OPTIMAL GROUP INC - 10-K Annual Report

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule

U.S. GAAP Financial Data:

Reconciliation of Non-GAAP Financial Information
(expressed in thousands of U.S. dollars)

Contractual
Obligations

(U.S. thousands of dollars)

Notes denominated in U.S. and Canadian dollars, with a weighted average effective yield of 1.98% (2003 - 1.39%), maturing between January 12, 2005 and December 12, 2005 (2003 - matured between January 12, 2004 and October 24, 2004 with a maturity value of $48,641)

Notes denominated in U.S. dollars, with a weighted average effective yield of 2.70% (2003 - 1.97%), maturing on December 29, 2006 with a maturity value of $5,000 (2003 - maturing between February 1, 2005 and December 9, 2008,with a maturity value of $25,626)

OPTIMAL GROUP INC.
(formerly Optimal Robotics Corp.)
Notes to Consolidated Financial Statements

Optimal Group Inc. (formerly Optimal Robotics Corp.) (the “Company”) is incorporated under the Canada Business Corporations Act. The Company operates in two segments through Optimal Payments and Optimal Services Group. Optimal Payments is a provider of technology and services that businesses require to accept credit card, debit card, electronic check and direct debit payments. Optimal Payments processes credit and debit card payments for Internet businesses, mail-order/telephone-order and retail point-of-sale merchants, as well as processing checks and direct debits online and by telephone. Optimal Services Group operates repair depots and is a provider of field hardware maintenance and repair outsourcing services to retail, financial services and other third-party accounts.

As a result of the sale of U-Scan® self-checkout business referred to in note 4 (c), the results of discontinued operations are included in the net loss, but recorded separately for current and prior periods. The balance sheet separately presents the current and long-term assets and liabilities related to the discontinued operations for the current and prior periods.

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada. These principles conform, in all material respects, with accounting principles generally accepted in the United States, except as described in note 25. The principal accounting policies of the Company are summarized as follows:

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

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

Cash held in escrow represents funds held by third parties associated with the acquisitions described in note 4 (f) and note 26.

Short-term investments include investments with maturities of less than a year, as well as investments with maturities greater than a year that can be promptly liquidated. Investments are carried at the lower of amortized cost and market value.

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

To provide maintenance and repair services to its customers, the Company maintains an inventory of replacement parts. Parts are stated at cost (weighted average). The Company provides an allowance for obsolescence and shrinkage. The costs of refurbishing parts are included in the service costs as incurred.

Periodic revisions to allowance estimates are required, based upon the evaluation of several factors, including changes in estimated product life cycles, usage levels, and technology changes. Changes in these estimates are reflected immediately in income.

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

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

Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the assets acquired, less liabilities assumed, based on their fair values. Goodwill is allocated as of the date of the business combination to the Company’s reporting units that are expected to benefit from the synergies of the business combination.

Goodwill is not amortized but is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting unit is compared with its fair value. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired, and the second step of the test is not required. The second step is performed when the carrying amount of a reporting unit exceeds its fair value, in which case the implied fair value of the reporting unit’s goodwill is compared with its carrying amount to measure the impairment loss, if any. When the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in an amount equal to the excess and is presented as a separate line item on the consolidated statement of operations.

Based on the impairment tests performed, the Company concluded that no goodwill impairment charge was required.

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

Intangible assets are amortized using the straight-line method over the following periods:

As at December 31, 2004, estimated amortization expense for each of the next five years is expected to be as follows:

Estimated future amortization expense is based on intangible amounts recorded as of December 31, 2004. Actual amounts will increase if additional amortizable intangible assets are acquired.

Long-lived assets, consisting of property and equipment and intangible assets with finite useful lives, are reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, which is established as the carrying amount of an asset to be held and used over the sum of the undiscounted cash flows expected from its use and disposal; the impairment recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. Fair value is the estimated value at which the asset could be bought or sold in a transaction between willing parties. Based on the impairment test performed, the Company concluded that no impairment charge was required.

On January 1, 2004, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants relating to asset retirement obligations. This standard was established for the recognition, measurement and disclosure of liabilities for asset retirement obligations and the associated retirement cost. The standard applies to legal obligations associated with the retirement of a tangible long-lived asset that results from acquisition, development or normal operations. The standard requires an entity to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and when a reasonable estimate of fair value can be made. An entity is subsequently required to allocate the asset retirement cost to expense using a systematic and rational method over its estimated life. The adoption of this standard did not have an impact on the Company’s financial statements.

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

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

As a result of the business acquisitions and disposals referred to in note 4, the Company is engaged in the business of providing payment services and hardware maintenance and repair outsourcing services.

The majority of payment service revenues are generated from fees charged to customers for payment processing services. Customers are charged a discount fee or rate, which is based upon the customer’s monthly charge volume and risk profile, and is calculated as a percentage of the dollar amount of each credit or debit transaction. Higher discount rates are charged for card-not-present transactions than for card-present transactions in order to compensate for the higher cost of underwriting and managing the increased chargeback risk associated with such transactions. The balance of payment service revenues are derived from a variety of fixed transaction or services fees, including set-up fees, fees for monthly minimum charge volume requirements, statement fees, annual fees and fees for other miscellaneous services, such as handling chargebacks. Discount and other fees related to payment transactions are recognized at the time the customer’s transactions are processed. Revenues derived from service fees are recognized at the time the service is performed. Revenues from set-up fees are deferred and amortized over the expected term of the customer relationship, which is approximately five years.

In those situations where the Company is the primary party responsible for providing processing services, discount fees are reported gross, and amounts paid to financial institutions for payment processing services are included in transaction processing expenses. Where the Company is not the primary party in providing a merchant with payment processing services, the Company records revenue, net of amounts paid to the acquiring processing supplier.

Revenues from repair services are recognized at the time the services are rendered. Revenues from maintenance contracts are deferred and recognized ratably over the term of the contract.

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

The Company maintains a reserve for its merchant losses necessary to absorb chargebacks and other losses for merchant transactions that have been previously processed and on which revenues have been recorded. The Company analyzes the adequacy of its reserve for merchant losses, each reporting period. The reserve for merchant losses is comprised of specifically identifiable reserves for merchant transactions for which losses are estimable.

The reserve for losses on merchant accounts is decreased by merchant losses (arising from chargebacks) and is increased by provisions for merchant losses, net of any recoveries. Provisions for merchant losses are included in selling, general and administrative expenses in the consolidated statements of operations. As at December 31, 2004, the reserve for losses on merchant accounts is included in accounts payable and accrued liabilities.

Monetary assets and liabilities of the Canadian and foreign operations denominated in currencies other than the US dollar are translated at the rates of exchange prevailing at the balance sheet dates. Other assets and liabilities denominated in currencies other than the US dollar are translated at the exchange rates prevailing when the assets were acquired or the liabilities incurred. Revenues and expenses denominated in currencies other than the US dollar are translated at the average rate of exchange in effect for the period during which the transaction occurred. Foreign exchange gains and losses are included in the determination of net earnings.

Research costs, which include all costs incurred to establish technological feasibility, are charged to operations in the period in which they are incurred. Once technological feasibility has been established, development costs are evaluated for deferral and subsequent amortization over the estimated period of benefit. As at December 31, 2004 and 2003, the Company had no deferred development costs.

Effective January 1, 2003, the fair value-based method is used to account for all transactions whereby goods and services are received in exchange for stock-based compensation and other stock-based payments. Under the fair value-based method, compensation cost is measured at fair value at the date of grant and is expensed over the award’s vesting periods. Previously, the Company applied the settlement method of accounting for employee stock options. Under the settlement method, any consideration paid by employees on the exercise of stock options was credited to share capital and no compensation expense was recognized.

The following disclosure is required to report the pro forma net loss and loss per share as if the fair value-based method had been used to account for employee stock options granted during fiscal 2002. The pro forma adjustment for fiscal 2003 relates to the amortization of the remaining balance of compensation cost for stock options granted during fiscal 2002 due to the cancellation of all options outstanding in July 2003.

The weighted average fair value of the 1,765,000 options granted during fiscal 2002, estimated on the date of grant using the Black-Scholes pricing model with the following weighted average assumptions, was $11.49 per share:

Dividend yield was excluded from the calculation, since it is the present policy of the Company to retain all earnings to finance operations.

Basic earnings per share are determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share are calculated using the treasury stock method. Diluted earnings per share are computed in a manner consistent with basic earnings per share, except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of options and warrants, if dilutive. The number of additional shares is calculated by assuming that outstanding options and warrants were exercised, and that the proceeds from such exercises are used to repurchase common shares at the average market price during the reporting period.

In the normal course of business, the Company enters into various agreements that may contain features that meet the definition of a guarantee. A guarantee is defined to be a contract (including an indemnity) that contingently requires the Company to make payments to a third party based on (i) changes in an underlying interest rate, foreign exchange rate, equity or commodity instrument, index or other variable that is related to an asset, a liability or an equity security of the guaranteed party, (ii) failure of another party to perform under an obligating agreement, or (iii) failure of another party to pay its indebtedness when due. A liability is recorded when the Company considers it probable that a payment relating to a guarantee has to be made to the other party of the contract or agreement.

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

On February 27, 2004, the Company acquired the hardware service division of Systech Retail Systems (“Systech”). The Company believed that the combination of this division with the Company’s existing service organization would contribute positively to the Company’s financial results in 2004. The acquisition of Systech resulted in the recognition of goodwill primarily because of the Company’s strategy to re-establish a repair services business in the United States in light of the then-anticipated sale of its U-Scan® self-checkout business.

The net assets acquired for cash were approximately $3.5 million. The acquisition is accounted for by the Company using the purchase method and the results of Systech are consolidated with those of the Company from the date of acquisition.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition.

Effective April 6, 2004, the Company completed a Combination Agreement with Terra Payments Inc. (“Terra”), a publicly-traded company that offered proprietary technology and services to businesses to accept credit card, electronic check and direct debit payments. Terra processed credit card payments for non-face-to-face transactions, including mail-order/telephone order, licensed online gaming and other online merchants, as well as for retail point-of-sale merchants. Terra also processed checks and direct debits online and by telephone. The primary reasons for the Company’s acquisition of Terra and the primary factors that contributed to a purchase price that resulted in recognition of goodwill include its industry position, management strength, earnings prospects and ability to serve as a platform for potential strategic acquisitions for enhanced growth and profitability in this segment.

The agreement provided for a stock-for-stock merger in which 0.4532 of the Company’s common shares were exchanged for each share of Terra. The total purchase price of approximately $66 million was paid through the issuance of 7,242,168 Class A shares by the Company, the acquisition of outstanding options and warrants issued by Terra and estimated transaction costs of the Company.

The acquisition is accounted for by the Company using the purchase method and the results of Terra are consolidated with those of the Company from the date of acquisition. The following table presents the estimated fair value of the assets purchased and liabilities assumed from Terra on April 6, 2004.

The per share value of the shares issued as consideration for the business acquisition was $8.48, which was determined using the Company’s average closing share price on NASDAQ over a reasonable period before and after the date the terms of the business combination were agreed to and announced.

The Company assumed 1,587,058 stock options and warrants having a fair value of $5,877, or a weighted average of $3.70 per share, relating to the Terra outstanding stock options and warrants. This also represents 0.4532 stock option or warrant of the Company for each stock option or warrant of Terra. The fair value of the vested stock options and warrants of $3,202 is included in the purchase consideration. The remaining $2,675, representing the fair value of the unvested stock options, is recorded as deferred compensation cost and is being amortized over the vesting periods. For the year ended December 31, 2004, $868 was amortized as stock-based compensation in the consolidated statements of operations.

The fair values of the stock options and warrants were determined using the Black-Scholes option pricing model using the following weighted average assumptions:

Effective April 8, 2004, the Company sold its U-Scan® self-checkout business to Fujitsu Transaction Solutions Inc. (“Fujitsu”), including all related tangible assets, intellectual property rights, and obligations, for $35,000 in cash plus the assumption of liabilities. Fujitsu funded the payment of a termination fee owed by the Company to NCR Corporation as a result of the termination of their offer to purchase the self-checkout business. Subsequent to April 8, 2004, the Company paid an amount of $4,806 to Fujitsu due to purchase price adjustments mainly attributed to there being less net assets sold to Fujitsu, as the Company collected a large portion of the accounts receivable and realized the cash thereon in advance of the sale. Thus, the net proceeds realized on the sale to Fujitsu were $30,194.

The sale of the U-Scan® self-checkout business is consistent with the Company’s strategy to reposition the business as a payments and services leader. As a result of weak capital spending environment for retail technology and a significantly more competitive landscape in the self-checkout business, which negatively impacted sales, gross margins and overall financial results, the Company decided to exit this business and focus on building a payments and services business.

The following table summarizes the book value of the assets and liabilities at April 8, 2004 and December 31, 2003 relating to the business sold by the Company:

The results of operations of this business for the years ended December 31, 2004, 2003 and 2002 were as follows:

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

In May 2004, the Company sold its investment in ebs Electronic Billing Systems AG (“EBS”) to EBS’ majority shareholder for a net cash consideration of $3,974, which was the fair value of the investment recorded by the Company upon the acquisition of Terra at April 6, 2004. Accordingly, there was no gain or loss on this transaction.

On July 1, 2004, the Company acquired NPS, a registered VISA® and Mastercard® independent sales organization, for a total consideration of approximately $15,000. The acquisition of NPS resulted in the recognition of goodwill primarily because the NPS operations would deliver earnings prospects and potential strategic and other benefits, including an increase in its revenue base and diversification of the payment services portfolio.

The acquisition was accounted for by the Company using the purchase method and the results of NPS were consolidated with those of the Company from the date of acquisition.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition.

The balance of sale is due in equal installments of which $1,500 was paid in January 2005 and the remainder is due in July 2005.

On September 30, 2003, the Company acquired substantially all of the assets and the ongoing business of RBA Inc. (“RBA”), a company that provides hardware maintenance outsourcing services, including debit/credit card system maintenance and computer maintenance services, across Canada. The Company believed that the RBA acquisition resulted in the recognition of goodwill primarily because the RBA operations would deliver earnings prospects and potential strategic and other benefits, including a stronger and more integrated services business segment with the benefits of increased size and scale, which would improve the stability of the combined businesses’ earnings in varying economic and market climates.

The net assets acquired for cash are approximately $5.3 million (CA$7.2 million). The acquisition is accounted for by the Company using the purchase method, and the results of RBA are consolidated with those of the Company from the date of acquisition.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at date of acquisition.

In fiscal 2004, an adjustment of $139 was made to increase goodwill attributable to the acquisition of the ongoing business of RBA Inc. for liabilities estimated at time of the acquisition. In addition, the purchase price of the RBA acquisition was decreased by $742 in 2004. This adjustment has been recorded as a decrease to goodwill and an increase to cash held in escrow, and represents management’s best estimate of the purchase price consideration expected to be recovered from funds held in escrow from the resolution of disputes associated with the acquisition.

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

Included in long-term receivables is the net present value of an interest-free note received on the sale of the assets of a division of Terra in fiscal 2002. The repayment terms require monthly payments equal to 10% of the debtor’s sales.

Assets held under capital leases consist of vehicles and computer equipment. Amortization expense related to assets under capital leases was $933 in 2004 (2003 and 2002 - nil).

Gross carrying
amount

Accumulated
amortization

Gross carrying
amount

Accumulated
amortization

Customer
contracts and
relationships

The Company has credit facilities in the amount of approximately CA$16,800, which can be utilized in the form of loans, bankers’ acceptances or letters of guarantees. At December 31, 2004, the Company utilized $8,301 of the facilities in borrowings and $1,500 (CA$1,800) through the issuance of letters of guarantee. The borrowings are due on demand and bear interest either at the bank’s prime rate, the market rate for bankers’ acceptances plus an acceptance fee of 0.75% per annum or at between 115 and 135 basis points on bank’s prime rate, depending on the form of the facility utilized. The facilities are secured by a first ranking moveable hypothec on short-term investments.

Customer reserves and security deposits are required from certain customers in the payments segment to allow the Company to recover any amounts charged by the financial institutions under the arrangements described in note 3 (d). Customer reserves relate to the short-term portion of collateral and outstanding payments due to customers. Security deposits are held by the Company over the term of the customer relationship, which has generally been of a long-term nature.

Future principal payments under capital leases for subsequent years are as follows: 2005 - $578, 2006 - $174, 2007 - $26. Interest expense related to obligations under capital leases was $70 in 2004 (2003 and 2002 - nil).

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

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

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

Changes in the issued and outstanding share capital are as follows:

Number of
common
shares

The book value of the amounts credited to share capital from the exercise of stock options and warrants in fiscal 2004 includes a cash consideration of $482, as well as an ascribed value from additional paid-in capital of $193.

During 2002, 535,100 shares having a book value of $4,374 had been repurchased for a total consideration of $8,684. The excess of the purchase price over book value of the shares in the amount of $4,310 was charged to deficit.

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 common shares. 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 and vest over a period of three years.

Weighted
average
exercise price
per share

On April 29, 2004, the Company granted 4,606,926 stock options having an exercise price of $7.10 per share. Included in the stock option grants are 3,484,417 stock options that have certain performance vesting triggers tied to the market price of the Company’s shares. As at December 31, 2004, none of the 4,586,926 options outstanding were exercisable.

The remaining contractual life of the options outstanding at December 31, 2004 is 4.3 years. The weighted average remaining contractual life of the options outstanding at December 31, 2003, all of which were exercisable, was 8.8 years.

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 common 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 common shares for each share of Terra.

Details of the 751,534 stock options outstanding under this plan as at December 31, 2004 are as follows:

US dollar exercise price

Canadian dollar exercise price

Exercise price
per share

Weighted average
exercise price
per share

The Canadian dollar exercise price options outstanding as at December 31, 2004 are as follows:

The 217,451 options outstanding with a US dollar exercise price have an exercise price of $7.43 and none were exercisable as at December 31, 2004. The remaining contractual life of these options as at December 31, 2004 is 4.3 years.

As at April 6, 2004 and December 31, 2004, there were 766,854 and 728,944 warrants outstanding, respectively, with a weighted average exercise price of CA$9.32 and CA$9.38, respectively and expiring on dates up to March 2008.

There are 39,076 stock options that were deemed to be antidilutive, and as such, were not included in the computation of diluted earnings per share for the year ended December 31, 2004 because the exercise prices were greater than the average market price of the common shares.

The Company has entered into operating leases for its premises, vehicles and certain office equipment. Minimum lease payments, including the Company’s proportionate share of common operating costs, are approximately as follows:

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.

In connection with the sale of the U-Scan® self-checkout business on April 8, 2004 to Fujitsu, orders were obtained from the Superior Court of Quebec permitting the Company to submit the sale to Fujitsu to the Company’s shareholders for approval in lieu of the originally proposed sale to NCR Corporation (“NCR”). NCR appealed these decisions in May 2004, but has since done nothing to advance its appeal. The Company believes that these appeals, if pursued by NCR, will not prevail. NCR has also delivered a notice of dispute under its now terminated purchase agreement alleging a breach of the non-solicitation provisions of that agreement. The Company believes that such allegations are without merit and intends to vigorously defend itself in any arbitration proceedings that may ensue. Accordingly, no provision has been made in these financial statements with respect to such claims.

The Company is party to litigations arising in the normal course of operations. The Company does not expect the resolution of such matters to have a materially adverse effect on the financial position or results of operations of the Company. 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.

The Company is pursuing the recovery of $6,800 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. The Company believes these charges are largely unsubstantiated and is pursuing the claim through legal recourse. The amount, if any, which the Company may recover cannot be quantified until the legal process is complete.

On March 11, 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. The Company is reviewing the claim with counsel and has not yet formed an opinion as to its merit or materiality.

As at December 31, 2004, significant guarantees that have been provided to third parties are the following:

The Company, and some of its subsidiaries, have granted irrevocable surety bonds and letters of guarantee, issued by highly rated financial institutions to third parties to indemnify them in the event the Company does not perform its contractual obligations. As at December 31, 2004, the maximum potential liability under these guarantees was $300 for surety bonds and $1,500 (CA$1,800) under letters of guarantee. The surety bonds are automatically renewed on an annual basis.

As at December 31, 2004, the Company has recorded no liability with respect to these guarantees, as the Company does not expect to make any payments for the aforementioned items.

The Company is contractually bound to indemnify Fujitsu for any losses, claims, liabilities or other damages resulting from the U-Scan® self-checkout business arising on or before April 8, 2004. A reasonable estimate of the maximum potential amount the Company could be required to pay to Fujitsu cannot be made given the nature of the indemnification.

During 2004, restructuring costs of $1.3 million were recorded as a result of efficiency initiatives undertaken that relate principally to the services operating segment. The restructuring costs relate primarily to workforce reduction of approximately $0.9 million and facility closure costs of $0.4 million. As at December 31, 2004, $0.8 million of workforce reduction is included in accrued liabilities in the consolidated balance sheets.

Inventory write-downs of $2.9 million were recorded during the year for service parts inventory that were deemed to be no longer of use to the Company in light of the realignment of its services business.

In 2003, the Company reduced its workforce in an effort to increase operating efficiencies; decrease overall general and administrative expenses and improve financial results. In total, the Company incurred charges of $748 primarily for severance and accrued vacations, of which $639 related to the U-Scan ® self-checkout business. All of these costs are fully paid.

In 2002, the Company closed the assembly facility in Phoenix, Arizona, and the support hub in Covington, Kentucky in an effort to consolidate operations of its U-Scan ® self-checkout business. Costs incurred as a result of the closures related mainly to lease costs, severance payments and the write-down of inventories and leasehold improvements. All of these costs are fully paid.

The fair value of stock options granted during the year ended December 31, 2004, discussed in note 15 (a), was determined at the date of grant using the Black-Scholes option pricing model and the following weighted average assumptions:

Number of
stock options

Weighted average
fair value
per share

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

For purposes of calculating the income tax provision of the Company, a tax liability is recognized on the foreign exchange gains which arise on the conversion into Canadian dollars of the net monetary assets denominated in US dollars; such conversion is required for tax purposes. Because these financial statements are presented in US dollars, this foreign exchange gain does not impact earnings before income taxes, even though the income tax provision includes a tax liability for this gain. Future fluctuations in the foreign exchange rate between the Canadian and US dollar will change the amount of the foreign exchange gains and, thus, the provision for income taxes thereon.

The (recovery of) provision for income taxes is composed of the following:

The future income tax balances are summarized as follows:

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

The Company has losses carryforward and unclaimed research and development expenses available to reduce federal taxable income. These losses expire as follows:

The Company also has $4,747 of non-refundable federal investment tax credits available to reduce future federal income taxes payable. These tax credits expire as follows:

As a result of the business acquisitions and disposals referred to in note 4, the Company now operates in two segments, namely payment processing services, and hardware maintenance and repair outsourcing services. Management measures the results of operations based on segment income before income taxes adjusted for certain non-cash and non-recurring items provided by each business segment.

Previously, the Company also developed and sold automated transaction products designed for use in the retail sector and provided related hardware and software maintenance. As a result of the sale of the U-Scan® self-checkout business, this segment has been reclassified as discontinued operations.

Since the payment services business was only acquired in fiscal 2004 and the U-Scan® self-checkout business has been reclassified as discontinued operations for fiscal 2004, 2003 and 2002, segment information pertaining to the statement of operations for fiscal 2003 and 2002 is not presented as the results relate entirely to the hardware maintenance and repair services segment.

Sales to major customers (customers from which 10% or more of total revenue of the respective segment is derived during the specified period):

Consulting fees paid to a corporation controlled by a Company director amounted to $269. The transactions have been recorded at the exchange amount, which is the amount of consideration agreed to by the parties.

Credit risk results from the possibility that a loss may occur from the failure of another party to perform according to the terms of the contract. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, short-term investments and accounts receivable. Cash is maintained with high-credit quality financial institutions. Short-term investments consist of discounted notes issued by high-credit quality corporations. For accounts receivable, the Company performs periodic credit evaluations. Allowances are maintained for potential credit losses consistent with the credit risk, historical trends, general economic conditions and other information.

Customers of the payments business consist of a diverse portfolio of small merchants whose businesses frequently are newly established. As of December 31, 2004, the Company provided services to small business merchants located across the world in a variety of industries. A significant portion of the merchants’ transaction volume comes from card-not-present transactions, which is subject to a higher risk of merchant losses. The Company believes that the loss of any single merchant would not have a material adverse effect on its financial condition or results of operations.

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

The Company has determined that the carrying values of its short-term financial assets and liabilities are reasonable estimates of their fair values due to the relatively short periods to maturity of these instruments.

The fair value of short-term investments as at December 31, 2004 amounted to approximately $90,382 (2003 - $74,456) which was calculated by reference to various market data. The carrying values of obligations under capital leases were not significantly different from their fair values.

The consolidated financial statements of the Company are prepared in accordance with Canadian generally accepted accounting principles (“GAAP”), which conform, in all material respects, with those generally accepted in the United States, except as described below:

The reconciliation of net earnings reported in accordance with Canadian GAAP to US GAAP is as follows:

The weighted average number of common shares outstanding for purposes of determining basic and diluted earnings (loss) per share are the same amount as the ones disclosed for Canadian GAAP purposes.

Prior to January 1, 2003, the Company accounted for its stock-based compensation plan under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations, which requires compensation costs to be recognized for the difference, if any, between the quoted market price of the stock as at the grant date and the amount the individual must pay to acquire the stock. Prior to the cancellation of the outstanding stock options in July 2003, certain of the Company’s stock options were variable because the exercise price was not known until the options were exercised.

OPTIMAL GROUP INC.

(formerly Optimal Robotics Corp.)

Notes to Consolidated Financial Statements, Continued

Three-year period ended December 31, 2004

(expressed in thousands of US dollars, except per share amounts)

25.	Canadian/US reporting differences (continued):
	(a)	Consolidated Statements of Operations (continued):
		⁽¹⁾	Stock-based compensation (continued):

Effective January 1, 2003, the Company adopted the fair value recognition provisions of FASB Statement 123, Accounting for Stock-based Compensation , prospectively for all employee awards granted, modified or settled after January 1, 2003. Consequently, for periods after January 1, 2003, there are no differences between Canadian GAAP and US GAAP. However, for awards granted prior to January 1, 2003, and because awards under the Company’s plan vest over a period of three years, the cost related to stock-based compensation included in the determination of net earnings is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of Statement 123.

The following table illustrates the effect on net (loss) earnings and (loss) earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period:

	2004			2003			2002


Reported net (loss) earnings	$	(9,253	)	$	(6,168	)	$	4,451
Add: Stock-based employee compensation included in reported net earnings, net of related taxes of nil		—			—			(9,778	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related taxes of nil		—			(10,135	)		(41,975	)

Pro forma net loss	$	(9,253	)	$	(16,303	)	$	(47,302	)

(Loss) earnings per share:
Basic:
As reported	$	(0.46	)	$	(0.41	)	$	0.30
Pro forma		(0.46	)		(1.09	)		(3.14	)
Diluted:
As reported		(0.46	)		(0.41	)		0.29
Pro forma		(0.46	)		(1.09	)		(3.14	)

OPTIMAL GROUP INC.

(formerly Optimal Robotics Corp.)

Notes to Consolidated Financial Statements, Continued

Three-year period ended December 31, 2004

(expressed in thousands of US dollars, except per share amounts)

25.	Canadian/US reporting differences (continued):
	(a)	Consolidated Statements of Operations (continued):

The weighted averaged fair value of each option granted is estimated on the date of grant using the Black-Scholes pricing model with the following weighted average assumptions:

	2004		2003	2002


Risk-free interest rate	3.39	%	N/A	3.32	%
Expected volatility	69.4	%	N/A	81	%
Expected life in years	5		N/A	10
Expected dividend rate	0	%	N/A	0	%

No options were granted in fiscal 2003.

Dividend yield was excluded from the calculation, since it is the present policy of the Company to retain all earnings to finance operations.

The following table summarizes the weighted average grant-date fair value per share for options granted:

		Weighted average grant-date fair value per share


2002:
Exercise price per share equal to market price per share	1,765,000	$	11.49
2003:
Exercise price per share equal to market price per share	N/A		N/A
2004:
Exercise price per share equal to market price per share	4,636,926		4.25

OPTIMAL GROUP INC.

(formerly Optimal Robotics Corp.)

Notes to Consolidated Financial Statements, Continued

Three-year period ended December 31, 2004

(expressed in thousands of US dollars, except per share amounts)

25.	Canadian/US reporting differences (continued):
	(b)	Consolidated Balance Sheets:

Differences between Canadian and US GAAP in the presentation of share capital, additional paid-in capital and retained earnings are as follows:

(i)	Share capital:

	2004		2003


Share capital in accordance with Canadian GAAP	$	184,191	$	122,102
Stock-based compensation costs on options exercised:
Current year		—		—
Cumulative effect of prior years		39,868		39,868
Change in reporting currency (2)		2,588		2,588

Share capital in accordance with US GAAP	$	226,647	$	164,558

(ii)	Additional paid-in capital:

	2004			2003


Additional paid-in capital in accordance with Canadian GAAP	$	10,557		$	5
Stock-based compensation costs:
Current year		—			—
Cumulative effect of prior years		68,757			68,757
Stock-based compensation costs on options exercised:
Cumulative effect of prior years		(39,868	)		(39,868	)
Change in reporting currency (2)		968			968

Additional paid-in capital in accordance with US GAAP	$	40,414		$	29,862

OPTIMAL GROUP INC.

(formerly Optimal Robotics Corp.)

Notes to Consolidated Financial Statements, Continued

Three-year period ended December 31, 2004

(expressed in thousands of US dollars, except per share amounts)

25.	Canadian/US reporting differences (continued):
	(b)	Consolidated Balance Sheets (continued):
		(iii)	Retained earnings (deficit):

	2004			2003


Deficit in accordance with Canadian GAAP	$	(16,583	)	$	(7,330	)
Stock-based compensation costs:
Current year		—			—
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	$	(87,363	)	$	(78,110	)

⁽¹⁾	Stock-based compensation:

Under SFAS No. 123, transactions in which an entity acquires goods and services from non-employees in exchange for equity instruments are required to be recorded at fair value. In 1996, a total of 285,600 warrants were granted to non-employees, the fair value of which was $834 and was charged to deficit.

⁽²⁾	Change in reporting currency:

In 1998, the Company adopted the US 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 US GAAP, the financial statements, including prior years, are translated according to the current rate method. Accordingly, the cumulative translation account included as part of shareholders’ equity under Canadian GAAP does not exist for US GAAP purposes.

(c)	Accumulated other comprehensive income (loss):

Under US 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.

OPTIMAL GROUP INC.

(formerly Optimal Robotics Corp.)

Notes to Consolidated Financial Statements, Continued

Three-year period ended December 31, 2004

(expressed in thousands of US dollars, except per share amounts)

25.	Canadian/US reporting differences (continued):
	(c)	Accumulated other comprehensive income (loss) (continued):

Accumulated other comprehensive income (loss), which resulted solely from the translation of the financial statements up to June 30, 2000, the date the Company adopted the United States dollar as its measurement currency, in accordance with the current rate method, is $(3,018) as at December 31, 2004, 2003, and 2002.

(d)	Supplementary information:

Under US GAAP, separate disclosure is required for the following statement of operations item. There is no similar requirement under Canadian GAAP.

	2004		2003		2002


Advertising expense	$	93	$	130	$	178

(e)	Pro forma information:

The following unaudited pro forma financial information reflects the consolidated results of operations as if the acquisitions of Terra and RBA had taken place on January 1, 2003 and January 1, 2002, respectively. The pro forma financial information is not necessarily indicative of the results of operations as it would have been, had the transactions been reflected on the assumed date. No effect has been given for synergies that may have been realized through the acquisitions.

	2004			2003			2002


Pro forma revenues	$	113,212		$	72,733		$	33,726
Pro forma net income (loss)		(10,185	)		(6,393	)		1,969
Pro forma diluted income (loss) per share		(0.46	)		(0.29	)		0.13

OPTIMAL GROUP INC.

(formerly Optimal Robotics Corp.)

Notes to Consolidated Financial Statements, Continued

Three-year period ended December 31, 2004

(expressed in thousands of US dollars, except per share amounts)

26.

Subsequent event:

Acquisition of Merchant Card Acceptance Corp.

On January 1, 2005, Optimal Payments Inc., a wholly-owned subsidiary of the Company, acquired the operating assets of Merchant Card Acceptance Corp. and its affiliated companies, Precision Management Consulting Inc. and Merchant Card Interactive Corp. (collectively, “MCA”), for approximately $3,721 subject to the determination of certain post-closing adjustments. The agreement also provides for a contingent consideration of $832 (CA$1,000) based on the attainment of specified financial targets. MCA is an independent sales organization providing Canadian-based merchants with credit card and Interac PIN-based debit card acceptance. MCA is based in Toronto, Ontario and has approximately 40 employees across Canada, of whom most are in sales. The Company believes that this acquisition will diversify its payment services portfolio and contribute positively to the Company’s financial results.

The Company will account for this acquisition using the purchase method and the results of MCA will be consolidated with those of the Company from the date of acquisition. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at date of acquisition. The Company is in the process of finalizing its valuation of the net assets acquired, including goodwill and other intangible assets; thus, the allocation of the purchase price is subject to refinement.


Assets acquired:
Property and equipment	$	145
Supplier contract		779
Goodwill		2,797

	$	3,721

Consideration:
Cash paid on closing	$	3,672
Transaction costs		49

	$	3,721

On December 31, 2004, an amount of $2,794 (CA$3,250) was held in escrow pending closure of the transaction on January 1, 2005.

27.

Comparative figures:

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

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

None.

Item 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and our principal accounting officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal accounting officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The names, ages and positions of our directors and executive officers at December 31, 2004, are as follows:

Name	Age	Position

Neil S. Wechsler	38	Co-Chairman, Chief Executive Officer and Director
Holden L. Ostrin	45	Co-Chairman and Director
Henry M. Karp	50	President, Chief Operating Officer and Director
Gary S. Wechsler, C.A	46	Treasurer and Chief Financial Officer
Mitchell A. Garber	40	Executive Vice-President
Leon P. Garfinkle	44	Senior Vice-President, General Counsel and Secretary
Douglas P. Lewin	35	Senior Vice-President
O. Bradley McKenna, C.A	54	Vice-President, Administration and Human Resources
David S. Schwartz	35	Vice-President, Investor Relations
Tommy Boman⁽¹⁾	66	Director
James S. Gertler⁽¹⁾⁽²⁾	38	Director
Thomas D. Murphy⁽¹⁾	51	Director
Stephen J. Shaper	68	Director
Sydney Sweibel⁽²⁾	54	Director
Jonathan J. Ginns⁽²⁾	40	Director

———————

(1) Member of Compensation Committee, established on March 3, 2005

(2) Member of Audit Committee

The number of directors of our company is currently set at nine, divided into three classes, Messrs. Ostrin, Gertler, Boman, Shaper and Sweibel, as members of a single class of directors, have been elected to hold office until the close of our 2005 annual meeting of shareholders; Messrs. N. Wechsler and Murphy, as members of a single class of directors, have been elected to hold office until the close of our 2006 annual meeting of shareholders and Messrs. Karp and Ginns, as members of a single class of directors, have been elected to hold office until the close of our 2007 annual meeting of shareholders.

Executive officers of our company are appointed annually by our Board of Directors and serve until their successors are duly appointed and qualified.

There are no family relationships between any of our directors or executive officers, except for Neil S. Wechsler and Gary S. Wechsler who are brothers.

Neil S. Wechsler has been a director of our company since June 1995. Mr. Wechsler has been our Chief Executive Officer since October 1994 and was our Chairman from June 1996 through June 1999, at which time Mr. Wechsler and Mr. Holden L. Ostrin each became Co-Chairman. Mr. Wechsler earned a Bachelor of Arts degree from McGill University in 1988 and a Bachelor of Civil Law degree and a Bachelor of Common Law degree from McGill University in 1992.

Holden L. Ostrin has been a director of our company since June 1996. Mr. Ostrin was our Vice Chairman from June 1996 through June 1999, at which time Mr. Ostrin and Mr. N. Wechsler each became Co-Chairman. Mr. Ostrin earned a Bachelor of Arts degree from Boston University in 1982 and a Juris Doctor degree from Boston University School of Law in 1985.

Henry M. Karp has been a director and the Chief Operating Officer of our company since June 1996. Since June 1999, Mr. Karp has been our President. From June 1996 through June 1999, Mr. Karp was our Executive Vice President, and from December 1994 to May 1996, Mr. Karp was our Vice President, Business Development. Mr. Karp earned a Bachelor of Arts degree in Economics from McGill University in 1976 and a Master of Business Administration degree from McGill University in 1978.

Gary S. Wechsler, C.A. has been the Treasurer and Chief Financial Officer of our company since May 1994. For over five years until May 1999, Mr. Wechsler was a partner of Victor & Gold, a Montreal-based accounting firm. Mr. Wechsler earned a Bachelor of Commerce degree from McGill University in 1980. Mr. Wechsler obtained his Chartered Accountant designation in 1983.

Mitchell A. Garber has been our Executive Vice-President since April 2004. Mr. Garber is President and Chief Executive Officer of Optimal Payments Inc. and prior to April 2004, he was President and Chief Executive Officer of Terra Payments Inc. Mr. Garber earned a Bachelor of Arts degree from McGill University in 1986 and a Bachelor of Law degree from University of Ottawa in 1989.

Leon P. Garfinkle has been our Senior Vice-President, General Counsel and Secretary since July 2000. Prior to July 2000, Mr. Garfinkle was a partner with the law firm of Goodman Phillips & Vineberg, in Montreal, Quebec. Mr. Garfinkle earned a Bachelor of Commerce degree from McGill University in 1982, a Bachelor of Laws degree from the University of Toronto in 1985 and a Bachelor of Laws degree from the University of Montreal in 1986.

Douglas P. Lewin has been our Senior Vice-President since April 2004. Mr. Lewin is Executive Vice-President of Optimal Payments Inc. and prior to April 2004, he was Executive Vice-President of Terra Payments Inc. Mr. Lewin earned a Bachelor of Science degree from Babson College in 1993.

O. Bradley McKenna, C.A. has been the Vice-President, Administration and Human Resources of our company since June 1999. From March 1994 until June 1999, Mr. McKenna was our Controller. Mr. McKenna earned a Bachelor of Commerce degree from Loyola College in 1973 and a Master of Business Administration degree from McGill University in 1975. Mr. McKenna obtained his Chartered Accountant designation in 1978.

David S. Schwartz has been our Vice-President, Investor Relations since April 2004. Prior to April 2004, Mr. Schwartz was Chief Financial Officer and Secretary of Terra Payments Inc. Mr. Schwartz earned a Bachelor of Commerce degree from McGill University in 1992. Mr. Schwartz obtained his Chartered Accountant designation in 1996 and his Chartered Financial Analyst designation in 1999.

Tommy Boman has been a director of our company since April 2004. Mr. Boman served as a director of Terra Payments Inc. from March 2003 until April 2004. Prior to 1998, Mr. Boman was Vice-Chairman of IMS International and President and Chief Executive Officer of IMS America, a market research company for the pharmaceutical and healthcare industries. Mr. Boman earned a Bachelor of Electrical Engineering degree from Stockholm Engineering School in 1960.

James S. Gertler has been a director of our company since November 1997. He is a managing member of Independent Outdoor Advertising, LLC, an outdoor media company in the northeast United States and is a principal of the general partner of Signal International, an offshore rig repair, maintenance, upgrade and conversion company in the Gulf of Mexico. In addition, from October 2001 to February 2005, he was a principal of the general partner in Florimex, an integrated worldwide floral distributor. From 1993 to 2001, Mr. Gertler was Vice President of Corporate Development of the New York Daily News and U.S. News & World Report. From 1995 to 2001, Mr. Gertler was the Vice President of Corporate Development of Applied Graphics Technologies, Inc. Mr. Gertler earned a Bachelor of Science degree in Economics from the Wharton School of the University of Pennsylvania in 1988 and a Masters of Business Administration degree from Harvard University in 1992.

Thomas D. Murphy has been a director of our company since July 2000. Mr. Murphy is the President of Peak Tech Consulting, a firm that specializes in information technology management and related benefit realization. Prior to January 2000, Mr. Murphy was Vice President, Information Technology of The Kroger Co. Mr. Murphy earned a Bachelor of Arts degree in Education and Sciences from Western State College, Colorado in 1976.

Stephen J. Shaper has been a director of our company since April 2004. Mr Shaper served as a director of Terra Payments Inc. from October 2000 until April 2004. Mr. Shaper is a partner with Convergent Investors, a private equity venture capital firm based in Houston, Texas. Mr. Shaper earned a Mechanical Engineering degree from Rice University in 1958 and a Masters in Business Administration from Harvard University in 1960.

Sydney Sweibel has been a director of our company since October 2001. Since 1994, Mr. Sweibel has been a founding partner of the law firm Sweibel Novek in Montreal, Quebec, and he has more than 25 years experience in taxation and business law. Mr. Sweibel earned a Bachelors of Arts degree from Sir George Williams University in 1971 and a bachelors degree in civil law from McGill University in 1974.

Jonathan J. Ginns has been a director of our company since October 2001. Since 1996, Mr. Ginns has been Managing Partner of ACON Investments, a Washington, D.C.-based private equity investment firm. Mr. Ginns earned a Bachelor of Arts degree from Brandeis University in 1986, and a Masters of Business Administration degree from Harvard University in 1992.

Audit Committee Report

The following Audit Committee Report does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other filing of ours under the 1933 Act or the Exchange Act, except to the extent we specifically incorporate this Report by reference therein.

In accordance with its written charter, the Audit Committee oversees our financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for our consolidated financial statements and the overall reporting process, including our system of financial controls. In fulfilling its oversight responsibilities during fiscal 2004, the Audit Committee:

	•	discussed the quarterly and year-to-date financial information contained in each quarterly earnings announcement with senior members of our financial management and KPMG LLP (KPMG), independent auditors, prior to public release;

	•	reviewed our audited consolidated financial statements as of and for the year ended December 31, 2004, as well as the quarterly unaudited consolidated financial statements and earnings release with senior members of our financial management and KPMG;

	•	reviewed with our financial management and KPMG their judgments as to the quality, not just the acceptability, of our accounting principles;

	•	discussed with KPMG the overall scope and plan for their audit;

	•	reviewed our financial controls and financial reporting process;

	•	reviewed our litigation matters;

	•	reviewed significant financial reporting issues and practices, including judgmental items, change in accounting principles and disclosure practice; pre-approved all services performed by KPMG; met with KPMG, without management present, to discuss the results of their examinations, their evaluations of our internal controls and the overall quality of our financial reporting; and met with our financial management, without KPMG present, to discuss the quality of services provided by KPMG.

In addition, the Audit Committee has discussed with KPMG their independence from management and our company, including the matters in the written disclosures required by the Independence Standards Board Standard No.1 Independence Discussions with Audit Committee and any matters required to be discussed by Statement on Auditing Standards No. 61 Communications with Audit Committees, as amended, and considered whether the provision of all other non-audit services provided to us by KPMG during fiscal 2004 was compatible with the auditors’ independence.

In reliance on the reviews and discussions referred to above and representations by management that the consolidated financial statements were prepared in accordance with Canadian generally accepted auditing standards and generally accepted auditing standards in the United States, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2004 for filing with the Commission. The Audit Committee selected KPMG as our independent auditors for the fiscal year ending December 31, 2005.

THE AUDIT COMMITTEE

James S. Gertler, Chairman
Jonathan J. Ginns
Sydney Sweibel

For more specific information concerning the role, independence and responsibilities of our Audit Committee, please refer to our Audit Committee Charter included as Exhibit 99.1 to this Form 10-K.

Audit Committee Financial Expert

Our Board of Directors has determined that each of James S. Gertler, Chairman of the Audit Committee, and Audit Committee member Jonathan J. Ginns is an audit committee financial expert as defined by Item 401(h) of Regulation S-K of the Exchange Act, is financially sophisticated for the purpose of Nasdaq Rule 4350(d)(2) and is independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.

COMPLAINT PROCEDURES FOR ACCOUNTING AND AUDITING MATTERS

Under Section 301 of the Sarbanes-Oxley Act of 2002 and Rule 10A-3 under the Exchange Act, the Nasdaq Stock Market must adopt rules prohibiting the listing of any company whose audit committee does not, among other things establish procedures for (a) the receipt, retention, and treatment of complaints received by the company regarding accounting, internal accounting controls, or auditing matters, and (b) the submission by employees of the company on a confidential and anonymous basis, of concerns regarding questionable accounting or auditing matters. Accordingly, our Audit Committee has adopted complaint procedures that are in compliance with the Commission mandate.

Code of Ethics

We have adopted a code of business conduct and ethics for directors and employees (including officers). The code complies with regulations issued by the Commission under section 406 of the Sarbanes - Oxley Act of 2002. The code has been designed to deter wrongdoing and promote: honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the Commission and in other public communications made by us; compliance with applicable governmental laws, rules and regulations; the prompt internal reporting of violations of the code to an appropriate person or persons; and accountability for adherence to the code. The application of the code to the persons it applies to may only be waived by our Board of Directors in accordance with Commission regulations and the Sarbanes - Oxley Act of 2002. A copy of the code is available to the general public at our website at http://www.optimalgrp.com. In addition, we will disclose on our website any amendment to the code and any waiver of the code that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or any person performing similar functions.

Reporting Status

We were a foreign private issuer under the rules and regulations of the Commission as of December 31, 2004. As in the past, we intend to voluntarily file annual reports on Form 10-K and quarterly reports on Form 10-Q.

Item 11. EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth compensation paid to the Co-Chairman and Chief Executive Officer and the four other most highly compensated executive officers of the Corporation (collectively, the “Named Executives”) for each of the three most recently completed fiscal years.

The Named Executive Officers are paid in Canadian dollars. On October 3, 2003, each of the officers of Optimal Group Inc. voluntarily agreed to a 10% reduction in his salary, which with respect to the Named Executive Officers applied only to the portion of their salaries paid in bi-weekly installments (see note (2) to the Summary Compensation Table below). On January 23, 2004, each of Messrs. N. Wechsler, Ostrin and Karp voluntarily agreed to reduce his salary, by an aggregate of approximately 35%, through a further reduction in the portion of his 2004 salary payable in bi-weekly installments and the complete waiver of his entitlement to receive the portion of his 2004 salary that would otherwise be payable to him in a single installment in 2005 (see note (2) to the Summary Compensation Table below). On January 1, 2005, each of Messrs. N. Wechsler, Ostrin and Karp agreed to continue the voluntary reduction in the portion of his salary payable in bi-weekly installments, for 2005.

		Annual Compensation ($)			Long Term Compensation

Name and Position	Year	Salary^{(1) (2)}	Bonus	Other	Common Shares Underlying Options

Neil S. Wechsler	2004	761,088	120,000	—⁽³⁾	870,000⁽⁴⁾
Co-Chairman and	2003	1,047,230	Nil	—⁽³⁾	Nil
Chief Executive Officer	2002	793,577	Nil	—⁽³⁾	325,000

Holden L. Ostrin	2004	761,088	120,000	—⁽³⁾	870,000⁽⁴⁾
Co-Chairman	2003	1,047,230	Nil	—⁽³⁾	Nil
	2002	793,577	Nil	—⁽³⁾	325,000

Henry M. Karp	2004	761,088	60,000	—⁽³⁾	870,000⁽⁴⁾
President and	2003	1,047,230	Nil	—⁽³⁾	Nil
Chief Operating Officer	2002	793,577	Nil	—⁽³⁾	325,000

Mitchell A. Garber	2004	454,965⁽⁵⁾	153,965⁽⁵⁾	—⁽³⁾	454,417^{(4) (5)}
Executive Vice President	2003	—⁽⁵⁾	—⁽⁵⁾	—⁽⁵⁾	—⁽⁵⁾
	2002	—⁽⁵⁾	—⁽⁵⁾	—⁽⁵⁾	—⁽⁵⁾

Gary S. Wechsler	2004	506,639	95,000	—⁽³⁾	420,000⁽⁴⁾
Treasurer and	2003	510,524	Nil	—⁽³⁾	Nil
Chief Financial Officer	2002	352,578	Nil	—⁽³⁾	180,000


(1)	We pay salary in Canadian dollars. The respective average exchange rates for 2002, 2003 and 2004 used to convert these salaries into dollars were: US$1.00=Cdn$1.5703 (2002), US$1.00=Cdn$1.4015 (2003) and US$1.00=Cdn$1.2990 (2004).

(2)	Salary includes a portion paid bi-weekly in accordance with our general payroll practice and a portion paid in a single installment.

(3)	The dollar value of all perquisites and other personal benefits did not exceed the lesser of $50,000 and 10% of the Named Executive Officer’s salary for the year.

(4)	The options have a five-year term and vest as to one-third after each of the first, second and third anniversaries, subject to the following additional conditions attached to vesting: the first one-third only vests if the average closing price for the Class “A” shares over any period of five consecutive trading days (the “Average Price”) exceeds the exercise price by 20%; the second one-third only vests if the Average Price exceeds the exercise price by 35%; and the final one-third only vests if the Average Price exceeds the exercise price by 50%. As at December 31, 2004, these additional performance conditions had been satisfied, and accordingly these options will now vest as to one-third after each of the first, second and third anniversaries.

(5)	Mr. Garber has occupied office since April 6, 2004. The amount of salary for Mr. Garber in fiscal 2004 is in respect of the period April 6, 2004 to December 31, 2004.

Option Grants in 2004

The following table provides information regarding options granted to the Named Executive Officers during 2004. These grants are also reflected in the Summary Compensation Table.

	Individual Grants					Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term ($) ⁽¹⁾

Name	Common Shares Underlying Options Granted (#)		Percent of Total Options Granted to Employees in 2004	Exercise Price ($)	Expiration Date	5%	10%

Neil S. Wechsler	870,000	⁽²⁾	19	7.10	04/29/2009	308,850	617,700
Holden L. Ostrin	870,000	⁽²⁾	19	7.10	04/29/2009	308,850	617,700
Henry M. Karp	870,000	⁽²⁾	19	7.10	04/29/2009	308,850	617,700
Mitchell A. Garber	454,417	⁽²⁾	10	7.10	04/29/2009	161,318	322,636
Gary S. Wechsler	420,000	⁽²⁾	9	7.10	04/29/2009	149,100	298,200


	(1)	The dollar amounts under these columns represent the potential realizable value of each option granted assuming that the market price of the common shares appreciates in value from the date of grant to the expiration date at the 5% and 10% annual rates prescribed by the Commission and are for illustration purposes only. They are not intended to forecast possible future appreciation, if any, of the price of the common shares.

	(2)	The options have a five-year term and vest as to one-third after each of the first, second and third anniversaries, subject to the following additional conditions attached to vesting: the first one-third only vests if the average closing price for the Class “A” shares over any period of five consecutive trading days (the “Average Price”) exceeds the exercise price by 20%; the second one-third only vests if the Average Price exceeds the exercise price by 35%; and the final one-third only vests if the Average Price exceeds the exercise price by 50%. As at December 31, 2004, these additional performance conditions had been satisfied, and accordingly these options will now vest after each of the first, second and third anniversaries.

Aggregated Option Exercises in 2004 and Year-end Option Values

The following table provides information regarding option exercises by the Named Executive Officers in 2004 and the amount and value of the Named Executive Officers’ exercisable and unexercisable options as of December 31, 2004

	Option Exercises		Number of Common Shares Underlying Unexercised Options		Value of Unexercised In-the-Money Options ($)

Name	Common Shares Acquired on Exercise	Value Realized ($)	Exercisable	Unexercisable	Exercisable	Unexercisable

Neil S. Wechsler	Nil	Nil	Nil	870,000	Nil	4,071,600
Holden L. Ostrin	Nil	Nil	Nil	870,000	Nil	4,071,600
Henry M. Karp	Nil	Nil	Nil	870,000	Nil	4,071,600
Mitchell A. Garber	22,660 ⁽¹⁾	129,535 ⁽¹⁾	87,238 ^{(1) (2)}	586,099 ⁽³⁾	511,161 ^{(2) (4)}	2,676,624 ⁽⁴⁾
Gary S. Wechsler	Nil	Nil	Nil	420,000	Nil	1,965,600


	(1)	These options were granted to Mr. Garber by Terra Payments Inc. prior to April 6, 2004. In accordance with the terms of our January 20, 2004 combination agreement with Terra Payments, pursuant to which we acquired Terra Payments on April 6, 2004, we assumed all of the options outstanding under the Terra Payments share option plan, and these options now represent options to purchase common shares.

	(2)	Includes 54,006 exercisable options, representing $291,607 of in-the-money value, which Mr. Garber has agreed that so long as he is an employee of Optimal Payments Inc., a wholly owned subsidiary of the issuer, he will exercise only as to one-third after each of the first, second and third anniversaries of April 29, 2004.

	(3)	Includes 131,682 options that were granted to Mr. Garber by Terra Payments Inc. prior to April 6, 2004. In accordance with the terms of our January 20, 2004 combination agreement with Terra Payments, pursuant to which we acquired Terra Payments on April 6, 2004, we assumed all of the options outstanding under the Terra Payments share option plan, and these options now represent options to purchase common shares.

	(4)	As at December 31, 2004, Mr. Garber held options to acquire 149,931 common shares with an exercise price denominated in Canadian dollars. The exchange rate used to calculate the value in dollars of unexercised in-the-money options was the closing rate on December 31, 2004 of US$1.00 =Cdn$1.202.

Executive Employment Agreements

We have entered into employment agreements with each of the Named Executive Officers.

Neil S. Wechsler, Holden L.Ostrin, Henry M. Karp and Gary S.Wechsler

The agreements with Messrs. N. Wechsler, Ostrin, Karp and G. Wechsler, the terms of which are identical, were entered into as of March 5, 2004, and replace their respective agreements, which were entered into in 1997 (1999 for G. Wechsler), and subsequently amended before being replaced. The current agreements with these Named Executive Officers were designed to assure us of the continued employment of each officer in his respective executive positions with our company.

Under the terms of these agreements, (i) each officer receives a minimum annual salary and shall be entitled to participate in any bonus plan for senior executives that might be established by our Board of Directors, and (ii) we will pay or reimburse the officer for the premiums for a life and disability term or whole life insurance policy with a minimum coverage of $5,000,000 ($3,000,000 for G. Wechsler), in addition to any other coverage previously paid for or provided for by the company.

If we terminate the officer’s employment other than for cause or death or disability, or for any reason following the announcement of a change of control, or if the officer terminates his employment for good reason (as defined in the agreements) or for any reason following a change of control, (i) we will pay to the officer an amount equal to two times the sum of the highest salary and bonus, if any, paid to him during the term of his employment, (ii) all options held by the officer shall become immediately exercisable and we will compensate him for the determined value of his options if he is required by the terms of our option plan to exercise his options before their expiry date due to the termination of his employment, (iii) the term insurance, for which we have been reimbursing premiums, will be converted to a level deposit premium insurance policy to age 80, for which we will pay the premiums, and (iv) we will acquire medical insurance coverage for the officer and his family for a period of five years, equivalent to the coverage already enjoyed by the officer as a senior officer of our company. The agreements also provide for the forgiveness of indebtedness of the officer if he leaves the employment of our company for any reason.

The agreements each contain a covenant on the part of the officer not to compete with our company for a period of 24 months following the date upon which he ceases to be an employee of our company.

Mitchell A. Garber

The agreement with Mr. Garber was entered into as of March 31, 2004.

Under the terms of the agreement, Mr. Garber receives a minimum annual salary and shall be entitled to participate in any bonus plan for senior executives that might be established by our Board of Directors. If Mr. Garber’s employment is terminated other than for cause or death or disability, or for any reason following the announcement of a change of control, or if he terminates his employment for good reason (as defined in the agreement) or for any reason following a change of control, (i) we will pay to him an amount equal to two times the sum of the highest salary and bonus, if any, paid to him during the term of his employment, and (ii) all options held by him shall become immediately exercisable and he shall be compensated for the determined value of his options if he is required by the terms of our option plan to exercise his options before their expiry date due to the termination of his employment.

The agreement contains a covenant on the part of Mr. Garber not to compete with our company for a period of 24 months following the date upon which he ceases to be an employee of our company.

Compensation of Directors

The compensation package for each of our five non-executive directors consists of an annual retainer of $20,000 and $1,000 for each Board of Directors meeting attended. In addition, each non-executive director who serves on a committee of the Board of Directors receives an annual retainer of $5,000 per committee and $1,000 for each committee meeting attended.

Options to Purchase Securities

On February 7, 1997, our Board of Directors adopted a share option plan known as the 1997 Stock Option Plan (as amended, the “1997 Plan”).

Pursuant to the provisions of the 1997 Plan, we may grant options to purchase common shares to our full-time employees or directors. Options may be granted for a term of up to 10 years and the term during which such options may be exercised will be determined by our Board of Directors at the time of each grant of options. The conditions of vesting and exercise of the options and the option price will be established by our Board of Directors when such options are granted and the option price shall not involve a discount greater than that permitted by law and by the regulations, rules and policies of the securities regulatory authorities to which we may then be subject.

Options granted under the 1997 Plan cannot be assigned or transferred, except by will or by the laws of descent and distribution of the domicile of the deceased optionee. Upon an optionee’s employment with our company being terminated for cause or upon an optionee being removed from office as a director or becoming disqualified from being a director by law, any option or the unexercised portion thereof shall terminate forthwith. If an optionee’s employment with our company is terminated otherwise than by reason of death or termination for cause, or if any optionee ceases to be a director other than by reason of death, removal or disqualification by law, any option or the unexercised portion thereof may be exercised by the optionee for that number of shares only which he was entitled to acquire under the option at the time of such termination or cessation, provided that such option shall only be exercisable within 90 days after such termination or cessation or prior to the expiration of the term of the option, whichever occurs earlier. If an optionee dies while employed by our company or while serving as a director, any option or the unexercised portion thereof may be exercised by the person to whom the option is transferred by will or the laws of descent and distribution for that number of shares only which the optionee was entitled to acquire under the option at the time of death, provided that such option shall only be exercisable within 180 days following the date of death or prior to the expiration of the term of the option, whichever occurs earlier.

Upon its establishment, 3,000,000 common shares were authorized for issuance pursuant to options granted under the 1997 Plan. In each of 2000 and 2001, shareholders approved an additional 3,000,000 shares for issuance under the 1997 Plan. As at February 28, 2005, 2,546,996 common shares had been issued under the 1997 Plan and 4,586,926 options were outstanding under the 1997 Plan, leaving 1,866,078 common shares available for issuance pursuant to future option grants under the 1997 Plan.

In accordance with the terms of our January 20, 2004 combination agreement with Terra Payments, pursuant to which we acquired Terra Payments on April 6, 2004, we assumed all of the options outstanding under the Terra Payments share option plan, which now represent options to purchase common shares. As at February 28, 2005, 35,841 common shares had been issued upon the exercise of Terra Payments options and an additional 751,013 common shares underlie the outstanding balance of the Terra Payments options.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The following table sets forth, as of February 28, 2005, certain information regarding the beneficial ownership of our common shares by (i) each person known to us to be a beneficial owner of more than 5% of the common shares of our company, (ii) each director and Named Executive Officer of our company and (iii) all directors and officers of our company as a group.

Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership		Percent

Tiger Technology Management, LLC	1,501,726	⁽¹⁾	6.67	%
101 Park Avenue, 48th Floor, New York, NY 10178
Reich & Tang Asset Management, LLC	1,454,000	⁽²⁾	6.46	%
600 Fifth Avenue, New York, NY, 10020
Neil S. Wechsler	435,607	⁽³⁾	1.91	%
3500 de Maisonneuve Blvd West, 17th Floor,
Westmount, PQ, H3Z 3C1
Holden L. Ostrin	432,857	⁽³⁾	1.90	%
3500 de Maisonneuve Blvd West, 17th Floor,
Westmount, PQ, H3Z 3C1
Henry M. Karp	432,857	⁽³⁾	1.90	%
3500 de Maisonneuve Blvd West, 17th Floor,
Westmount, PQ, H3Z 3C1
Gary S. Wechsler	292,857	⁽⁴⁾	1.29	%
3500 de Maisonneuve Blvd West, 17th Floor,
Westmount, PQ, H3Z 3C1
Mitchell A. Garber	321,104	⁽⁵⁾	1.41	%
3500 de Maisonneuve Blvd West, 17th Floor,
Westmount, PQ, H3Z 3C1
Tommy Boman	15,971	⁽⁶⁾	*
30 Oyster Landing Road, Hilton Head, SC, 29928
James S. Gertler	32,383	⁽⁷⁾	*
62 West 62nd Street, New York, NY, 10023
Thomas D. Murphy	28,979	⁽⁸⁾	*
1208 Highcrest Lane, Colorado Springs, CO, 80921
Stephen J. Shaper	95,548	⁽⁹⁾	*
325 Ripple Creek, Houston, TX, 77024
Sydney Sweibel	23,333	⁽¹⁰⁾
3449 du Musee Avenue, Montreal, PQ, H3G 2C8
Jonathan J. Ginns	23,333	⁽¹⁰⁾	*
1133 Connecticut Avenue, NW Suite 700, Washington,
DC, 200036
All directors and officers as a group (15 persons)	2,364,734	⁽¹¹⁾	9.77	%


*	does not exceed one percent (1%)

(1)	The address of this beneficial owner is 101 Park Avenue, 48^th Floor, New York, NY 10178. According to the Schedule 13G, dated January 26, 2005, filed with the Commission by this beneficial owner, which is an investment manager, it is the beneficial owner of 1,501,726 common shares with shared voting power and shared dispositive power over all 1,501,726 shares. The information in this table is based exclusively on the most recent Schedule 13G filed by this beneficial owner with the Commission. We make no representation as to the accuracy or completeness of the information reported.

(2)	The address of this beneficial owner is 600 Fifth Avenue, New York, NY 10020. According to Amendment No. 2 to the Schedule 13G, dated February 11, 2004, filed with the Commission by this beneficial owner, which is an investment advisor, it is the beneficial owner of 1,454,000 common shares with shared voting power and shared dispositive power over all 1,454,000 shares. The information in this table is based exclusively on the most recent Schedule 13G filed by this beneficial owner with the Commission. We make no representation as to the accuracy or completeness of the information reported.

(3)	Includes 290,000 common shares underlying options held by this Named Executive Officer that will vest within 60 days. Excludes 580,000 common shares underlying unvested options held by this Named Executive Officer.

(4)	Includes 140,000 common shares underlying options held by Mr. Wechsler that will vest within 60 days. Excludes 280,000 common shares underlying unvested options held by Mr. Wechsler.

(5)	Includes 284,367 common shares underlying options held by Mr. Garber that are vested or that will vest within 60 days. Excludes 388,670 common shares underlying unvested options held by Mr. Garber.

(6)	Includes 12,799 common shares underlying options held by Mr. Boman that will vest within 60 days. Excludes 25,600 common shares underlying unvested options held by Mr. Boman.

(7)	Includes 32,083 common shares underlying options held by Mr. Gertler that will vest within 60 days. Excludes 64,167 common shares underlying unvested options held by Mr. Gertler.

(8)	Includes 26,979 common shares underlying options held by Mr. Murphy that will vest within 60 days. Excludes 53,962 common shares underlying unvested options held by Mr. Murphy.

(9)	Includes 89,883 common shares underlying options held by Mr. Shaper that are vested and that will vest within 60 days. Excludes 121,608 common shares underlying unvested options held by Mr. Shaper.

(10)	Includes 23,333 common shares underlying options held by this director that will vest within 60 days. Excludes 46,667 common shares underlying unvested options held by this director.

(11)	Includes 1,709,621 common shares underlying vested options and options that will vest within 60 days. Excludes 3,059,713 common shares underlying unvested options.

Equity Compensation Plan Information

The following table sets forth the number of common shares to be issued upon exercise of outstanding options, rights and warrants issued pursuant to our equity compensation plans, the weighted average exercise price of such options, rights and warrants and the number of common shares remaining available for future issuance under our equity compensation plans, all as at December 31, 2004.

*Plan Category*	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights ($/Share) (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (1) (c)

Equity compensation plans	4,586,926	7.10	1,866,078
approved by security holders ⁽¹⁾
Equity compensation plans not	217,451	7.43	Nil
approved by security holders⁽²⁾
Equity compensation plans not	534,083	Cdn$14.34	Nil
approved by security holders⁽²⁾
Total	5,338,460	$7.60 ⁽³⁾	1,866,078


	(1)	The 1997 Plan (referred to under “Executive Compensation – Options to Purchase Securities,” below), is our only equity compensation plan that has been approved by shareholders.

	(2)	Our only equity compensation plan not approved by our shareholders is the share option plan of Terra Payments, which we assumed in accordance with the terms of our acquisition of Terra Payments on April 6, 2004.

	(3)	The figure includes the weighted average exercise price of 534,083 share purchase options having a Canadian dollar exercise price which was converted at the closing rate on December 31, 2004 of US$1.00=Cdn$1.202.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Indebtedness of Directors and Employees

The aggregate indebtedness to our company of all employees, officers and directors and former employees, officers and directors is $110,762, of which $87,260 relates to an unsecured home-loan agreement with our Co-Chairman and $23,502 relates to advances to several employees. The unsecured home-loan is non-interest bearing and is repayable in annual installments of Cdn$17,000 through and including July 1, 2012.

100

Transactions with Management

The employment agreements that we have with Neil S. Wechsler, Holden L. Ostrin and Henry M. Karp provide that we will pay or reimburse the officer for the premiums for a life and disability insurance policy with a minimum coverage of $5,000,000. The agreements also provide for the forgiveness of indebtedness of such officer if he leaves the employment of our company for any reason. See Item 11—“Executive Compensation – Executive Employment Agreements.” The employment agreement that we have with Gary S. Wechsler, our Chief Financial Officer, provides that we will pay or reimburse him for the premiums for a life and disability insurance policy with a minimum coverage of $3,000,000.

Mr. Stephen Shaper provides us with consulting services and as a result, in fiscal 2004, we paid approximately $269,000 to a company under his control.

Item 14. PRINCIPAL AUDITOR FEES AND SERVICES

The Audit Committee has recommended the appointment of KPMG LLP as our independent auditors for the fiscal year ending December 31, 2005.

Fees Incurred by our Company for KPMG LLP

The following table shows the fees paid or accrued by our company for the audit and other services provided by KPMG LLP for fiscal 2004 and 2003⁽¹⁾.

	2004		2003

Audit Fees⁽²⁾	$	689,761	$	171,245
Audit-Related Fees⁽³⁾		464,049		52,943
Tax Fees⁽⁴⁾		305,596		2,711
All Other Fees⁽⁵⁾		82,602		17,838


Total	$	1,542,008	$	244,737

The Audit Committee has delegated to the Chairman of the Audit Committee the authority to pre-approve audit-related and non-audit services not prohibited by law to be performed by our independent auditors and associated fees up to a maximum for any one non-audit service of $25,000, provided that the Chairman shall report any decisions to pre-approve such audit-related or non-audit services and fees to the full Audit Committee at its next regular meeting. The Audit Committee has also delegated to our Chief Financial Officer the authority to pre-approve the following non-audit services to be performed by our independent auditors, provided that the Chief Financial Officer shall report any decisions to pre-approve such non-audit services and fees to the full Audit Committee at its next regular meeting: tax advisory services of up to Cdn$60,000 during each fiscal year, provided that no individual mandate is estimated by our independent auditors to cost in excess of Cdn$10,000; acquisition-related financial due diligence services of up to Cdn$150,000 during each fiscal year, provided that no individual mandate is estimated by our independent auditors to cost in excess of Cdn$25,000; and, other, general services of up to Cdn$60,000 during each fiscal year, provided that no individual mandate is estimated by our independent auditors to cost in excess of Cdn$10,000.

————
	(1)	We pay fees to KPMG in Canadian dollars. The respective average exchange rates for 2002 and 2003 used to convert these fees into dollars were: US$1.00=Cdn$1.4015 (2003) and US$1.00=Cdn$1. 2990 (2004).

	(2)	Audit fees represent fees for professional services provided in connection with the audit of our consolidated financial statements and the review of our quarterly financial statements.

	(3)	Audit-related fees represent primarily fees for the preparation of our Joint Management Information Circular dated March 5, 2004, general accounting consultations and other attestation services.

	(4)	For 2003, tax fees were for the review of our Canadian corporate tax returns. For 2004, tax fees represent primarily fees for assistance in claiming research and development tax credits.

	(5)	For 2004 and 2003, all other fees relates primarily to financial due diligence in connection with business acquisitions.

101

PART IV

Item 15. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit Number		Exhibit

3.1		Certificate and Articles of Continuance (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form F-1, file 333-4950, filed with the Commission on October 24, 1996)

3.2		By-laws (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K, File No. 0-28572, filed with the Commission on March 8, 1999 )

3.3		Certificate and Articles of Amendment (incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000, filed with the Commission on March 1, 2001)

4		Specimen certificate of the common shares (incorporated by reference to Exhibit 1.1 to the Company’s Registration Statement on Form 8, File No. 0-28572, filed with the Commission on July 17, 1996 )

10.1		Employment Agreement with Neil S. Wechsler (incorporated by reference to Exhibit I to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997, filed with the Commission on March 31, 1998)

10.2		Amendment to Employment Agreement with Neil S. Wechsler (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999, filed with the Commission on March 8, 1999)

10.3		Amendment to Employment Agreement with Neil S. Wechsler (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, filed with the Commission on April 1, 2002)

10.4		Employment Agreement with Henry M. Karp (incorporated by reference to Exhibit II to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997, filed with the Commission on March 31, 1998)

10.5		Amendment to Employment Agreement with Henry M. Karp (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999, filed with the Commission on March 8, 1999)

10.6		Amendment to Employment Agreement with Henry M. Karp (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, filed with the Commission on April 1, 2002)

10.7		Employment Agreement with Holden L. Ostrin (incorporated by reference to Exhibit III to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997, filed with the Commission on March 31, 1998)

10.8		Amendment to Employment Agreement with Holden L. Ostrin (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999, filed with the Commission on March 8, 1999)

10.9		Amendment to Employment Agreement with Holden L. Ostrin (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, filed with the Commission on April 1, 2002)

10.10		Employment Agreement with Gary S.Wechsler (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Commission on March 31, 2003)

10.11		Amendment to Employment Agreement with Gary S. Wechsler (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Commission on March 31, 2003)

10.12		Amendment to Employment Agreement with Gary S. Wechsler (incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Commission on March 31, 2003)

102

10.13		Employment Agreement with Leon P. Garfinkle (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Commission on March 31, 2003)

10.14		Employment Agreement with Neil S. Wechsler (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Commission on March 10, 2004)

10.15		Employment Agreement with Henry M. Karp (incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Commission on March 10, 2004)

10.16		Employment Agreement with Holden L. Ostrin (incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Commission on March 10, 2004)

10.17		Employment Agreement with Gary S. Wechsler (incorporated by reference to Exhibit 10.17 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004, filed with the Commission on April 30, 2004)

10.18		Combination Agreement between Optimal Robotics Corp. and Terra Payments Inc. (incorporated by reference to Exhibit 10.18 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004, filed with the Commission on April 30, 2004)

10.19		Asset Purchase Agreement among NCR Corporation, and certain of its affiliates, and Optimal Robotics Corp. and certain of its affiliates (incorporated by reference to Exhibit 10.19 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004, filed with the Commission on April 30, 2004)

10.20		Asset Purchase Agreement among Fujitsu Transaction Solutions Inc., Optimal Robotics Corp. and Optimal Robotics Inc. (incorporated by reference to Exhibit 10.20 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004, filed with the Commission on August 9, 2004)

10.21		Amendment to Asset Purchase Agreement among Fujitsu Transaction Solutions Inc., Optimal Robotics Corp. and Optimal Robotics Inc. (incorporated by reference to Exhibit 10.21 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004, filed with the Commission on August 9, 2004)

10.22		Asset Purchase Agreement among Optimal Payments Corp. and NPS Holdings LLC, NPS Manager, Inc. and The Members of NPS Holdings LLC (incorporated by reference to Exhibit 10.22 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004, filed with the Commission on November 4, 2004)

10.23		Employment Agreement with Mitchell A. Garber

21		List of Subsidiaries

23.1		Consent of KPMG LLP

31.1		Certification required under Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification required under Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1		Audit Committee Charter (incorporated by reference to Exhibit 99.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Commission on March 10, 2004)

103

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

March 14, 2005	Optimal Group Inc.

	By:	/s/ NEIL S. WECHSLER
		———————————
		Neil S. Wechsler, Co-Chairman
		and Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ GARY S. WECHSLER
		———————————
		Gary S. Wechsler, Chief Financial Officer
		(Principal Accounting Officer)

Pursuant to the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

March 14, 2005	By:	/s/ NEIL S. WECHSLER
		———————————
		Neil S. Wechsler, Director

March 14, 2005	By:	/s/ HOLDEN L. OSTRIN
		———————————
		Holden L. Ostrin, Director

March 14, 2005	By:	/s/ HENRY M. KARP
		———————————
		Henry M. Karp, Director

March 14, 2005	By:	/s/ JAMES S. GERTLER
		———————————
		James S. Gertler, Director

March 14, 2005	By:	/s/ TOMMY BOMAN
		———————————
		Tommy Boman, Director

March 14, 2005	By:	/s/ THOMAS D. MURPHY
		———————————
		Thomas D. Murphy, Director

March 14, 2005	By:	/s/ STEVE SHAPER
		———————————
		Steve Shaper, Director

March 14, 2005	By:	/s/ SYDNEY SWEIBEL
		———————————
		Sydney Sweibel, Director

March 14, 2005	By:	/s/ JONATHAN J. GINNS
		———————————
		Jonathan J. Ginns, Director

104

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

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

Securities registered pursuant to Section 12(b) of the Act:
Title of class:	None
Securities registered pursuant to Section 12(g) of the Act:
Title of class:	Class “A” shares, no par value

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 No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule
12b-2).	Yes No

Aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant as of June 30, 2004 (computed by reference to the last reported sale price of the Class “A” shares on the Nasdaq Stock Market on such date): $164,295,521. For purposes of this calculation, only executive officers and directors are deemed to be affiliates of the registrant. Number of Class “A” shares outstanding at February 28, 2005: 22,501,486 DOCUMENTS INCORPORATED BY REFERENCE: NONE

	Optimal Group Inc.
	3500 de Maisonneuve Boulevard West
	Suite 1700
	Montreal, Quebec, H3Z 3C1

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

	For the fiscal year ended December 31, 2004

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

	•	On April 6, 2004, we completed the amalgamation of a wholly-owned subsidiary with Terra Payments Inc (“Terra Payments”). The amalgamated company is a wholly-owned subsidiary of Optimal Group Inc. and has continued its business under the name of Optimal Payments Inc.

	•	On April 8, 2004, we completed the sale of our U-Scan® self-checkout business to Fujitsu Transaction Solutions, Inc. for $35 million plus the assumption of certain liabilities.

	•	On July 1, 2004, Optimal Payments completed the acquisition of National Processing Services LLC (“NPS”), a Detroit, Michigan-based registered Visa® and MasterCard® independent sales organization for $15 million. The portfolios acquired in this transaction include approximately 4,500 merchants, processing in excess of $1 billion in annual credit and debit card volume.

	(a)	Market Information

		Our common shares trade on the Nasdaq National Market under the symbol “OPMR.” The following table sets forth the range of high and low bid prices for our common shares as reported by the Nasdaq Stock Market. These quotations reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

	Nasdaq Stock Market

	$ High	$ Low

2004
4^th Quarter	12.32	8.99
3^rd Quarter	9.35	6.55
2^ndQuarter	7.95	6.57
1^stQuarter	9.20	7.20
2003
4^th Quarter	9.00	7.00
3^rd Quarter	9.67	6.30
2^ndQuarter	8.35	5.75
1^stQuarter	6.50	5.67

		At February 28, 2005, there were 610 stockholders of record of our common shares.

	(c)	Dividends

	Year ended December 31,

	2004 ⁽¹⁾			2003			2002			2001			2000

	Audited								\|	Unaudited

	(U.S. dollars, in thousands except per share data)
Consolidated Statement of Operations Data:
Revenues	$	99,397		$	15,666		$	8,631		$	5,000		$	—
Transaction processing and service costs		58,443			10,872			6,152			3,811			—
Inventory write-downs pertaining to service costs		2,931			—			—			—			—
Amortization of intangibles pertaining to transaction processing and service costs		2,844			299			157			168			—
Selling, general and administrative		32,433			11,419			7,900			7,127			3,976
Stock-based compensation pertaining to selling, general and administrative expenses⁽²⁾		5,736			—			—			—			—
Research and development		1,511			—			—			—			—
Operating leases		3,629			970			520			322			—
Restructuring costs		1,325			109			—			—			—

Amortization of property and equipment		2,257			606			430			128			—
Foreign exchange (gain) loss		(1,014	)		333			6			90			(1,507	)
Investment income		(1,599	)		(981	)		(1,817	)		(3,148	)		(3,897	)

(Loss) earnings from continuing operations before income taxes		(9,099	)		(7,961	)		(4,717	)		(3,498	)		1,428
Income tax (recovery)		1,188			(3,215	)		(1,676	)		—			546

Net (loss) earnings from continuing operations		(10,287	)		(4,746	)		(3,041	)		(3,498	)		882
Earnings (loss) from discontinued operations, net of income taxes		(3,130	)		(1,422	)		(2,286	)		12,804			3,914
Gain on disposal of net assets from discontinued operations, net of income taxes		(4,164	)		—			—			—			—

Net (loss) earnings	$	(9,253	)	$	(6,168	)	$	(5,327	)	$	9,306		$	4,796

Weighted average number of common shares outstanding (thousands)		20,290			14,936			15,059			14,705			13,104
Weighted average diluted number of common shares
outstanding (thousands)		20,426			14,937			15,101			15,573			14,499
Basic net (loss) earnings per common share	$	(0.46	)	$	(0.41	)	$	(0.35	)	$	0.63		$	0.37

Diluted net (loss) earnings per common share⁽³⁾	$	(0.46	)	$	(0.41	)	$	(0.35	)	$	0.60		$	0.33


U.S. GAAP Financial Data:	Year ended December 31,

	2004 ⁽¹⁾			2003			2002			2001			2000
	Audited								\|	Unaudited

	(U.S. dollars, in thousands except per share data)
Revenues	$	99,397		$	15,666		$	8,631		$	5,000		$	—
Net (loss) earnings		(9,253	)		(6,168	)		4,451			(23,294	)		(14,105	)
Basic net (loss) earnings per common share		(0.46	)		(0.41	)		0.30			(1.58	)		(1.08	)
Diluted net (loss) earnings per common share		(0.46	)		(0.41	)		0.29			(1.58	)		(1.08	)


	December 31,

	2004 ⁽¹⁾		2003		2002			2001		2000

	Audited						\|	Unaudited
	(U.S. dollars, in thousands)
Total assets	$	295,244	$	135,543	$	129,691		$	147,691	$	111,273


	⁽¹⁾	As a result of the various business acquisitions and disposals in 2004 (see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview and Strategy – Significant Developments”), the fiscal 2004 amounts, results and balances may not be comparable to prior periods.

	⁽²⁾	In 2003, we adopted the new recommendations of the Canadian Institute of Chartered Accountants with respect to stock-based compensation, which requires the use of the fair value method. The new recommendations have been applied prospectively effective January 1, 2003. See note 3(p) of the notes to our consolidated financial statements, which are included in Item 8 - “Financial Statements and Supplementary Data.”

	⁽³⁾	In 2001, we adopted the new recommendations of the Canadian Institute of Chartered Accountants with respect to the calculation of diluted earnings per share, which requires the use of the treasury stock method. The new recommendations have been applied retroactively and accordingly, all figures presented for the periods prior to 2001 have been adjusted to conform to the new recommendations. See note 3(q) of the notes to our consolidated financial statements, which are included in Item 8 - “Financial Statements and Supplementary Data.”

(U.S. dollars, in thousands)


Cash and cash equivalents	62,937		4,212
Cash held as reserves	18,739		—
Cash held in escrow	3,536		—
Short-term investments	88,213		74,302
Short-term investments held as reserves	2,104		—
Settlement assets	14,375		—

	189,904		78,514

Less:
Bank indebtedness	(8,301	)	(10,726	)
Customer reserves and security deposits	(77,574	)	—


Net	104,029		67,788


	(b)	Holders

	For the quarter ended

	Dec. 31, 2004		Sept. 30, 2004		June 30, 2004			March 31, 2004			Dec. 31, 2003			Sept. 30, 2003			June 30, 2003			March 31, 2003

	(U.S. dollars, in thousands except per share data) (unaudited)

Revenues	$	33,856	$	31,219	$	24,042		$	10,280		$	9,257		$	2,212		$	2,094		$	2,103

Earnings (loss) from continuing operations before income taxes		1,126		669		(7,313	)		(3,580	)		(2,450	)		(1,904	)		(2,045	)		(1,561	)
Provision for (recovery of) income taxes		671		537		308			(328	)		(336	)		—			(1,073	)		(1,806	)

Net earnings (loss) from continuing operations		455		132		(7,621	)		(3,252	)		(2,114	)		(1,904	)		(972	)		245

Net earnings (loss)	$	455	$	132	$	(6,646	)	$	(3,193	)	$	(2,859	)	$	(2,110	)	$	(1,217	)	$	19


Basic net earnings (loss) per common share	$	0.02	$	0.01	$	(0.31	)	$	(0.21	)	$	(0.19	)	$	(0.14	)	$	(0.08	)	$	0.00

Diluted net earnings (loss) per common share	$	0.02	$	0.01	$	(0.31	)	$	(0.21	)	$	(0.19	)	$	(0.14	)	$	(0.08	)	$	0.00

	•	On September 30, 2003, we acquired substantially all the assets of RBA;

	•	On February 27, 2004, we acquired the hardware service division of Systech;

	•	On April 6, 2004, Terra Payments amalgamated with a wholly-owned subsidiary of ours; and

	•	On July 1, 2004, we acquired NPS.

Reconciliation of Non-GAAP Financial Information (expressed in thousands of U.S. dollars)
	Twelve months ended December 31,

	2004			2003

Earnings (loss) from continuing operations before income taxes		(9,099	)		(7,961	)


Add (deduct):
Restructuring costs		1,325			109

Inventory write-downs pertaining to service costs		2,931			—
Stock-based compensation pertaining to selling, general and administrative expenses		5,736			—
Amortization of intangibles pertaining to transaction processing and service costs		2,844			299

Amortization of property and equipment		2,257			606

Foreign exchange (gain) loss		(1,014	)		333

Underlying earnings (loss) from continuing operations before income taxes		4,980			(6,614	)


Reconciliation of Non-GAAP Financial Information (expressed in thousands of U.S. dollars)
	Twelve months ended December 31,

	2003			2002

Earnings (loss) from continuing operations before income taxes		(7,961	)		(4,717	)

Add (deduct):

Restructuring costs		109			—

Inventory write-downs pertaining to service costs		—			—
Stock-based compensation pertaining to selling, general and administrative expenses		—			—
Amortization of intangibles pertaining to transaction processing and service costs		299			157

Amortization of property and equipment		606			430

Foreign exchange loss		333			6


Underlying loss from continuing operations before income taxes		(6,614	)		(4,124	)

	•	$32.9 million was assumed on the acquisition of Terra;

	•	$30.2 million was generated on the disposal of our U-Scan self-checkout business;

	•	$4.0 million was generated on the disposal of our investment in EBS;

	•	$7.4 million additional cash was generated on the maturity of short-term investments ($9.2 million in 2004 compared to $1.8 million in 2003);

	•	$10.8 million additional cash was used for business acquisitions ($16.9 million in 2004 compared to $6.1 million in 2003);

	•	$3.0 million additional cash was used for the purchase of equipment (net of proceeds from the sale of equipment of $0.7 million in 2003); and

	•	$2.8 million of cash was placed in escrow pertaining to business acquisitions compared to nil in 2003.

	• expose us to additional liability and to potentially costly litigation;

	• increase expenses relating to resolution of these breaches;

	• deter customers from using our products; and

	• decrease market acceptance of electronic commerce transactions generally.

	December 31, 2004

	Carrying Value		Fair Value⁽¹⁾

	(U.S. thousands of dollars)
Notes denominated in U.S. and Canadian dollars, with a weighted average effective yield of 1.98% (2003 - 1.39%), maturing between January 12, 2005 and December 12, 2005 (2003 - matured between January 12, 2004 and October 24, 2004 with a maturity value of $48,641)
	$	83,208	$	83,329

Notes denominated in U.S. dollars, with a weighted average effective yield of 2.70% (2003 - 1.97%), maturing on December 29, 2006 with a maturity value of $5,000 (2003 - maturing between February 1, 2005 and December 9, 2008,with a maturity value of $25,626)		5,005	$	4,949

		88,213		88,278

Held as reserves
Notes denominated in U.S. dollars and in Canadian dollars, with a weighted average effective yield of 2.30%, maturing on January 14 and March 22, 2005		2,104		2,104

TOTAL:	$	90,317	$	90,382


	Consolidated Financial Statements of

	OPTIMAL GROUP INC.
	(formerly Optimal Robotics Corp.)

	Three years ended December 31, 2004
	(expressed in thousands of US dollars)

Financial Statements
Consolidated Balance Sheets		40
Consolidated Statements of Operations		41
Consolidated Statements of Deficit		42
Consolidated Statements of Cash Flows		43
Notes to Consolidated Financial Statements		44


	2004			2003

Assets
Current assets:
Cash and cash equivalents	$	62,937		$	4,212
Cash held as reserves		18,739			—
Cash held in escrow (notes 4 (f) and 26)		3,536			—
Short-term investments (note 5)		88,213			74,302
Short-term investments held as reserves (note 5)		2,104			—
Settlement assets (note 5 (b))		14,375			—
Accounts receivable (note 6)		8,212			4,793
Income taxes receivable and refundable investment tax credits		773			922
Inventory		3,513			4,216
Prepaid expenses and deposits		1,331			796
Future income taxes (note 20)		—			332
Current assets related to discontinued operations (note 4 (c))		—			25,292

		203,733			114,865

Long-term receivables (note 7)		3,666			—
Non-refundable investment tax credits		4,747			—
Property and equipment (note 8)		4,807			1,931
Goodwill and other intangible assets (note 9)		72,505			10,518
Deferred compensation cost (note 4 (b))		1,807			—
Future income taxes (note 20)		3,979			2,278
Long-term assets related to discontinued operations (note 4 (c))		—			5,951

	$	295,244		$	135,543

Liabilities and Shareholders’ Equity
Current liabilities:
Bank indebtedness (note 10)	$	8,301		$	10,726
Customer reserves and security deposits (note 11)		77,574			—
Accounts payable and accrued liabilities (note 12)		23,680			5,569
Deferred revenue		3,201			1,302
Current portion of obligations under capital leases (note 13)		578			—
Future income taxes (note 20)		917			134
Current liabilities related to discontinued operations (note 4 (c))		—			4,389

		114,251			22,120

Future income taxes (note 20)		3,794			130
Deferred revenue		318			—
Obligations under capital leases (note 13)		200			—
Shareholders’ equity:
Share capital (note 14)		184,191			122,102
Additional paid-in capital (note 15 (d))		10,557			5
Deficit		(16,583	)		(7,330	)
Cumulative translation adjustment		(1,484	)		(1,484	)

		176,681			113,293
Commitments and contingencies (note 16)
Subsequent event (note 26)

	$	295,244		$	135,543


See accompanying notes to consolidated financial statements. Approved by the Board of Directors

/s/ HOLDEN L. OSTRIN	Director	/s/ NEIL S. WECHSLER	Director



Computer equipment and software	33% - 50%
Equipment	10% - 33%
Leasehold improvements	Lease term

	Goodwill:

	Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the assets acquired, less liabilities assumed, based on their fair values. Goodwill is allocated as of the date of the business combination to the Company’s reporting units that are expected to benefit from the synergies of the business combination.

	Goodwill is not amortized but is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting unit is compared with its fair value. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired, and the second step of the test is not required. The second step is performed when the carrying amount of a reporting unit exceeds its fair value, in which case the implied fair value of the reporting unit’s goodwill is compared with its carrying amount to measure the impairment loss, if any. When the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in an amount equal to the excess and is presented as a separate line item on the consolidated statement of operations.

	Based on the impairment tests performed, the Company concluded that no goodwill impairment charge was required.

	Other intangible assets:

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

	Other intangible assets (continued):

	Intangible assets are amortized using the straight-line method over the following periods:



Customer contracts and customer relationships	42 - 84 months
Acquired technology	60 months
Supplier contract	84 months
Customer list	44 months
Deferred compensation cost	Vesting period for periods
	ranging up to 36 months


	2004		2003			2002


Net loss, as reported	$	(9,253)	$	(6,168)	$	(5,327	)

Deduct:
Total stock-based employee
compensation expense determined
under fair value-based method for
all awards granted in fiscal 2002,
net of related taxes of nil		—		(1,424)		(18,575	)


Pro forma net loss	$	(9,253)	$	(7,592)	$	(23,902	)


Loss per share:
Basic:
As reported	$	(0.46)	$	(0.41)	$	(0.35	)
Pro forma		(0.46)		(0.51)		(1.59	)
Diluted:
As reported		(0.46)		(0.41)		(0.35	)
Pro forma		(0.46)		(0.51)		(1.59	)



Assets acquired:
Accounts receivable	$	1,428
Inventories		750
Property and equipment		1,082
Prepaid expenses and deposits		65
Customer contracts and customer rela tionship		612
Goodwill		4,258

		8,195

Liabilities assumed:
Accounts payable and accrued liabili lities		1,441
Obligations under capital leases		808
Deferred revenue		2,481

		4,730


Net assets acquired for cash	$	3,465



Assets acquired:
Cash and cash equivalents	$	32,880
Short-term investments		23,153
Cash and short-term investments - held as reserves		23,555
Settlement assets		10,547
Accounts receivable		1,283
Refundable investment tax credits receivable		589
Prepaid expenses and deposits		475
Property and equipment		1,466
Investment in ebs Electronic Billing Systems AG		3,974
Long-term receivables		3,698
Non-refundable investment tax credits		3,954
Future income taxes		3,859
Customer contracts and customer relationships		5,456
Acquired technology		4,520
Non-deductible goodwill		35,650

		155,059

Liabilities assumed:
Accounts payable and accrued liabilities		10,697
Deferred revenue		444
Customer reserves and security deposits		73,259
Future income taxes		3,922
Obligations under capital leases		732

		89,054


Net assets acquired	$	66,005



Consideration:
7,242,168 common shares	$	61,414
Transaction costs		1,389
Options and warrants		5,877
Less options and warrants considered as deferred compensation		(2,675	)


Total purchase price	$	66,005