |   | 1,848  |   | 2,479  |
| Operating leases                                                                                                               |   | 292  |   | 409  |   | 806  |   | 1,161  |
| Impairment loss                                                                                                                |   | -    |   | 1,910  |   | -    |   | 1,910  |
|                                                                                                                           |   |   |   |   |   |   |   |   |
| (Loss) earnings from continuing operations before                            undernoted item                                   |   | (1,542) |   | 4,612  |   | (8,468) |   | 23,156  |
|                                                                                                                           |   |   |   |   |   |   |   |   |
| Investment income                                                                                                              |   | 1,522  |   | 2,369  |   | 4,999  |   | 5,886  |
|                                                                                                                           |   |   |   |   |   |   |   |   |
| (Loss) earnings from continuing operations before income                            tax provision and non-controlling interest |   | (20) |   | 6,981  |   | (3,469) |   | 29,042  |
|                                                                                                                           |   |   |   |   |   |   |   |   |
| Income tax (provision) recovery (note 10)                                                                                      |   | (393) |   | 3,098  |   | (1,280) |   | (1,225) |
|                                                                                                                           |   |   |   |   |   |   |   |   |
| (Loss) earnings from continuing operations before                            non-controlling interest                          |   | (413) |   | 10,079  |   | (4,749) |   | 27,817  |
|                                                                                                                           |   |   |   |   |   |   |   |   |
| Non-controlling interest                                                                                                       |   | -    |   | 1,361  |   | 159  |   | 5,518  |
|                                                                                                                           |   |   |   |   |   |   |   |   |
| (Loss) earnings from continuing operations                                                                                     |   | (413) |   | 8,718  |   | (4,908) |   | 22,299  |
|                                                                                                                           |   |   |   |   |   |   |   |   |
| Loss from discontinued operations                                                                                              |   | -    |   | (2,489) |   | -    |   | (7,990) |
|                                                                                                                           |   |   |   |   |   |   |   |   |
| Loss on disposal of discontinued operations                                                                                    |   | -    |   | (4,283) |   | -    |   | (4,283) |
|                                                                                                                 |   |   |   |   |   |   |   |   |
| Net (loss) earnings and comprehensive income                            (loss)                                                 | $ | (413) | $ | 1,946  | $ | (4,908) | $ | 10,026  |
|                                                                                                                           |   |   |   |   |   |   |   |   |
| Weighted average number of shares:                                                                                             |   |   |   |   |   |   |   |   |
| Basic                                                                                                                          |   | 23,866,604  |   | 23,687,171  |   | 23,855,987  |   | 23,574,945  |
| Plus impact of stock options and warrants                                                                                      |   | -    |   | 1,871,072  |   | 411,423  |   | 2,201,549  |
|                                                                                                                           |   |   |   |   |   |   |   |   |
| Diluted                                                                                                                        |   | 23,866,604  |   | 25,558,243  |   | 24,267,410  |   | 25,776,494  |
|                                                                                                                           |   |   |   |   |   |   |   |   |
| (Loss) earnings per share:                                                                                                     |   |   |   |   |   |   |   |   |
| Continuing operations:                                                                                                         |   |   |   |   |   |   |   |   |
| Basic                                                                                                                          | $ | (0.02) | $ | 0.37  | $ | (0.21) | $ | 0.95  |
| Diluted                                                                                                                        |   | (0.02) |   | 0.34  |   | (0.21) |   | 0.87  |
| Discontinued operations:                                                                                                       |   |   |   |   |   |   |   |   |
| Basic                                                                                                                          |   | -    |   | (0.29) |   | -    |   | (0.52) |
| Diluted                                                                                                                        |   | -    |   | (0.26) |   | -    |   | (0.48) |
| Net:                                                                                                                           |   |   |   |   |   |   |   |   |
| Basic                                                                                                                          |   | (0.02) |   | 0.08  |   | (0.21) |   | 0.43  |
| Diluted                                                                                                                        |   | (0.02) |   | 0.08  |   | (0.21) |   | 0.39  |
|                                                                                                                           |   |   |   |   |   |   |   |   |
|                                                                                                                           |
| See accompanying notes to unaudited consolidated                            financial statements.                              |

 

**-            5 - **

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| **OPTIMAL GROUP INC.**                                                                    |
|-------------------------------------------------------------------------------------------|
| Consolidated Statements of Shareholders’                            Equity          |
| (Unaudited)                                                                               |
|                                                                                      |
| Periods ended September 30, 2007 and 2006                                                 |
| (expressed in thousands of U.S. dollars, except share                            amounts) |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                      |   |   |   |   |   |   |   |   | Accu-  |   |   |
|                                                                                      |   |   |   |   |   |   |   |   | mulated  |   |   |
|                                                                                      |   |   |   |   | Addi-  |   |   |   | other |   |   |
|                                                                                      |   |   |   |   | tional  |   |   |   | compre-  |   |   |
|                                                                                      | Share capital |   | paid-in  |   |   |   | hensive  |   |   |
|                                                                                      | Number  |   | Dollars  |   | capital  |   | Deficit  |   | loss  |   | Total  |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |
| Balance, December 31, 2006                                                                | 23,849,090  | $ | 202,252  | $ | 23,169  | $ | (4,555) | $ | (1,484) | $ | 219,382  |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |
| Exercise of stock options:                                                                |   |   |   |   |   |   |   |   |   |   |   |
| Cash proceeds                                                                             | 18,261  |   | 87  |   | –    |   | –    |   | –    |   | 87  |
| Ascribed value                                                                            | –    |   | 95  |   | (95) |   | –    |   | –    |   | –    |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |
| Stock-based compensation (note 9)                                                         | –    |   | –    |   | 6,057  |   | –    |   | –    |   | 6,057  |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                  | –    |   | –    |   | –    |   | (4,908) |   | –    |   | (4,908) |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |
| Balance, September 30, 2007                                                               | 23,867,351  | $ | 202,434  | $ | 29,131  | $ | (9,463) | $ | (1,484) | $ | 220,618  |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                      |   |   |   |   |   |   |   |   |   |   |   |

| See accompanying notes to unaudited consolidated                            financial statements. |
|---------------------------------------------------------------------------------------------------|

 

 

**-            6 - **

----

| **OPTIMAL GROUP INC.**                                                                                          |
|-----------------------------------------------------------------------------------------------------------------|
| Consolidated Statements of Cash Flows                                                                           |
| (Unaudited)                                                                                                     |
|                                                                                                            |
| Periods ended September 30, 2007 and 2006                                                                       |
| (expressed in thousands of U.S. dollars)                                                                        |
|                                                                                                            |
|                                                                                                            | Three months ended | Nine months ended |
|                                                                                                            | September 30,  | September 30,  |
|                                                                                                            | 2007  | 2006  | 2007  | 2006 |
|                                                                                                            |   |   |   |   |   |   |   |   |
| Cash flows from (used in) operating                                activities:                                  |   |   |   |   |   |   |   |   |
| Net (loss) earnings                                                                                             | $ | (413) | $ | 1,946  | $ | (4,908) | $ | 10,026  |
| Add:  loss from discontinued                                operations                                |   | **-**    |   | 2,489  |   | **-**    |   | 7,990  |
| loss on disposal of discontinued                                operations                                      |   | **-**    |   | 4,283  |   | **-**    |   | 4,283  |
| Net   (loss) earnings from continuing                                operations                       |   | (413) |   | 8,718  |   | (4,908) |   | 22,299  |
|                                                                                                            |   |   |   |   |   |   |   |   |
| Adjustments for items not affecting cash:                                                                       |   |   |   |   |   |   |   |   |
| Non-controlling interest                                                                                        |   | **-**    |   | 1,361  |   | 159  |   | 5,518  |
| Amortization                                                                                                    |   | 3,240  |   | 3,479  |   | 10,226  |   | 10,310  |
| Gain on settlement of litigation                                                                                |   | **-**    |   | -    |   | (1,612) |   | -    |
| Future income taxes                                                                                             |   | 1,165  |   | (4,959) |   | 168  |   | (7,500) |
| Impairment loss                                                                                                 |   | **-**    |   | 1,910  |   | **-**    |   | 1,910  |
| Stock-based compensation                                                                                        |   | 30  |   | 671  |   | 6,057  |   | 1,006  |
| Foreign exchange                                                                                                |   | (206) |   | 145  |   | (344) |   | (723) |
| Net change in operating assets and liabilities (note                                12 (a))                     |   | 2,749  |   | 2,436  |   | (42,835) |   | (9,037) |
|                                                                                                            |   |   | 6,565  |   | 13,761  |   | (33,089) |   | 23,783  |
|                                                                                                            |   |   |   |   |   |   |   |   |
| Cash flows from (used in) financing                                activities:                                  |   |   |   |   |   |   |   |   |
| Proceeds from exercise of RSUs in OPIL                                                                          |   | **-**    |   | 3  |   | 58  |   | 24  |
| Proceeds from issuance of Class “A”                                shares                           |   | 35  |   | 31  |   | 87  |   | 4,078  |
| OPIL dividend paid                                                                                              |   | **-**    |   | (2,689) |   | **-**    |   | (4,796) |
| Decrease in bank indebtedness                                                                                   |   | **-**    |   | (1,657) |   | (8,581) |   | (719) |
| Repurchase of Class “A”                                shares                                       |   | **-**    |   | -    |   | **-**    |   | (2,264) |
|                                                                                                            |   |   | 35  |   | (4,312) |   | (8,436) |   | (3,677) |
|                                                                                                            |   |   |   |   |   |   |   |   |   |
| Cash flows from (used in) investing                                activities:                                  |   |   |   |   |   |   |   |   |
| Repurchase of OPIL ordinary shares                                                                              |   | **-**    |   | -    |   | (16,463) |   | -    |
| Transaction costs                                                                                               |   | **-**    |   | -    |   | (1,748) |   | -    |
| Purchase of property, equipment and intangible                                assets                            |   | (603) |   | (859) |   | (2,661) |   | (2,557) |
| (Acquisition of) proceeds from maturity of                                short-term investments                |   | **-**    |   | (7,997) |   | 71,621  |   | 26,251  |
| Decrease (increase) in long-term                                receivables                                     |   | 39  |   | (265) |   | 401  |   | 324  |
|                                                                                                            |   |   | (564) |   | (9,121) |   | 51,150  |   | 24,018  |
|                                                                                                            |   |   |   |   |   |   |   |   |   |
| Effect of exchange rate changes on cash and cash                                equivalents during the period   |   | 206  |   | (25) |   | 361  |   | 377  |
|                                                                                                            |   |   |   |   |   |   |   |   |
| Cash flows of discontinued operations:                                                                          |   |   |   |   |   |   |   |   |
| Operating cash flows                                                                                            |   | **-**    |   | (844) |   | **-**    |   | (4,105) |
| Investing cash flows                                                                                            |   | **-**    |   | (5) |   | **-**    |   | (87) |
|                                                                                                            |   |   | **-**    |   | (849) |   | –    |   | (4,192) |
|                                                                                                            |   |   |   |   |   |   |   |   |
| Increase (decrease) in cash and cash                                equivalents                                 |   | 6,242  |   | (546) |   | 9,986  |   | 40,309  |
|                                                                                                            |   |   |   |   |   |   |   |   |
| Cash and cash equivalents, beginning of                                period                                   |   | 107,666  |   | 139,091  |   | 103,922  |   | 98,236  |
|                                                                                                            |   |   |   |   |   |   |   |   |
| Cash and cash equivalents, end of period                                                                        | $ | 113,908  | $ | 138,545  | $ | 113,908  | $ | 138,545  |
|                                                                                                            |
| Supplemental disclosure of cash flow information and                                other information (note 12) |
|                                                                                                            |
| See accompanying notes to unaudited consolidated                                financial statements.           |
|                                                                                                                 |  |  |  |  |  |  |  |  |  |  |

 

**- 7            - **

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| ****OPTIMAL GROUP                            INC.****

Notes to Consolidated Financial Statements,                            Continued

(Unaudited)

                             

Nine-month periods ended September 30, 2007 and                            2006

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

                              |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

| **1.** | **Interim                            financial information:** |
|--------|---------------------------------------------------------------|

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

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

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

             

| **2.** | **Changes in                            accounting policies:** |
|--------|----------------------------------------------------------------|

Effective January 1, 2007, the Company adopted the Canadian Institute of            Chartered Accountants (CICA) Handbook Section 1530,*Comprehensive Income*, CICA Handbook Section            3251,*Equity*, CICA Handbook Section            3855,*Financial Instruments – Recognition and            Measurement*, CICA Handbook Section 3861,*Financial Instruments – Disclosure and            Presentation*, and CICA Handbook Section 3865,*Hedges*. These new Handbook Sections provide            comprehensive requirements for the recognition and measurement of financial            instruments, as well as standards on when and how hedge accounting may be applied.            Handbook Section 1530 also establishes standards for reporting and displaying            comprehensive income. Comprehensive income is defined as the change in equity from            transactions and other events from non-owner sources. Other comprehensive income refers            to items recognized in comprehensive income but that are excluded from net income            calculated in accordance with GAAP.

 

**-            8 - **

----

| ****OPTIMAL GROUP                            INC.****

Notes to Consolidated Financial Statements,                            Continued

(Unaudited)

                             

Nine-month periods ended September 30, 2007 and                            2006

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

                              |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

| **2.** | **Changes in                            accounting policies (continued):** |
|--------|----------------------------------------------------------------------------|

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

The standards require derivative instruments to be recorded as either            assets or liabilities measured at their fair value unless exempted from derivative            treatment as a normal purchase and sale. Certain derivatives embedded in other            contracts must also be measured at fair value. All changes in the fair value of            derivatives are recognized in earnings unless specific hedge criteria are met, which            requires that a company must formally document, designate and assess the effectiveness            of transactions that receive hedge accounting.

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

             

| **3.** | **Basis of                            presentation:** |
|--------|-------------------------------------------------------|

As a result of the sale of the hardware maintenance and repair services            business segment effective September 30, 2006 as described in note 4 (b), the            results of this discontinued operation are presented separately under discontinued            operations in the consolidated statements of operations and comprehensive income (loss)            for 2006.

             

**-            9 - **

----

| ****OPTIMAL GROUP                            INC.****

Notes to Consolidated Financial Statements,                            Continued

(Unaudited)

                             

Nine-month periods ended September 30, 2007 and                            2006

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

                              |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **4.** | **Business                            acquisition and disposal:** |
|--------|-------------------------------------------------------------------|

|   | (a) | Acquisition: |
|--------|-----|--------------|

On December 22, 2006, Optimal Acquisition Inc., a wholly-owned            subsidiary of the Company, made an offer to acquire all the issued and to be issued            ordinary shares of Optimal Payments (Ireland) Limited (“OPIL” - formerly            FireOne Group plc) held by non-controlling shareholders (approximately 25% of the            total), at a price of £0.60 per share, representing a cash consideration of            $16,463. On February 23, 2007, Optimal Acquisition Inc. completed the acquisition of            all of the outstanding shares of OPIL, which as of that date became a wholly-owned            subsidiary of the Company. Effective February 23, 2007, a non-controlling interest            is no longer recorded in the consolidated financial statements of the Company.            Transaction costs in connection with this transaction were $1,748. The transaction was            accounted for using the purchase method. The Company recorded goodwill of $1,603 in            connection with this transaction.

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

Effective September 30, 2006, the Company sold its Canadian hardware            maintenance and repair services segment. The divestiture is in accordance with the            Company’s strategy of identifying opportunities that can generate superior            returns while selling assets that do not generate acceptable returns.

The 2006 results of operations for this business segment are included in            discontinued operations on the consolidated statement of operations. The results of            operations include management assumptions and adjustments related to cost allocations            which are inherently subjective.

 

**-            10 - **

----

| ****OPTIMAL GROUP                            INC.****

Notes to Consolidated Financial Statements,                            Continued

(Unaudited)

                             

Nine-month periods ended September 30, 2007 and                            2006

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

                              |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **4.** | **Business                            acquisition and disposal (continued):** |
|--------|-------------------------------------------------------------------------------|

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

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

             

|                                                                               | Three months ended  | Nine months ended    |
|------------------------------------------------------------------------------------|--------------------------|---------------------------|
|                                                                               | September 30,       | September 30,        |
|                                                                               |                     | 2006                 |   | 2006  |
|                                                                               |                     |                      |   |   |
|                                                                               |                     |                      |   |   |
|                                                                               |                     |                      |   |   |
| Revenue                                                                            | $                        | 7,675                | $ | 25,879  |
|                                                                               |                     |                      |   |   |
| Expenses:                                                                          |                     |                      |   |   |
| Service costs                                                                      |                     | 6,489                |   | 21,765  |
| Selling, general and administrative                                                |                     | 2,062                |   | 5,809  |
| Restructuring                                                                      |                     | 1,031                |   | 3,414  |
| Amortization of property, equipment and                                intangibles |                     | –    |   | 259  |
| Operating leases                                                                   |                     | 615                  |   | 1,937  |
| Foreign exchange                                                                   |                     | (33)                      |   | 335  |
|                                                                               |                     |                      |   |   |
| Loss before income taxes                                                           |                     | (2,489)                   |   | (7,640) |
|                                                                               |                     |                      |   |   |
| Income tax provision                                                               |                     | –    |   | 350  |
|                                                                               |                     |                      |   |   |
| Net loss from discontinued operations                                              | $                        | (2,489)                   | $ | (7,990) |

                 

             

             

**-            11 - **

----

| **OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements,                            Continued

(Unaudited)

                             

Nine-month periods ended September 30, 2007 and                            2006

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

                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **5.** | **Goodwill and                            other intangible assets:** |
|--------|----------------------------------------------------------------------|

             

|                                           |   |           |   |                      | September                            30,  |
|------------------------------------------------|--------|----------------|--------|---------------------------|------------------------------------------------|
|                                           |   |           |   |                      |                                           | 2007  |
|                                           |   |           |   |                      |                                           |   |
|                                           |   | Gross     |   |                      |                                           |   |
|                                           |   | carrying  |   | Accumulated          |                                           | Net                            book  |
|                                           |   | amount    |   | amortization         |                                           | value  |
|                                           |   |           |   |                      |                                           |   |
| Goodwill                                       | $      | 50,846    | $      | –    | $                                              | 50,846  |
| Customer relationships and service agreements  |   | 64,887    |   | 22,640               |                                           | 42,247  |
| Acquired                            technology |   | 4,520     |   | 3,164                |                                           | 1,356  |
| ISO/ISA                            relations   |   | 7,180     |   | 2,052                |                                           | 5,128  |
| Supplier                            contract   |   | 1,376     |   | 991                  |                                           | 385  |
| Licensing                            agreement |   | 538       |   | 141                  |                                           | 397  |
|                                           |   |           |   |                      |                                           |   |
|                                           | $      | 129,347   | $      | 28,988               | $                                              | 100,359  |

             

Goodwill in the amount of $1,603 was recognized as a result of the            acquisition of all the issued shares of Optimal Payments (Ireland) Limited not already            owned by the Company. Other various merchant payment processing agreements and software            licensing agreements were acquired during the nine-month period ended            September 30, 2007, entitling the Company to future revenues.

             

| December 31, 

2006                 |
|-----------------------------------------------|
|                                          |   |   |   |
|                                          | Gross  |   |   |
|                                          |   | carrying  |   | Accumulated  |   | Net book  |
|                                          |   | amount  |   | amortization  |   | value  |
|                                          |   |   |   |   |   |   |
| Goodwill                                      | $ | 49,243  | $ | –    | $ | 49,243  |
| Customer relationships and service agreements |   | 63,324  |   | 15,331  |   | 47,993  |
| Acquired technology                           |   | 4,520  |   | 2,486  |   | 2,034  |
| ISO/ISA relations                             |   | 7,180  |   | 1,282  |   | 5,898  |
| Supplier contract                             |   | 1,376  |   | 732  |   | 644  |
| Licensing agreement                           |   | 240  |   | 11  |   | 229  |
|                                          |   |   |   |   |   |   |
|                                          | $ | 125,883  | $ | 19,842  | $ | 106,041  |

             

             

**-            12 - **

----

| **OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements,                            Continued

(Unaudited)

                             

Nine-month periods ended September 30, 2007 and                            2006

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

                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **6.** | **Share                            capital:** |
|--------|-----------------------------------------------|

On November 6, 2006, the Board of Directors approved a stock buyback            program which authorizes the Company to purchase up to 1,100,000 of its issued and            outstanding Class "A" shares. The Company may purchase the Class "A" shares            on the open market through the facilities of the Nasdaq Stock Market over the course of            12 months commencing November 21, 2006 and ending November 20, 2007. All shares            purchased under the stock buyback program will be cancelled. During the nine months            ended September 30, 2007, no Class "A" shares were purchased.

             

| **7.** | **Stock                            options and warrants:** |
|--------|------------------------------------------------------------|

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

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

Details of the outstanding stock options are as follows:

             

|                                    |                                        |   | Weighted average                 |
|-----------------------------------------|---------------------------------------------|--------|--------------------------------------------|
|                                    | Number                                 |   | exercise price                   |
|                                    | of                            options  |   | per                            share  |
|                                    |                                        |   |                                       |
| Options outstanding, December 31, 2006  | 3,933,171                              | $      | 7.14                                  |
| Expired/cancelled                       | (630)                                       |   | 7.10                                  |
|                                    |                                        |   |                                       |
| Options outstanding, September 30, 2007 | 3,932,541                              | $      | 7.14                                  |

             

As at September 30, 2007, there were 3,932,541 (September 2006 - nil)            stock options that could potentially dilute basic earnings per share in the future and            were not included in the computation of diluted earnings per share because to do so            would have been anti-dilutive.

             

**-            13 - **

----

| **OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements,                            Continued

(Unaudited)

                             

Nine-month periods ended September 30, 2007 and                            2006

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

                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **7.** | **Stock                            options and warrants (continued):** |
|--------|------------------------------------------------------------------------|

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

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

             

|        | Options                            outstanding | Options                            exercisable |   |
|-------------|------------------------------------------------|------------------------------------------------|--------|
|        |                                           | Weighted                                  |   |   |   |   |   |   |   |   |
|        |                                           | average                                   |   |   |   | Weighted  |   |   |   | Weighted  |
|        |                                           | remaining                                 |   |   |   | average  |   |   |   | average  |
|        |                                           | contractual                               |   |   |   | exercise  |   |   |   | exercise  |
| Exercise    |                                           | life                                      |   |   |   | price/  |   |   |   | price/  |
| price/share |                                           | (years)                                   |   | Number  |   | share  |   | Number  |   | share  |
|        |                                           |                                           |   |   |   |   |   |   |   |   |
| $7.10       |                                           | 1.58                                      |   | 3,865,041  | $ | 7.10  |   | 3,865,041  | $ | 7.10  |
| $9.36       |                                           | 4.22                                      |   | 67,500  |   | 9.36  |   | –    |   | –    |
|        |                                           |                                           |   |   |   |   |   |   |   |   |
|        |                                           | 1.63                                      |   | 3,932,541  | $ | 7.14  |   | 3,865,041  | $ | 7.10  |
|             |                                                |                                                |        |  |  |  |  |  |  |  |  |  |  |

             

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

Under the terms of the Combination Agreement with Terra, the Company            assumed Terra's stock option plan and, as such, stock options governed by this plan            will be exercisable for the Company's Class "A" shares. The exercise price and number            of options outstanding on April 6, 2004, the effective date of the acquisition of            Terra, were adjusted based on the exchange ratio of 0.4532 of the Company's            Class "A" shares for each share of Terra.

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

             

|                                                                  | Options                            with a             | Options                            with a                 |
|-----------------------------------------------------------------------|-------------------------------------------------------|-----------------------------------------------------------|
|                                                                  | U.S. dollar                            exercise price | Canadian                            dollar exercise price |
|                                                                  |                                                  |                                                      |
|                                                                  |                                                  | Weighted                            average          |
|                                                                  | Exercise                            price        | exercise                            price            |
|                                                                  | Number                                           |                                                      | per                            share  | Number  |   | per                            share  |
|                                                                  |                                                  |                                                      |   |   |   | CA$ |
| Options                            outstanding,December 31, 2006 | 134,113                                          | $                                                         | 7.43  | 181,758  | $ | 8.19  |
| Expired/cancelled                                                     | –                                |                                                      | –    | (19,783) |   | 10.58  |
| Exercised                                                             | –                                |                                                      | –    | (18,261) |   | 5.12  |
|                                                                  |                                                  |                                                      |   |   |   |   |
| Options outstanding,September 30, 2007                                | 134,113                                          | $                                                         | 7.43  | 143,714  | $ | 8.25  |

             

 

**-            14 - **

----

| **OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements,                            Continued

(Unaudited)

                             

Nine-month periods ended September 30, 2007 and                            2006

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

                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **7.** | **Stock                            options and warrants (continued):** |
|--------|------------------------------------------------------------------------|

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

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

The weighted average remaining contractual life of the options at            September 30, 2007 is approximately 1.3 year.

As at December 31, 2006 and September 30, 2007, there were 22,003 and            21,978 warrants outstanding, respectively, with a weighted average exercise price of            CA$0.01 and CA$0.01, respectively, and expiring on dates up to March 2008.

At September 30, 2007, all of the Terra options and warrants (September            30, 2006 - nil), could potentially dilute basic earnings per share in the future and            were not included in the computation of diluted earnings per share because to do so            would have been anti-dilutive for nine-month periods ended September 30,            2007.

|   | (c) | Optimal Payments (Ireland) Limited: |
|--------|-----|-------------------------------------|

OPIL established a restricted share unit plan whereby eligible            individuals were awarded rights to receive ordinary shares in OPIL to be issued from            treasury for a nominal consideration. The plan was administered by OPIL’s            remuneration committee. Awards were made to eligible individuals at the discretion of            the remuneration committee, vested in accordance with a specified vesting schedule and            terminate 7 years from date of award.

Changes in restricted share units were as follows:

             

|                                        | RSUs outstanding          | Non-vested RSUs |
|---------------------------------------------|---------------------------|-----------------|
|                                        |                      |            |   |   |   |   |
|                                        |                      |            | Weighted  |   |   | Weighted  |
|                                        |                      |            | average  |   |   | average  |
|                                        |                      |            | fair value  |   |   | fair value  |
|                                        | Number               |            | per unit  | Number  |   | per unit  |
|                                        |                      |            |   |   |   |   |
| Restricted share units, December 31, 2006   | 2,232,711            | $               | 4.71  | 1,332,540  | $ | 6.13  |
|                                        |                      |            |   |   |   |   |
| Exercised                                   | (2,232,711)               |            | 4.71  | (1,332,540) |   | 6.13  |
|                                        |                      |            |   |   |   |   |
| Restricted share units,

September 30, 2007 | –    |            | –    | –    |   | –    |

             

             

**-            15 - **

----

| **OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements,                            Continued

(Unaudited)

                             

Nine-month periods ended September 30, 2007 and                            2006

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

                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **7.** | **Stock                            options and warrants (continued):** |
|--------|------------------------------------------------------------------------|

Optimal Payments (Ireland) Limited (continued):

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

             

| **8.** | **Contingencies and other:** |
|--------|------------------------------|

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

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

|   | (c) | The Company was pursuing the recovery                            of funds withdrawn from a Terra bank account by one of its credit card                            suppliers for various service charges assessed pertaining to periods                            prior to December 31, 2001, on the belief that these charges                            were largely unsubstantiated. The Company’s claim, which was                            being pursued through legal recourse, was settled and received in July                            2007 for $3,000. The Company recorded a gain of approximately $1,600 as                            a result of the settlement in the second quarter, representing the                            difference between the settlement amount and the carrying amount of the                            receivable. The gain has been recorded in selling, general and                            administrative expenses in the consolidated statements of operations                            and comprehensive income (loss) for the nine-month period ended                            September 30, 2007. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

**-            16 - **

----

| **OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements,                            Continued

(Unaudited)

                             

Nine-month periods ended September 30, 2007 and                            2006

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

                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **8.** | **Contingencies and other (continued):** |
|--------|------------------------------------------|

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

|   | (e) | In the sale or other disposition of                            assets out of the ordinary course of business, in addition to possible                            indemnification relating to failure to perform covenants and breach of                            representations and warranties, the Company might agree to indemnify                            the buyer against claims from its past conduct of its business.                            Typically, the term and amount of such indemnification will be limited                            by agreement. The nature of these indemnification agreements prevents                            the Company from estimating the maximum potential liability to                            indemnified parties. Accordingly, no provision has been made in these                            financial statements with respect to this item. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

Following announcements by the U.S. Attorney’s office in the            Southern District of New York relating to its investigation of the U.S. Internet            gambling industry, the Company announced on May 8, 2007 that it has initiated            discussions with the U.S. Attorney’s office in the Southern District of New York            and is in the process of responding to a voluntary request for information issued by            the U.S. Attorney’s office. In connection with such ongoing investigation, the            Company announced on May 11, 2007 that it had received a copy of warrants of seizure            issued by the U.S. Attorney’s Office against funds of certain payment processors            that were on deposit with two U.S. banks. These funds included monies that were on            deposit to the credit of Company affiliates of $19,182. The total amount seized of            $19,182 is presented as restricted cash on the consolidated balance sheets. No            provision has been recorded by the Company for this matter because the outcome of these            discussions and the amount of loss, if any, are not currently determinable.

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

             

**-            17 - **

----

| **OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements,                            Continued

(Unaudited)

                             

Nine-month periods ended September 30, 2007 and                            2006

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

                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **9.** | **Stock-based                            compensation:** |
|--------|----------------------------------------------------------|

Stock-based compensation expense in the consolidated statements of            operations and comprehensive income (loss) was comprised of:

             

             

|                                                                          | Three months ended | Nine months ended         |
|-------------------------------------------------------------------------------|--------------------|---------------------------|
|                                                                          | September 30,      | September 30,             |
|                                                                          |               | 2007                 |   | 2006  |   | 2007  |   | 2006  |
| Expense related to options granted in 2006                                    | $                  | 30                   | $ | –    | $ | 90  | $ | –    |
| Expense related to OPIL restricted share unit                            plan |               | –    |   | 671  |   | 5,967  |   | 1,006  |
|                                                                          |               |                      |   |   |   |   |   |   |
|                                                                          | $                  | 30                   | $ | 671  | $ | 6,057  | $ | 1,006  |

             

| **10.** | **Income                            taxes:** |
|---------|----------------------------------------------|

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

             

|                                                                                                                           | Three months ended | Nine months ended         |
|--------------------------------------------------------------------------------------------------------------------------------|--------------------|---------------------------|
|                                                                                                                           | September 30,      | September 30,             |
|                                                                                                                           |               | 2007                 |   | 2006  |   | 2007  |   | 2006  |
| (Loss) earnings from continuing operations before income                            tax provision and non-controlling interest | $                  | (20)                      | $ | 6,981  | $ | (3,469) | $ | 29,042  |
|                                                                                                                           |               |                      |   |   |   |   |   |   |
| Combined Canadian federal and provincial income taxes at                            32 %                                  | $                  | (6)                       | $ | 2,235  | $ | (1,111) | $ | 9,299  |
| Foreign exchange(1)                                                                                                            |               | (1,215)                   |   | (515) |   | (2,505) |   | (1,660) |
| Change in valuation allowance                                                                                                  |               | 1,437                |   | (3,530) |   | 2,976  |   | (3,015) |
| Stock-based compensation not deductible for                            tax                                                     |               | 10                   |   | 157  |   | 1,940  |   | 232  |
| Permanent differences and other                                                                                                |               | 420                  |   | (516) |   | 307  |   | 439  |
| Differences in tax rates                                                                                                       |               | (253)                     |   | (968) |   | (563) |   | (4,109) |
| Amortization of other asset                                                                                                    |               | –    |   | 39  |   | 236  |   | 39  |
|                                                                                                                           |               |                      |   |   |   |   |   |   |
| Income tax provision (recovery) for continuing                            operations                                           | $                  | 393                  | $ | (3,098) | $ | 1,280  | $ | 1,225  |

             

             

**-            18 - **

----

| **OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements,                            Continued

(Unaudited)

                             

Nine-month periods ended September 30, 2007 and                            2006

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

                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **10.** | **Income taxes                            (continued):** |
|---------|----------------------------------------------------------|

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

             

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

             

             

|                 | Three months ended | Nine months ended |
|----------------------|--------------------|-------------------|
|                 | September 30,      | September 30,     |
|                 |               | 2007         |   | 2006  |   | 2007  |   | 2006  |
|                 |               |              |   |   |   |   |   |   |
| Current income taxes | $                  | (772)             | $ | 1,861  | $ | 1,112  | $ | 8,725  |
| Future income taxes  |               | 1,165        |   | (4,959) |   | 168  |   | (7,500) |
|                 |               |              |   |   |   |   |   |   |
|                 | $                  | 393          | $ | (3,098) | $ | 1,280  | $ | 1,225  |

             

| **11.** | **Segmented                            information:** |
|---------|-------------------------------------------------------|

In 2006, the Company operated in two processing segments, namely gaming            payment services and payment services. On October 13, 2006, the Company’s then            majority-owned subsidiary, OPIL, ceased processing settlement transactions originating            from United States customers that may be viewed as related to on-line gaming, which            represented approximately 81% of the Company's total gaming payment processing services            revenue for the year ended December 31, 2006. On February 23, 2007, the Company            completed the acquisition of the OPIL shares as discussed in note 4 (a) and            reorganized its activities into one payment processing services segment beginning            January 1, 2007.

 

**-            19 - **

----

| **OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements,                            Continued

(Unaudited)

                             

Nine-month periods ended September 30, 2007 and                            2006

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

                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **11.** | **Segmented                            information (continued):** |
|---------|-------------------------------------------------------------------|

Geographic information is as follows:

             

|            |     |                             |   | Property and equipment,        |   |
|-----------------|----------|----------------------------------|--------|--------------------------------|--------|
|            | Revenues | goodwill and intangibles         |   |
|            |     | Three months ended September 30, |   | Nine months endedSeptember 30, |   | September 30,  |   | December 31,  |
|            |     | 2007                        |   | 2006                      |   | 2007  |   | 2006  |   | 2007  |   | 2006  |
|            |     |                             |   |                           |   |   |   |   |   |   |   |   |
| United States   | $        | 21,702                      | $      | 27,803                    | $      | 64,020  | $ | 84,036  | $ | 58,291  | $ | 64,445  |
| Central America |     | 2,624                       |   | 17,944                    |   | 10,709  |   | 53,564  |   | –    |   | –    |
| Canada          |     | 1,592                       |   | 2,335                     |   | 5,177  |   | 6,837  |   | 42,025  |   | 43,611  |
| Europe          |     | 1,206                       |   | 3,628                     |   | 4,504  |   | 8,806  |   | 1,682  |   | 106  |
| Other           |     | 498                         |   | 1,587                     |   | 1,320  |   | 4,718  |   | –    |   | –    |
|            |     |                             |   |                           |   |   |   |   |   |   |   |   |
|            | $        | 27,622                      | $      | 53,297                    | $      | 85,730  | $ | 157,961  | $ | 101,998  | $ | 108,162  |
|                 |          |                                  |        |                                |        |  |  |  |  |  |  |  |  |  |  |

             

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

             

| **12.** | **Supplemental                            disclosure of cash flow information and other                            information:** |
|---------|-----------------------------------------------------------------------------------------------------------------------------------|

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

             

|                                                                                                |   | Three                            months ended |   | Nine months                            ended |
|-----------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|----------------------------------------------|
|                                                                                                |   | September                            30,      |   | September                            30,     |
|                                                                                                |   | 2007                                     |   | 2006                                    |   | 2007  |   | 2006  |
|                                                                                                |   |                                          |   |                                         |   |   |   |   |
| Cash and short-term investments held as                            reserves                         | $      | 2,810                                    | $      | 1,145                                   | $ | 11,130  | $ | 211  |
| Restricted cash                                                                                     |   | –                        |   | –                       |   | (19,182) |   | –    |
| Settlement assets                                                                                   |   | 1,015                                    |   | (4,060)                                      |   | 6,068  |   | 3,834  |
| Accounts receivable                                                                                 |   | 3,703                                    |   | 934                                     |   | 4,160  |   | (2,071) |
| Income taxes receivable and refundable investment tax                            credits receivable |   | 47                                       |   | 397                                     |   | (385) |   | (1) |
| Prepaid expenses                                                                                    |   | (670)                                         |   | (136)                                        |   | 652  |   | (562) |
| Accounts payable and accrued liabilities                                                            |   | 1,339                                    |   | 2,580                                   |   | (4,382) |   | 2,507  |
| Income taxes payable                                                                                |   | (1,482)                                       |   | 1,726                                   |   | (962) |   | 636  |
| Customer reserves and security deposits                                                             |   | (4,013)                                       |   | (150)                                        |   | (39,934) |   | (13,591) |
|                                                                                                |   |                                          |   |                                         |   |   |   |   |
| Net                            change in operating assets and liabilities                           | $      | 2,749                                    | $      | 2,436                                   | $ | (42,835) | $ | (9,037) |

|   |   |   |   |   |   |   |   |   |
|--------|--------|--------|--------|--------|--------|--------|--------|--------|

 

**-            20 - **

----

             

| **OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements,                            Continued

(Unaudited)

                             

Nine-month periods ended September 30, 2007 and                            2006

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

                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **12.** | **Supplemental                            disclosure of cash flow information and other information                            (continued):** |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------|

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

             

|                             |   | Three                            months ended |   | Nine months                            ended |
|----------------------------------|--------|-----------------------------------------------|--------|----------------------------------------------|
|                             |   | September                            30,      |   | September                            30,     |
|                             |   | 2007                                     |   | 2006                                         |   | 2007  |   | 2006  |
|                             |   |                                          |   |                                         |   |   |   |   |
| Cash paid during the period for: |   |                                          |   |                                         |   |   |   |   |
| Interest                         | $      | 34                                       | $      | 5                                       | $ | 75  | $ | 14  |
| Income taxes                     |   | 1,547                                    |   | 2,264                                   |   | 2,226  |   | 5,954  |
|                             |   |                                          |   |                                         |   |   |   |   |

             

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

             

|                                                                                                 |   | September 30,  |   | December                            31,  |
|------------------------------------------------------------------------------------------------------|--------|---------------------|--------|-----------------------------------------------|
|                                                                                                 |   | 2007           |   | 2006                                     |
|                                                                                                 |   |                |   |                                          |
| Cash and cash equivalents consist of:                                                                |   |                |   |                                          |
| Cash balances with                            banks                                                  | $      | 101,412        | $      | 59,069                                   |
| Short-term investments, bearing interest at 5.21% (2006                            - 5.29% to 5.32%) |   | 12,496         |   | 44,853                                   |
|                                                                                                 |   |                |   |                                          |
|                                                                                                 | $      | 113,908        | $      | 103,922                                  |

             

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

Included in "selling, general and administrative expenses" in the            consolidated statements of operations and comprehensive income (loss) is a foreign            exchange loss of $601 for the three-month period ended September 30, 2007 (September            30, 2006 - $11) and $911 for the nine-month period ended

September 30, 2007 (September 30, 2006 - $493).

 

**-            21 - **

----

| **OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements,                            Continued

(Unaudited)

                             

Nine-month periods ended September 30, 2007 and                            2006

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

                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **13.** | **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,  |   | December 31,  |
|------------------------------------------------------------------------------------|--------|---------------------|--------|--------------------|
|                                                                               |   | 2007           |   | 2006          |
|                                                                               |   |                |   |               |
| Share capital in accordance with Canadian                            GAAP          | $      | 202,434        | $      | 202,252       |
| Stock-based compensation costs on options                            exercised(1): |   |                |   |               |
| Cumulative effect of prior years                                                   |   | 39,868         |   | 39,868        |
| Change in reporting currency (2)                                                   |   | 2,588          |   | 2,588         |
|                                                                               |   |                |   |               |
| Share capital in accordance with U.S. GAAP                                         | $      | 244,890        | $      | 244,708       |

             

|   | (ii) | Additional paid-in capital: |
|--------|------|-----------------------------|

             

|                                                                                   |   | September 30,  |   | December 31,  |
|----------------------------------------------------------------------------------------|--------|---------------------|--------|--------------------|
|                                                                                   |   | 2007           |   | 2006          |
|                                                                                   |   |                |   |               |
| Additional paid-in capital in accordance with Canadian                            GAAP | $      | 29,131         | $      | 23,169        |   |
| Stock-based compensation costs                            (1):                         |   |                |   |               |   |
| Cumulative effect of prior years                                                       |   | 68,757         |   | 68,757        |   |
| Stock-based compensation costs on options exercised                            (1):    |   |                |   |               |   |
| Cumulative effect of prior years                                                       |   | (39,868)            |   | (39,868)           |   |
| Change in reporting currency (2)                                                       |   | 968            |   | 968           |   |
|                                                                                   |   |                |   |               |   |
| Additional paid-in capital in accordance with U.S.                            GAAP     | $      | 58,988              | $      | 53,026        |   |

             

 

**-            22 - **

----

| **OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements,                            Continued

(Unaudited)

                             

Nine-month periods ended September 30, 2007 and                            2006

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

                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **13.** | **Canadian/U.S. reporting differences                            (continued):** |
|---------|---------------------------------------------------------------------------------|

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

|   | (iii) | Deficit: |
|--------|-------|----------|

             

|                                                                     |   | September 30,  |   | December 31,  |
|--------------------------------------------------------------------------|--------|---------------------|--------|--------------------|
|                                                                     |   | 2007           |   | 2006          |
|                                                                     |   |                |   |               |
| Deficit in accordance with Canadian GAAP                                 | $      | (9,463)             | $      | (4,555)            |
| Stock-based compensation costs(1):                                       |   |                |   |               |
| Cumulative effect of prior years                                         |   | (68,757)            |   | (68,757)           |
| Stock-based compensation to non-employees                            (1) |   | (834)               |   | (834)              |
| Change in reporting currency (2)                                         |   | (1,189)             |   | (1,189)            |
|                                                                     |   |                |   |               |
| Deficit in accordance with US GAAP                                       | $      | (80,243)            | $      | (75,335)           |

             

|   | (1) | Stock-based compensation: |
|--------|-----|---------------------------|

For U.S. GAAP purposes, the Company adopted Statement of Financial            Accounting Standards (SFAS) No-123R,*Share-based            Payments*, on January 1, 2006, which requires the expensing of            all options issued, modified or settled based on the grant date fair value over the            period during which the employee is required to provide service. The Company adopted            SFAS 123R using the modified prospective approach, which requires application of the            standard to all awards granted, modified or cancelled after January 1, 2006 and to            all awards for which the requisite service has not been rendered as at such date.            Previously, effective January 1, 2003, the Company adopted the fair value recognition            provisions of SFAS 123.

A description of the Company's stock option plans and OPIL's restricted            share unit plan is presented in note 7.

 

**-            23 - **

----

| **OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements,                            Continued

(Unaudited)

                             

Nine-month periods ended September 30, 2007 and                            2006

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

                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **13.** | **Canadian/U.S. reporting differences                            (continued):** |
|---------|---------------------------------------------------------------------------------|

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

|   | (iii) | Deficit: |
|--------|-------|----------|

Additional disclosures required under SFAS 123R are as            follows:

             

|                                                                                                                                                        |   |                      |   | Terra     |   | OPIL                 |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|--------|----------------|--------|---------------------------|
|                                                                                                                                                        |   | Stock                |   | options   |   | restricted           |
|                                                                                                                                                        |   | option               |   | and       |   | share                |
|                                                                                                                                                        |   | plan                 |   | warrants  |   | units                |
|                                                                                                                                                        |   |                      |   |           |   |                      |
| Aggregate intrinsic value:                                                                                                                                  |   |                      |   |           |   |                      |
| Options exercised during                            the nine-month      period ended September 30,                            2007 | $      | –    | $      | 59        | $      | 2,625                |
| Options and warrants outstanding and                            exercisable                                                                                 |   | –    |   | 118       |   | –    |
|                                                                                                                                                        |   |                      |   |           |   |                      |

 

The aggregate intrinsic value for outstanding and exercisable options at            September 30, 2007 represented the pre-tax intrinsic value based on the Company’s            closing stock price at September 30, 2007, which would have been received by            option holders had they exercised their securities at that date.

|   | (2) | Change in reporting currency: |
|--------|-----|-------------------------------|

In 1998, the Company adopted the U.S. dollar as its reporting currency.            Under Canadian GAAP, at the time of change in reporting currency, the historical            financial statements were presented using a translation of convenience. Under U.S.            GAAP, the financial statements, including prior years, are translated according to the            current rate method. Accordingly, the cumulative translation account included as part            of accumulated other comprehensive income in shareholders' equity under Canadian GAAP            does not exist for U.S. GAAP purposes.

 

**-            24 - **

----

| **OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements,                            Continued

(Unaudited)

                             

Nine-month periods ended September 30, 2007 and                            2006

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

                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **13.** | **Canadian/U.S. reporting differences                            (continued):** |
|---------|---------------------------------------------------------------------------------|

|   | (b) | Accumulated other comprehensive income                            (loss): |
|--------|-----|---------------------------------------------------------------------------|

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

Accumulated other comprehensive income (loss) under U.S. GAAP, which            resulted solely from the translation of the financial statements up to June 30,            2000, the date the Company adopted the United States dollar as its measurement            currency, in accordance with the current rate method, is $(3,018) as at September 30,            2007 and December 31, 2006.

|   | (c) | FIN 48 - Accounting for tax uncertainties: |
|--------|-----|--------------------------------------------|

For U.S. GAAP purposes, the Company adopted Financial Accounting            Standards Board Interpretation No. 48,*Accounting for            Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 (FIN            48).*FIN 48 clarifies the accounting for income taxes            recognized in a company's financial statements in accordance with FASB statement No.            109. FIN 48 prescribes a more-likely-than-not recognition threshold for tax            uncertainties. The adoption of FIN 48 resulted in no adjustment to the liability for            unrecognized tax benefits. As of the date of adoption, the total amount of unrecognized            tax benefits was $11.3 million, of which $5.4 million would impact the annual effective            rate if realized. For U.S. GAAP tax purposes, unrecognized tax benefits would be            classified as non-current other liabilities. The Company recognizes interest and            penalties related to unrecognized tax benefits in income tax expense. At September 30,            2007, the total liability for unrecognized tax benefits was approximately $13.7            million, with the increase represented by foreign exchange fluctuations, additional            interest and other increases to the reserve.

The Company and its subsidiaries file income tax returns with federal            and provincial tax authorities within Canada. The Company's foreign affiliates file            income tax returns in various jurisdictions, the most significant of which are Ireland,            the United Kingdom and the United States. In general, the Company is subject to            examination by taxing authorities for years after 2000. The Canadian tax authorities            have commenced examinations of tax returns for certain Canadian subsidiaries for the            taxation years 2003 to 2006.

 

**-            25 - **

----

| **OPTIMAL GROUP INC.**

Notes to Consolidated Financial Statements,                            Continued

(Unaudited)

                             

Nine-month periods ended September 30, 2007 and                            2006

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

                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **14.** | **Comparative                            figures:** |
|---------|-----------------------------------------------------|

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

             

| **15.** | **Subsequent                            events:** |
|---------|---------------------------------------------------|

|   | (a) | WowWee Limited: |
|--------|-----|-----------------|

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

The acquisition was completed at an approximate cost of $67,000, $55,000            of which was incurred in satisfaction of the cash portion of the purchase price,            $10,000 of which was incurred through the issuance of 2,169,197 Class “A”            shares of the Company at a price of $4.61 per share, in satisfaction of the stock            portion of the purchase price, and the balance of which was incurred upon the issuance            of a warrant having an estimated fair value of $2 million, to purchase up to an            additional 820,000 of the Company’s Class “A” shares at a price of            $5.56 per share. The fair value of the warrant was estimated using the Black-Scholes            pricing model. The Company will account for this acquisition using the purchase method            and the results will be consolidated with those of the Company from the date of            acquisition. The Company is in the process of finalizing the valuation of the net            assets acquired.

|   | (b) | Renewal of stock buyback program: |
|--------|-----|-----------------------------------|

On November 6, 2007, 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            twelve months commencing November 21, 2007 and ending November 20, 2008. All shares            purchased under the stock buyback program will be cancelled.

             

             

             

 

**-            26 - **

----

             

| **Item 2.** | **MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL                            CONDITION AND RESULTS OF OPERATIONS** |
|-------------|--------------------------------------------------------------------------------------------------------------------|

 

The following discussion of the financial condition and results of            operations of our Company describes our business, seasonality and trends within our            business environment, the critical accounting policies of our Company that will help            you understand our interim consolidated financial statements, and the principal factors            affecting our results of operations, liquidity and capital resources. This discussion            should be read in conjunction with our consolidated financial statements and management            discussion and analysis for the year ended December 31, 2006, and the factors set forth            below under “Cautionary Statements Regarding Forward-Looking Statements”.            All dollar amounts are expressed in United States dollars (unless otherwise stated)            and, other than those expressed in millions of dollars, have been rounded to the            nearest thousand. We prepare our interim consolidated financial statements in            accordance with generally accepted accounting principles (“GAAP”) in            Canada, with reconciliation to U.S. GAAP, as disclosed in note 13 of the notes to our            interim consolidated financial statements. Any reference in this report to uniform            resource locator (URL) website locations are inactive textual references only and the            contents of such websites do not form a part of this Form 10-Q.

             

**Cautionary Statements Regarding Forward-Looking            Statements**

 

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

 

|   | **•** | existing and future governmental                            regulations; |
|--------|------------|--------------------------------------------------------------------------|

             

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

             

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

             

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

             

|   | **•** | our ability to safeguard against breaches of privacy                            and security when processing electronic transactions; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------|

             

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

             

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

             

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

             

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

             

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

 

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

 

**-            27 - **

----

|   | **•** | the factors described under Item 1A “Risk                            Factors” in our Annual Report on Form 10-K for the year ended                            December 31, 2006, as amended below in Part II at Item 1A;                            and |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

             

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

             

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

 

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

 

On November 7, 2007, we completed our previously announced acquisition            of substantially all of the assets of WowWee Limited, a privately-held Hong Kong-based            developer, marketer and supplier of technology-based, consumer robotic, toy and            electronic products, as well as substantially all of the assets of WowWee Marketing,            with offices in La Jolla, California, and WowWee Group, with offices in Montreal,            Quebec. WowWee Marketing and WowWee Group were service providers to WowWee Limited in            the operation of its business. This acquisition was completed at an approximate cost of            US$67 million, US$55 million of which was incurred in satisfaction of the cash portion            of the purchase price, US$10 million of which was incurred through the issuance of            2,169,197 of our common shares, at a price of US$4.61 per share, in satisfaction of the            stock portion of the purchase price, and the balance of which was incurred upon the            issuance of a warrant with an estimated fair value of approximately $2 million to            purchase up to an additional 820,000 of our common shares at a price of US$5.56 per            share. In this Form 10-Q, all references to the WowWee business, now carried on by our            recently established Hong Kong subsidiary, and supported by newly established Canadian            and U.S. subsidiaries of ours, is referred to as            “WowWee”1.

             

We will account for this acquisition using the purchase method and the            results of WowWee will be consolidated with those of the Company from the date of            acquisition, November 7, 2007.

             

WowWee, with a team of design engineers based in Hong Kong and La Jolla,            designs, develops, markets and distributes technology-based consumer products and toys.            WowWee is best known for its line of Robo-branded consumer robotic products.            WowWee’s Robosapien, introduced in 2004, was the first in a line of robotic            products that use biomorphic motion technology and is uniquely programmable to perform            a variety of functions. Today, the Robo line includes Roboraptor, a robotic dinosaur;            Roboreptile, a robotic reptile; Robopet, a robotic dog; Robopanda, a robotic panda;            Roboquad, a robotic quadraped; Roboboa, a robotic snake; Robosapien V2; and RS Media, a            technologically advanced version of Robosapien.

 

WowWee also develops and markets products in its “Alive”            series, based upon highly sophisticated and realistic animatronic technology. In early            2007, WowWee launched the Flytech Dragonfly, adding the radio-controlled flight segment            to its product base.

 

WowWee’s core competency and key competitive advantage has been            its ability to identify cutting-edge technologies and through its creative, and            flexible design process, to incorporate these technologies in the development of            innovative consumer-focused products. WowWee has continued to expand its portfolio of            entertainment robots to incorporate “smart”, task-based features, setting a            standard for affordable, high-end, consumer-robotic and electronic devices.            WowWee’s products are sold through its direct sales channel as well as through            international distributors. Approximately 65% of its products are sold in North            America, with the balance being sold internationally.

_________________________

1 WowWee, Robosapien, Roboraptor,            Roboreptile, Robopet, Robopanda, Roboquad, Roboboa, Flytech and Flytech Dragonfly are            trademarks or registered trademarks of ours.

 

**-            28 - **

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In 2006 and 2005, WowWee’s revenues were approximately US$117            million and US$131 million, respectively, and earnings before interest, taxes,            depreciation and amortization were approximately US$5 million and US$27.5 million,            respectively. The results of WowWee are subject to seasonal variability with a            significant portion of revenues generated in the third and fourth quarter of each            calendar year.

 

Senior management of WowWee, including the majority shareholders of            WowWee Limited, continue to be employed in the business.

 

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

 

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

 

 
|  | ·      | Expanding sales and distribution through a broadening of the sales                        channels, particularly outside North America and in emerging markets; |
|--|----------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | ·      | Expanding product design, development and production capabilities to                        produce an increased number of SKUs (stock keeping units) 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 |
|--|----------------------------------------|---------------------------------------------------------------------------------------------------------------------|
|  | ·      | Evaluation of potential acquisition opportunities. |
|--|----------------------------------------|----------------------------------------------------|

 

We continue to operate a payments company with operations primarily in            North America and the United Kingdom. Through wholly owned subsidiaries, Optimal            Payments processes credit card payments for small and medium-sized Internet businesses,            mail-order/telephone-order (MOTO) merchants and retail point-of-sale merchants, and            processes electronic checks and direct debits online and by telephone, as well as            through its stored-value, electronic wallet.

             

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

             

In 2006, we operated in two processing segments, namely gaming payment            services through our then majority-owned subsidiary, FireOne Group plc (now known as            Optimal Payments (Ireland) Limited, “OPIL”) and payment services through            Optimal Payments Inc. On October 13, 2006, the United States Unlawful Internet Gambling            Enforcement Act of 2006 (the “Act”), was enacted. Upon the passage of the            Act, OPIL immediately ceased processing settlement transactions originating from United            States customers that may be viewed as related to online gaming, which accounted for            approximately 81% of the revenues of the gaming payment services segment for the year            ended December 31, 2006. On December 15, 2006, in order to repatriate and realign            certain assets, we announced that Optimal Acquisition Inc., a wholly-owned subsidiary,            would make an offer to acquire all of the issued and to be issued outstanding ordinary            shares of OPIL it did not already own at a price of £0.60 per share, representing            a cash consideration of $18.2 million inclusive of transaction costs. As a result,            effective January 1, 2007, we reorganized our activities and we now operate and report            our payment processing business as a combined segment.

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

 

**-            29 - **

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Effective September 30, 2006, we sold our Canadian hardware maintenance            and repair services segment. The divestiture was in accordance with our strategy of            identifying opportunities that can generate superior returns while selling assets that            do not generate acceptable returns. The results of operations for this business segment            are included in discontinued operations on the consolidated statement of operations for            the comparative period.

             

**Payment Processing**

 

We provide technology and services that businesses require to accept            credit card, electronic check and direct debit payments. We process credit card            payments for card-not-present and card-present transactions, including Internet            businesses, mail-order/telephone-order (MOTO) merchants and retail point-of-sale            merchants, and process electronic checks and direct debits online and by telephone, as            well as through our stored-value, electronic wallet.

             

We generate revenues primarily from fees charged to merchants for            processing services, as well as from fees charged to consumers who utilize our            electronic wallet. Fees charged to merchants typically include a discount rate, based            upon a percentage of the dollar amounts processed, and a variety of fixed transaction            fees. Merchant fees charged are based upon the merchant’s transaction volume and            risk profile. Generally, higher discount rates are charged for card-not-present            transactions than for card-present transactions in order to compensate for the            increased risk of fraud associated with these transactions. Other fees are derived from            a variety of fixed transaction fees, including set-up fees, fees for monthly minimum            charge volume requirements, statement fees, annual fees and fees for other            miscellaneous items, such as handling chargebacks. Fees charged to consumers who            utilize our electronic wallet are based on a fixed amount per transaction. Revenue is            recognized primarily at the time the transaction is performed. Where we are the primary            party responsible for providing processing services, revenue is recorded on a gross            basis and amounts paid to the acquiring processing supplier are recorded as part of our            transaction processing expenses. Where we are not the primary party in providing a            merchant with processing services, we record revenue net of amounts paid to the            acquiring processing supplier.

             

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

 

**Critical Accounting Policies and Estimates**

 

The accompanying interim consolidated financial statements have been            prepared in accordance with Canadian GAAP. In the preparation of our financial            statements we are required to make numerous estimates and assumptions. Financial            results as determined by actual events could differ from those estimates and            assumptions, and therefore affect our reported results of operations and financial            position. Our significant accounting policies are more fully described in note 3 of the            notes to our annual audited consolidated financial statements included in our Form 10-K            Annual Report for the year ended December 31, 2006. The critical accounting policies            described here are those that are most important to the depiction of our financial            condition and results of operations. The preparation of financial statements also            involves significant management judgment in making estimates about the effect of            matters that are inherently uncertain. While best estimates have been used for            reporting financial statement items subject to measurement uncertainty, management            considers that it is possible that changes in future conditions in the near term could            affect the reported amounts of assets and liabilities and disclosures of contingent            assets and liabilities. “Near term” is considered to be within one year            from the date of financial statements.

 

**-            30 - **

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Stock-based Compensation

 

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

 

Reserve            for Losses on Merchant Accounts

 

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

             

Goodwill and Other Intangibles

 

Goodwill is not amortized but rather evaluated under an impairment            approach on an annual basis using December 31st as the measurement date.            Other intangible assets with finite lives continue to be amortized over their estimated            useful lives. The amounts recorded as intangible assets at the date of acquisition            represent the estimated fair value of these assets based on estimated future cash flows            discounted at appropriate discount rates. In addition, in our assessment of impairment            of goodwill, we are required to determine the fair value of the businesses acquired, on            an annual basis, from which the goodwill and intangibles originated. For intangibles            with finite lives, we make estimates of future cash flows to be generated from the            related assets. No write-down of goodwill or other intangibles was recorded in the            nine-month period ended September 30, 2007.

 

Income            Taxes

 

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

 

Contingent liabilities

 

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

 

**-            31 - **

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**Recent Accounting Pronouncements**

 

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

 

Financial Instruments:

 

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

As a result of the adoption of these standards, we have classified our            cash and cash equivalents, short-term investments and cash and short-term investments            held as reserves as available for sale. We have also classified our accounts            receivable, settlement assets, and long-term receivables as loans and receivables, and            our accounts payable and accrued liabilities, and customer reserves and security            deposits as other financial liabilities, all of which are measured at amortized cost.            The adoption of these new standards also resulted in the reclassification of the amount            of $1.5 million previously recorded in "Cumulative translation adjustment" to            "Accumulated other comprehensive loss" on the consolidated balance sheets. The adoption            of these standards had no impact on the consolidated statements of            operations.

 

Accounting changes:

 

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

 

Accounting for uncertainty in income taxes:

 

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

 

Fair            value measurements:

 

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

 

**-            32 - **

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Fair            value option for financial assets and liabilities:

 

In February 2007, the FASB issued*Statement of            Financial Accounting Standards (SFAS) No. 159*,*Fair Value Option for Financial Assets and Financial Liabilities-            Including an amendment of FASB Statement No. 115*.*SFAS No. 159*permits entities the option to            measure financial instruments at fair value (“fair value option”) thereby            achieving an offsetting effect for accounting purposes for certain changes in fair            value of certain related assets and liabilities without having to apply hedge            accounting. The fair value option is applied on an instrument by instrument basis to            the entire instrument (not a portion of an instrument). Items eligible for the fair            value option are measured at fair value at specified election dates. This statement is            effective for financial instruments issued for fiscal years after November 15, 2007. We            do not expect the adoption of*SFAS No. 159*to materially impact our financial statements.

 

**Financial Condition**

 

As at September 30, 2007, our net cash position (see details below) was            $123.1 million, compared to $134.2 million as at December 31, 2006. The decrease in net            cash is primarily due to the acquisition of all the issued and outstanding ordinary            shares of OPIL held by non-controlling shareholders. A significant portion of cash and            cash equivalents, and short-term investments have a corresponding liability as these            amounts are derived from reserves and security deposits which are due to merchants (see            "Payment Processing"). Restricted cash respresents amounts seized by the U.S.            Attorney’s Office in connection with its ongoing investigation of the U.S.            Internet gambling industry (see “Overview and Recent Developments”).            Settlement assets result from timing differences in the settlement process of our            payment processing business segment. Settlement assets are typically funded to us            within days from the transaction processing date. As at September 30, 2007, our net            cash position was as follows:

 

|                                    | **September 30,** | **December 31,**    |   |
|-----------------------------------------|-------------------|---------------------|--------|
| (U.S. dollars, in thousands)            | **2007**          | **2006**            |   |
|                                    |              |                |   |   |
| Cash and cash equivalents               | $                 | 113,908        | $      | 103,922  |
| Restricted cash                         |              | 19,182         |   | -    |
| Cash held as reserves                   |              | 9,230          |   | 18,960  |
| Short-term investments                  |              | -    |   | 71,621  |
| Short-term investments held as reserves |              | 1,710          |   | 3,110  |
| Settlement assets                       |              | 993            |   | 7,061  |
|                                    |              | 145,023        |   | 204,674  |
|                                    |              |                |   |   |
| Less:                                   |              |                |   |   |
| Bank indebtedness                       |              | -    |   | (8,581) |
| Customer reserves and security deposits |              | (21,963)            |   | (61,897) |
| Net cash position                       | $                 | 123,060        | $      | 134,196  |
|                                         |                   |                     |        |  |  |

             

Working capital, excluding cash and short-term investments held as            reserves and restricted cash, as at September 30, 2007 was $78.1 million, as compared            to $94.6 million at December 31, 2006. The decrease in working capital is primarily due            to cash used for the acquisition of all the issued and outstanding ordinary shares of            OPIL held by non-controlling shareholders.

We were pursuing the recovery of funds withdrawn from our bank account            by one of our credit card suppliers for various service charges assessed pertaining to            periods prior to December 31, 2001, on the belief that these charges were largely            unsubstantiated. Our claim, which was being pursued through legal recourse, was settled            and received in July 2007 for $3.0 million. As a result of the settlement, we recorded            a gain of $1.6 million in the second quarter representing the difference between the            settlement amount and the carrying amount of the receivable. The gain was recorded as            part of selling, general and administrative expenses in the consolidated statements of            operations in the second quarter of 2007.

             

Accounts receivable as at September 30, 2007 were $5.2 million compared            to $5.6 million at December 31, 2006.

             

**-            33 - **

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Goodwill and other intangible assets decreased by $5.6 million, from            $106.0 million as at December 31, 2006 to $100.4 million as at September 30, 2007. This            decrease resulted primarily from goodwill of $1.6 million recorded on the acquisition            of all the issued and outstanding ordinary shares of OPIL held by non-controlling            shareholders and the acquisition of $1.9 million of intangible assets being offset by            amortization for the period of $9.4 million.

 

Customer reserves and security deposits as at September 30, 2007 were            $22.0 million compared to $61.9 million as at December 31, 2006. The decrease of $39.9            million was primarily due to a reduction in transaction processing volume in the gaming            payment processing services segment, resulting from the enactment of the            Act.

             

Shareholders’ equity as at September 30, 2007 was $220.6 million            as compared to $219.4 million as at December 31, 2006. The increase is attributable            primarily to the results of operations net of stock-based compensation.

             

**Results of Operations**

 

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

 

*Nine-month period ended September 30, 2007 compared to the nine-month            period ended September 30, 2006*

 

Revenues decreased by $72.3 million, from $158.0 million for the            nine-month period ended September 30, 2006 to $85.7 million for the nine-month period            ended September 30, 2007. The decrease in revenues is due primarily to the cessation,            in October 2006, of the U.S. based gaming portion of OPIL’s payment processing            business.

 

Transaction processing expenses decreased by $22.2 million, from $76.4            million for the nine-month period ended September 30, 2006 to $54.2 million for the            nine-month period ended September 30, 2007. The decrease in transaction processing            expenses is due primarily to the cessation, in October 2006, of the U.S. based gaming            portion of OPIL’s payment processing business.

             

Selling, general and administrative expenses decreased by $20.4 million,            from $41.5 million for the nine-month period ended September 30, 2006 to $21.1 million            for the nine-month period ended September 30, 2007. The net decrease is due primarily            to the cessation, in October 2006, of the U.S. based gaming portion of OPIL’s            payment processing business and a gain of approximately $1.6 million resulting from the            settlement of a claim with one of our former credit card processing            suppliers.

             

Amortization of intangibles pertaining to transaction processing            increased by $0.2 million, from $9.2 million for the nine-month period ended September            30, 2006 to $9.4 million for the nine-month period ended September 30, 2007.

             

Stock-based compensation pertaining to selling, general and            administrative expense is attributable to the accounting for the fair value of stock            options and restricted share units granted. As a result of our acquisition of all of            the issued and outstanding ordinary shares of OPIL held by non-controlling shareholders            in February 2007, all of the unvested restricted share units became exercisable and the            remaining unamortized compensation cost of $6.0 million was recognized. Stock-based            compensation expense for the nine-month period ended September 30, 2007 was $6.1            million.

             

Research and development expenses decreased by $ 0.7 million, from $2.5            million for the nine-month period ended September 30, 2006 to $1.8 million for the            nine-month period ended September 30, 2007.

             

Amortization of property and equipment decreased by approximately $0.4            million, from $1.2 million for the nine-month period ended September 30, 2006 to $0.8            million for the nine-month period ended September 30, 2007. The decrease is due            primarily to a lower carrying amount of property and equipment in 2007 compared to            2006.

             

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The provision for income taxes was $1.3 million for the nine-month            period ended September 30, 2007 compared to $1.2 million for the nine-month period            ended September 30, 2006. The effective tax rate in 2007 was higher than the comparable            2006 period due to changes in the valuation allowance, differences in the tax rates of            foreign jurisdictions, and permanent differences resulting from stock-based            compensation. The 2007 tax provision includes an increase to the valuation allowance of            $3.0 million for the nine-month period ended September 30, 2007, which is largely made            up of unrealized foreign exchange losses not likely to be realized. In 2006, we            recorded a decrease of $3.0 million to the valuation allowance, due primarily to the            recognition of previously unrecognized tax assets. In 2006, a greater portion of our            income was taxable in Ireland at a lower effective tax rate than in Canada. As a            result, differences in jurisdictional tax rates lowered our tax provision by only $0.5            million compared to $4.1 million in 2006. In addition, the 2007 tax provision includes            the tax effect of non-deductible stock-based compensation expense in the amount of $1.9            million compared to $0.2 million in 2006, as a result of the acceleration of vesting            and exercise of restricted stock units in connection with the privatization of            OPIL.

             

Our tax provision also includes the effect of future taxes on unrealized            foreign exchange gains and losses, which arise upon the conversion into Canadian            dollars of net monetary assets and liabilities denominated in U.S. dollars for purposes            of determining taxable income under Canadian income tax regulations. Since the U.S.            dollar is our measurement currency and our consolidated financial statements are            presented in U.S. dollars, these foreign exchange gains and losses do not affect            earnings before income taxes. In 2007, our tax provision includes a future tax recovery            of $2.5 million related to foreign exchange compared to a recovery of $1.7 million for            2006.

 

We recorded non-controlling interest of $0.2 million for the nine-month            period ended September 30, 2007 compared to $5.5 million for the nine-month period            ended September 30, 2006. The decrease results primarily from our acquisition in            February 2007 of all of the issued and outstanding ordinary shares of OPIL held by            non-controlling shareholders. After this date, non-controlling interest is no longer            recorded.

             

Our net loss for the nine-month period ended September 30, 2007 was $4.9            million (or $0.21 per share – basic and diluted), compared to net earnings of            $10.0 million (or $0.43 per share – basic and $0.39 per share – diluted)            for the nine-month period ended September 30, 2006. The decrease is due primarily to            the cessation in October 2006 of the U.S. based gaming portion of OPIL’s payment            processing business.

             

Adjusted earnings were $11.2 million (or $0.47 per share – basic            and $0.46 per share - diluted) for the nine-month period ended September 30, 2007            compared to adjusted earnings of $34.4 million (or $1.46 per share – basic and            $1.34 per share – diluted) for the nine-month period ended September 30,            2006.

             

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

             

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

             

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

 

**-            35 - **

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| Reconciliation of Non-GAAP Financial                            Information                                                                         |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| (expressed in thousands of U.S. dollars)                                                                                                            |   |   |
|                                                                                                                                                | **                                             Nine months ended** |
|                                                                                                                                                | **                                               September 30,** |
|                                                                                                                                                |   | **2007** |   | **2006** |
|                                                                                                                                                |   |   |   |   |
| Net (loss) earnings                                                                                                                                 | $ | (4,908) | $ | 10,026 |
| Add:                                                                                                                                                |   |   |   |   |
|                                                                                                                                                |   |   |   |   |
| Amortization of intangibles pertaining to transaction                            processing,net of income tax                            recoveries |   | 9,138  |   | 8,711 |
| Foreign exchange losses                                                                                                                             |   | 911  |   | 493 |
| Stock-based compensation pertaining to selling,general and administrative expenses                                                                  |   | 6,057  |   | 1,006 |
| Loss from discontinued operations                                                                                                                   |   | -    |   | 12,273 |
| Impairment loss                                                                                                                                     |   | -    |   | 1,910 |
| Adjusted earnings                                                                                                                                   | $ | 11,198  | $ | 34,419 |

 

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

 

Revenues decreased by $25.7 million, from $53.3 million for the            three-month period ended September 30, 2006 to $27.6 million for the three-month period            ended September 30, 2007. The decrease in revenues is due primarily to the cessation,            in October 2006, of the U.S. based gaming portion of OPIL’s payment processing            business.

 

Transaction processing expenses decreased by $9.0 million, from $26.4            million for the three-month period ended September 30, 2006 to $17.4 million for the            three-month period ended September 30, 2007. The decrease in transaction processing            expenses is due primarily to the cessation, in October 2006, of the U.S. based gaming            portion of OPIL’s payment processing business.

             

Selling, general and administrative expenses decreased by $7.4 million,            from $15.0 million for the three-month period ended September 30, 2006 to $7.6 million            for the three-month period ended September 30, 2007. The decrease is due primarily to            the cessation, in October 2006, of the U.S. based gaming portion of OPIL’s            payment processing business.

             

Amortization of intangibles pertaining to transaction processing            remained constant at $3.1 million for the three-month periods ended September 30, 2006            and 2007.

             

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

             

Amortization of property and equipment decreased by approximately $0.2            million, from $0.4 million for the three-month period ended September 30, 2006 to $0.2            million for the three-month period ended September 30, 2007.

             

The provision for income taxes was $0.4 million for the three-month            period ended September 30, 2007 compared to a recovery of $3.1 million for the            three-month period ended September 30, 2006. The effective tax rate in 2007 was higher            than the comparable 2006 period due to changes in the valuation allowance and permanent            differences. The 2007 tax provision includes an increase to the valuation allowance of            $1.4 million for the three-month period ended September 30, 2007, which is largely made            up of unrealized foreign exchange losses not likely to be realized. In 2006, we            recorded a decrease of $3.5 million to the valuation allowance, due primarily to the            recognition of previously unrecognized tax assets.

             

Our tax provision also includes the effect of future taxes on unrealized            foreign exchange gains and losses, which arise upon the conversion into Canadian            dollars of net monetary assets and liabilities denominated in U.S. dollars for purposes            of determining taxable income under Canadian income tax regulations. Since the U.S.            dollar is our measurement currency and our consolidated financial statements are            presented in U.S. dollars, these foreign exchange gains and losses do not affect            earnings before income taxes. In 2007, our tax provision includes a future tax recovery            of $1.2 million related to foreign exchange compared to a recovery of $0.5 million for            2006.

 

**-            36 - **

----

We did not record non-controlling interest for the three-month period            ended September 30, 2007 as compared to $1.4 million for the three-month period ended            September 30, 2006, a result of our acquisition of all of the issued and outstanding            ordinary shares of OPIL held by non-controlling shareholders in February            2007.

             

Our net loss for the three-month period ended September 30, 2007 was            $0.4 million (or $0.02 per share – basic and diluted), compared to net earnings            of $1.9 million (or $0.08 per share – basic and diluted) for the three-month            period ended September 30, 2006. The decrease is due primarily to the cessation in            October 2006 of the U.S. based gaming portion of OPIL’s payment processing            business.

             

Adjusted earnings were $3.2 million (or $0.13 per share – basic            and diluted) for the three-month period ended September 30, 2007 compared to adjusted            earnings of $14.3 million (or $0.60 per share – basic and $0.56 per share –            diluted) for the three-month period ended September 30, 2006.

             

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

             

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

             

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

             

| Reconciliation of Non-GAAP Financial                            Information                                                                         |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| (expressed in thousands of U.S. dollars)                                                                                                            |   |   |
|                                                                                                                                                | **                                                   Three months ended** |
|                                                                                                                                                | **                                                 September 30,** |
|                                                                                                                                                |   | **2007** |   | **2006** |
|                                                                                                                                                |   |   |   |   |
| Net (loss) earnings                                                                                                                                 | $ | (413) | $ | 1,946 |
| Add:                                                                                                                                                |   |   |   |   |
|                                                                                                                                                |   |   |   |   |
| Amortization of intangibles pertaining to transaction                            processing,net of income tax                            recoveries |   | 2,978  |   | 2,942 |
| Foreign exchange losses                                                                                                                             |   | 601  |   | 11 |
| Stock-based compensation pertaining to selling,general and administrative expenses                                                                  |   | 30  |   | 671 |
| Loss from discontinued operations                                                                                                                   |   | -    |   | 6,772 |
| Impairment loss                                                                                                                                     |   | -    |   | 1,910 |
| Adjusted earnings                                                                                                                                   | $ | 3,196  | $ | 14,252 |

             

 

**-            37 - **

----

**Liquidity and Capital Resources**

 

As at September 30, 2007, our net cash position was $123.1 million,            compared to $134.2 million as at December 31, 2006. Working capital, excluding cash and            short-term investments held as reserves and restricted cash, as at September 30, 2007            was $78.1 million (December 31, 2006 — $94.6 million). As described above, a            significant portion of cash and cash equivalents, and short-term investments have a            corresponding liability as these amounts are derived from reserves and security            deposits which are due to merchants (see "Payment Processing"). Restricted cash            respresents amounts seized by the U.S. Attorney’s Office in connection with its            ongoing investigation of the U.S. Internet gambling industry (see “Overview and            Recent Developments”).

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

Operating activities generated $6.6 million of cash and cash equivalents            in the three-month period ended September 30, 2007, as compared to $13.8 million of            cash generated for the three-month period ended September 30, 2006. The decrease in            cash generated in the current period is primarily as a result of decreased earnings            from continuing operations as well as a reduction of customer reserves and security            deposits.

             

Financing activities generated a nominal amount of cash for the            three-month period ended September 30, 2007 compared to using $4.3 million for the            three-month period ended September 30, 2006, which included the payment of a dividend            by OPIL and the decrease in bank indebtedness.

             

Investing activities used $0.6 million of cash for the three-month            period ended September 30, 2007 compared to $9.1 million of cash used for the            three-month period ended September 30, 2006. The decreased amount of cash used resulted            primarily from the acquisition of short-term investments for the three-month period            ended September 30, 2006 of $8.0 million compared to nil for the three-month period            ended September 30, 2007.

             

On November 7, 2007, we disbursed approximately $55.0 million in cash in            payment of the cash portion of the purchase price of WowWee.

             

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

             

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

             

| **Item 3.** | **Quantitative and Qualitative Disclosures About                            Market Risk** |
|-------------|-------------------------------------------------------------------------------------------|

             

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

 

| **Item 4.** | **Controls and Procedures** |
|-------------|-----------------------------|

 

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

 

**-            38 - **

----

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

 

**PART II. OTHER INFORMATION**

 

| **Item 1.** | **Legal Proceedings** |
|-------------|-----------------------|

                 

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

                 

| **Item 1A.** | **Risk Factors** |
|--------------|------------------|

                 

There were no material changes to the disclosure of risk factors                contained in our Annual Report on Form 10-K for the year ended December 31, 2006,                except for the following risk factors relating to our recently acquired                technology-based consumer robotic, toy and electronic products business (the                “WowWee Business”):

 

***Our strategy for the operation of the WowWee Business might                not succeed and the anticipated benefits to us from that strategy might not be                realized.***

 

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

 

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

|   | **•** | Expanding product design, development and                                production capabilities to produce an increased number of SKUs                                (stock keeping units) 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 |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Evaluation of potential acquisition                                opportunities. |
|--------|------------|-----------------------------------------------------------------------------------|

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

 

***The WowWee Business depends upon the services of key personnel                and we might not be able to retain and integrate all such                personnel.***

                 

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

 

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

                 

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

 

*****-***39 - **

----

 

***The WowWee Business is seasonal and therefore its annual                operating results will depend, in large part, upon the relatively brief holiday                season in the fourth quarter of the year. Improved inventory management by                retailers resulting in shorter lead times for production and possible shipping                disruptions during peak demand times may affect the ability of the WowWee Business                to deliver its products in time to meet retailer demands.***

                 

Retail sales of the current WowWee Business products are seasonal,                with a majority of retail sales occurring during the period from September through                December. As a result, the operating results of the WowWee Business depend, in                large part, upon sales made during this period. Due to the seasonal nature of the                WowWee Business, it would be significantly and adversely affected, in a manner                disproportionate to the impact on a company with sales spread more evenly                throughout the year, by unforeseen events, such as a terrorist attack or economic                shock, that harm the retail environment or consumer buying patterns during our key                selling season.

 

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

 

***The concentration of its sales among a relatively small number                of major retailer customers exposes the WowWee Business to any financial                difficulties or changes in purchasing policies of these                customers.***

                 

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

 

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

 

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

                 

As all of the products of the WowWee Business are manufactured by                third parties in the People’s Republic of China, social and economic                conditions in China affecting the movement of people and products into and from                China to the major markets in which the WowWee Business products are sold,                principally North America, and the labor and other costs of doing business in                China, could have a significant negative impact on our results of operations.                Factors that could negatively impact the WowWee Business include a potential                revaluation of the Chinese Yuan, which may result in an increase in the cost of                producing products in China, increases in labor costs and difficulties in                transporting products manufactured in China through the ports on the western coast                of North America, whether due to port congestion, labor disputes or other factors.                Also, a change in China’s trade status with the United States or the European                Union, including the imposition of trade sanctions, could significantly increase                the cost of products imported from China. Any increase in the cost of producing and                shipping the WowWee Business products in and from China could significantly                adversely affect our results of operations.

 

 

*****-***40 - **

----

 

***A reduction or interruption in the supply of raw materials,                parts and components or a significant increase in the price of supplies could                negatively impact the gross profit margins of the WowWee                Business.***

                 

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

 

***As a developer and supplier of consumer products, the WowWee                Business is subject to various government regulations, violation of which could                subject us to sanctions. In addition, we could be the subject of future product                liability suits or product recalls, which could harm the WowWee                Business.***

 

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

 

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

 

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

 

The value of the WowWee Business depends to a large degree on its                ability to protect its intellectual property and information, including its                trademarks, trade names, copyrights and trade secrets. Any failure by the WowWee                Business to protect its proprietary intellectual property and information could                have a material adverse effect on the WowWee Business, our financial condition and                our results of operations.

 

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

 

Goodwill is the amount by which the cost of an acquisition accounted                for using the purchase method exceeds the fair value of the net assets we acquire.                Current accounting standards require that goodwill no longer be amortized but                instead be periodically evaluated for impairment based on the fair value of the                reporting unit. At September 30, 2007, approximately $50.8 million, or 18.6%,                of our total assets represented goodwill. Our goodwill will increase even further,                both in absolute terms and as a percentage of total assets, as a result of our                acquisition of the WowWee Business. Declines in our profitability may impact the                fair value of our reporting segments, which could result in a write-down of our                goodwill and a reduction in our net income.  

 

                 

*****-***41 - **

----

 

| **Item                                2.** | **Unregistered Sales of Equity Securities and Use                                of Proceeds** |
|--------------------------------------------|------------------------------------------------------------------------------------------------|

 

The registrant has nothing to report under this item.

                 

| **Item                                3.** | **Defaults                                Upon Senior Securities** |
|--------------------------------------------|--------------------------------------------------------------------|

 

The registrant has nothing to report under this item.

 

| **Item                                4.** | **Submission of Matters to a Vote of Security                                Holders** |
|--------------------------------------------|----------------------------------------------------------------------------------------|

 

The registrant has nothing to report under this item.

                 

| **Item                                5.** | **Other                                Information** |
|--------------------------------------------|------------------------------------------------------|

                 

The registrant has nothing to report under this item.

                 

| **Item 6.** | **Exhibits** |
|-------------|--------------|

 

Exhibits

 

| **Exhibit Number** | **Exhibit**                                                                                                                                                                                                                                                                      |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |                                                                                                                                                                                                                                                                             |
| 2.1                | Asset Purchase Agreement dated September 26, 2007                                (filed as Exhibit 2.1 to the registrant's current report on Form                                8-K dated October 2, 2007 and incorporated herein by                                reference). |
| 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.                                                          |

 

 

**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 9, 2007 | **Optimal Group Inc.** |
|------------------|------------------------|

 

 

By:   /s/ Neil S. Wechsler 

|   | Neil S. Wechsler, Co-Chairman |
|--------|-------------------------------|

|   | and Chief Executive Officer |
|--------|-----------------------------|

|   | (Principal Executive Officer) |
|--------|-------------------------------|

 

 

|   | By: | /s/ Gary S. Wechsler |
|--------|-----|----------------------|

|   | Gary S. Wechsler, Chief Financial Officer |
|--------|-------------------------------------------|

|   | (Principal Accounting Officer) |
|--------|--------------------------------|

                 

                 

 

*****-***42 - **